FORM 20-F

UNITED STATES SECURITIES AND EXCHANGE COMMISSON

WASHINGTON, D.C. 20549

FORM 20-F

(Mark One)


o		REGISTRATION STATEMENT PURSUANT TO SECTION 12 (b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934


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

For the fiscal year ended June 30, 2006


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


o		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

For the transition period from to

Commission file number 001-02419

Commonwealth Bank of Australia (ABN 48 123 123 124)

(Exact name of Registrant as specified in its charter)

(Translation of Registrant’s name into English)

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.


Title of each class		Name of each exchange on which registered

None		Not Applicable

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

Commonwealth Bank of Australia Ordinary Shares

(Title of Class)


SEC 1852 (05-06)		Persons who respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number

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

None

(Title of Class)

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

Commonwealth Bank of Australia Ordinary Shares: 1,282,904,909 Fully Paid Shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

þ Yes o No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934.

o Yes þ No

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

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.

þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

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

o Item 17 þ Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes þ No

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by the court

o Yes o No

Form 20-F Cross Reference Index


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

Financial Information Definitions		5
Currency of Presentation Exchange Rates and Certain Definitions		10, 284
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, 40-44, 91-92
Item 4 Information on the company		14-34, 38, 54-58, 180-181, 214-216, 223, 224, 242-243, 318
Item 4A Unresolved Staff Comments ⁽²⁾
Item 5 Operating and Financial Review and Prospects		7-9, 15-52
Item 6 Directors, Senior Management and Employees		11, 33-34, 56, 59-90, 201-206, 247-251, 282-284
Item 7 Major Shareholders and Related Party Transactions		71-90, 245-251, 284
Item 8 Financial Information		7, 35, 69, 93-276
Item 9 The Offer and Listing		281
Item 10 Additional Information		4, 285-289
Item 11 Quantitative and Qualitative Disclosures about Market Risk		41-42, 228-239
Item 12 Description of Securities Other Than Equity Securities ⁽¹⁾
Part II
Item 13 Defaults, Dividend Arrearages and Delinquencies ⁽³⁾
Item 14 Material Modifications to the Rights of Security Holders and use of Proceeds ⁽⁴⁾
Item 15 Controls and Procedures		64
Item 16A Audit Committee Financial Expert		62
Item 16B Code of Ethics		64
Item 16C Principal Accountant Fees and Services		53, 62-63, 223
Item 16D Exemptions from the Listing Standards for Audit Committee ⁽⁵⁾
Item 16E Purchase of Equity Securities by the issuer and Affiliated Purchasers		200
Part III
Item 17 Financial Statements ⁽⁶⁾
Item 18 Financial Statements		94-276
Item 19 Exhibits		317
Signatures		316
Consolidated Income Statements for years ended 30 June 2006 and 2005		94
Consolidated Balance Sheets as at 30 June 2006 and 2005		95
Consolidated Statements of Recognised Income and Expense for years ended 30 June 2006 and 2005		96
Consolidated Statements of Cash Flows for years ended 30 June 2006 and 2005		97-98
Notes to the Financial Statements		99-276
Report of Independent Registered Public Accounting Firm		277


(1)		Not required in this Annual Report.

(2)		Item 4A one.

(3)		Item 13 (A) and (B) none.

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

(5)		Item 16D none.

(6)		Not applicable as item 18 complied with.

Special Note Regarding Forward-Looking Statements

Certain statements under the captions ”Highlights”, “Financial Review”, “Banking Analysis”, “Funds Management Analysis”, “Insurance Analysis”, “Integrated Risk Management”, “Contractual and Commercial Commitments”, “Description of Business Environment”, “Directors’ Details”, “Note 50 Disclosure about Fair Value of Financial Instruments” and elsewhere in this Annual 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 the United Kingdom, changes in the regulatory structure of the banking, life insurance and funds management industries in Australia, New Zealand, the United Kingdom or Asia, changes in political, social, credit and economic conditions in Australia or New Zealand, legislative proposals for reform of the banking, life insurance and funds management 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 page 14.

Documents on Display

Documents referred to in this report are available for inspection. Please contact the Company Secretary, Level 7, 48 Martin Place, Sydney, NSW 1155 Australia for further information. In addition, the Group files reports and other information with the US Securities and Exchange Commission (the “SEC”). You can read and copy these reports and other information at the SEC Public Reference Room at 100 F Street, North East, Washington DC 20549 or at the SEC website at www.sec.gov through EDGAR. You can telephone the SEC at 1-800-SEC-0330 for further information on the Public Reference Room.

4 Commonwealth Bank of Australia Form 20-F 2006

Financial Information Definitions

In addition to discussing the Australian equivalent to International Financial Reporting Standards (“AIFRS”) in this annual report, certain “non-GAAP financial measures” of the financial performance and results of the Group (as defined in SEC Regulation G) are included. These non-GAAP financial measures are not calculated in accordance with either AIFRS 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 AIFRS.

In this Annual Report, the Group presents its profit from ordinary activities after tax on a “statutory basis”, which is calculated in accordance with AIFRS. This Annual Report is the first under AIFRS (for more details refer to the Financial Statements, Note 1). The Group also presents its results on a “cash basis”. “Cash basis” is defined by management as net profit after tax and minority interests, before treasury share valuation adjustments and defined benefit superannuation plan expense. Management believes “cash basis” is a meaningful measure of the Group’s performance and provides the basis for the determination of the Bank’s dividends.

The Group presents certain results after adjusting for the impact of the sale of the Hong Kong insurance business – in relation to the profit on the sale of that business, and the ongoing results of the insurance operations after excluding the financial results of the Hong Kong insurance business. Management believes presentation of results after these adjustments provides a more meaningful measure of the Group’s ongoing performance since the Hong Kong insurance business is no longer part of the Group’s business operations.

The Group 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 treasury share valuation adjustments and defined benefit superannuation plan expense. “Earnings per share (“cash basis”)” is defined by management as net profit after tax and minority interests, before treasury share valuation adjustments and defined benefit superannuation plan expense, 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 Group 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 other equity instruments. 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 other equity instruments. Similarly, the Group presents “Dividend cover – statutory”, which is net profit attributable to members of the Bank after dividends on other equity instruments 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 dividends on other equity instruments 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 – Which new Bank” refers to incremental expenses associated with the Which new Bank Program. These incremental costs principally relate to restructuring and IT development expenses. “Operating expenses – Which new Bank” plus “operating expenses — comparable business” is equal to the AIFRS measure “operating expenses”.

In September 2003, the Group launched its “Which new Bank” customer service vision “To excel in customer service”. The service transformation consisted of three themes; excellent customer service, through engaged people, supported by simple processes.

The Group estimated a spend of $1,480 million over the three Financial Years to 2006. This included $600 million of normal project spend, an additional $620 million in areas such as systems and process simplification, technology and staff training and $260 million invested in the branch network. The completion of all major Which new Bank projects, including the deployment of CommSee across Australia, occurred during Financial Year 2006. There were no incremental Which new Bank expenses in Financial Year 2006.

Management believes it is meaningful to separately present the incremental operating expenses attributable to the Which new Bank Program in an analysis of our results as excluding those expenses provides a basis of comparison of the Group’s comparable businesses for each financial year.

The Group 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. The ACE ratio is calculated in accordance with Standard & Poor’s methodology. For the Group’s calculation of the ACE ratio refer to Note 35 to the Financial Statements

Commonwealth Bank of Australia Form 20-F 2006 5

AIFRS Transition

The consolidated Financial Statements of the Group for the years ended 30 June 2006 and 2005 comply with current Australian Accounting Standards, which consist of Australian equivalents to International Financial Reporting Standards (“AIFRS”).

The basis of the AIFRS standards are the International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board. As a result of complying with AIFRS, the Group accounts also comply with IFRS, and interpretations adopted by the International Accounting Standards Board.

The accounting policies of the Group have changed significantly in this transition to the adoption of AIFRS. These changes are summarised in Note 1 to the Financial Statements.

The accounting policies which have changed as a result of the adoption of AIFRS have been applied retrospectively and consistently by the Group to all periods presented in the Financial Statements and in preparing an opening AIFRS Balance Sheet at 1 July 2004, except for the following standards which were adopted and applied from 1 July 2005 onwards as permitted by AIFRS:

(i) AASB 132 Financial Instruments – Disclosure and Presentation;

(ii) AASB 139 Financial Instruments – Recognition and Measurement;

(iii) AASB 4 Insurance Contracts;

(iv) AASB 1023 General Insurance Contracts; and

(v) AASB 1038 Life Insurance Contracts.

This means that, for significant segments of the Group’s business, involving financial instruments and life insurance products, the financial results for Financial Year 2006 are not prepared on a consistent basis with Financial Year 2005. As a result there are certain differences between financial results of the two years, which are referred to in this Annual Report as “AIFRS Transition” issues.

Appendices A and B contain certain financial information based on Australian GAAP as it applied prior to the adoption of AIFRS (“AGAAP”). AGAAP is not, and should not be considered to be, comparable to information prepared in accordance with AIFRS.

6 Commonwealth Bank of Australia Form 20-F 2006

Highlights

(Except where otherwise stated, all figures relate to the Financial Year ended 30 June 2006 and comparatives for the profit and loss are to the Financial Year ended 30 June 2005. ‘$’ and ‘A$’ 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.

These “Highlights” contain certain forward-looking statements. See “Special Note Regarding Forward-Looking Statements”.)

Financial Year 2006 v Financial Year 2005

Financial Performance and Business Review

The Group’s net profit after tax (“statutory basis”) increased by 16% to $3,928 million for the year ended 30 June 2006.

Net profit after tax (“cash basis”) increased by 16% to $4,053 million compared with $3,492 million in the prior year. Excluding the profit from the sale of the Hong Kong insurance business this cash basis net profit after tax increased 12% to $3,908 million.

The performance over the year was supported by:

•

Strong growth in banking income, following average interest earning asset growth of 12% to $275 billion and net interest margin contraction of nine basis points;

•

Growth in Funds under Administration of 23% to $152 billion supported by both strong inflows and continued strength in investment markets;

•

Higher operating margins and favourable insurance claims experience, offset by lower investment returns on Shareholder funds;

•

Continued strength in credit quality across the portfolio; and

•

Expense growth of 2% with continued productivity improvements.

The Group’s results include the full impact of the adoption of AIFRS from 1 July 2005. Comparative figures have also been adjusted to an AIFRS basis, other than for the impact of those standards related to financial instruments and insurance. Most significantly, the 2006 Financial Statements include a $123 million expense associated with distributions on hybrid financial instruments. Changes to the Group’s accounting policies and explanations of the key changes are covered in Note 1 to the Financial Statements on pages 99 to 134.

Financial Condition

The Group’s assets increased by $32 billion to $369 billion (2005: $337 billion) over the year.

Total lending assets increased by $30 billion from $236 billion to $266 billion at 30 June 2006, reflecting growth across a range of lending products.

The Bank maintains a strong capital position. The Tier One Capital Ratio increased from 7.46% to 7.56% during the year reflecting the issue of hybrid securities during the second half of the financial year. The Total Group Capital Ratio decreased from 9.75% at 30 June 2005 to 9.66% at 30 June 2006 primarily due to the growth in Risk Weighted Assets. Risk Weighted Assets increased from $190 billion to $216 billion at 30 June 2006 primarily due to strong growth in lending assets particularly in the business/corporate sector. The Bank’s credit ratings remained unchanged.

The Bank adopted AIFRS on 1 July 2005. APRA required reporting under the previous Australian GAAP (“AGAAP”) to continue for regulatory capital purposes until the introduction of revised prudential standards which take effect on 1 July 2006.

The revised prudential standards that apply from 1 July 2006 will impact the Group’s Tier 1 Capital and Capital Base. ⁽¹⁾ However, APRA has granted transition relief in relation to changes to its prudential regulations from 1 July 2006, until 31 December 2007.

A number of significant capital management initiatives were undertaken to actively manage the Bank’s Tier One capital during the year, including the Dividend Reinvestment Plans (“DRP”), issue of Tier One hybrid capital, issue of PERLS III to replace expiring PERLS instruments, and completion of a $500 million on-market share buyback.

As required by APRA, the Bank’s investment in its life insurance and funds management companies is deducted from regulatory capital to arrive at the Bank’s Capital Ratios. The Bank’s insurance and funds management companies held an estimated $642 million excess over regulatory capital requirements at 30 June 2006 in aggregate.

The Bank has an integrated risk management framework to identify, assess and manage risks in the business. The Bank believes its risk profile is measured by the difference between capital available to absorb loss and risk as assessed by economic capital required. This risk framework is described more fully in the Integrated Risk Management section of this report as detailed on pages 40 to 44.

Dividends

The final dividend declared is 130 cents per share which takes the full year dividend to a record of 224 cents, an increase of 27 cents or 14% on the prior year. The dividend payment was fully franked and was paid on 5 October 2006 to owners of ordinary shares at the close of business on 18 August 2006 (“record date”). Shares were quoted ex–dividend on 14 August 2006.

The Bank’s dividend policy does not target specific payouts for future periods. In determining dividends for particular periods, the Directors have regard to actual and projected net profit after tax (“cash basis”) and a range of business, economic, regulatory and other factors affecting and expected to affect the Bank. For additional detail regarding regulatory factors affecting the payment of dividends, see “Liquidity and Capital Resources – Dividends” on page 35.

Outlook

The Australian economy performed well in the 2006 Financial Year. Business credit growth has been solid, supported by infrastructure and capacity expansion while consumer credit growth moderated.

The overall environment for the financial services industry is expected to remain highly competitive and as a result margin pressure is expected to continue. Australian credit quality, high employment levels and business confidence are strong and provide a positive outlook. Economic growth is likely to remain solid although higher oil prices, increasing domestic and international interest rates, geopolitical instability particularly in the Middle East and the health of the Chinese economy are all factors which could potentially impact the Australian economy.

Going into the new financial year, the Group remains confident that it will be a tougher competitor and will continue to deliver both revenue growth and productivity improvements.

(1)

Total of Tier 1 and Tier 2 Capital less deductions.

Commonwealth Bank of Australia Form 20-F 2006 7

Highlights


	Full Year Ended
	30/06/06			30/06/05			Jun 06 vs
Group Performance Summary	$M			$M			Jun 05 %

Net interest income ⁽¹⁾		6,514			6,026			8
Other banking income ⁽¹⁾		3,036			2,845			7

Total Banking Income		9,550			8,871			8
Funds management income		1,543			1,247			24
Insurance income		742			747			(1	)

Total Operating Income		11,835			10,865			9
Shareholder investment returns		101			237			(57	)
Profit on sale of the Hong Kong insurance business		145			—			—

Total Income		12,081			11,102			9
Operating expenses		5,994			5,719			(5	)
Which new Bank ⁽²⁾		—			150			—

Total Operating Expenses		5,994			5,869			(2	)
Bad debts expense		398			322			(24	)

Net profit before income tax		5,689			4,911			16
Corporate tax expense		1,605			1,409			(14	)
Minority interests ⁽³⁾		31			10		large

Net profit after tax (“cash basis”)		4,053			3,492			16
Defined benefit superannuation plan expense		(25	)		(53	)		53
Treasury shares		(100	)		(39	)	large

Net profit after tax (“statutory basis”)		3,928			3,400			16

Represented by:
Banking		3,203			2,782			15
Funds management		309			309			—
Insurance		416			309			35

Net profit after tax (“statutory basis”)		3,928			3,400			16


(1)		Due to a change in accounting policy regarding classification of interest expense on certain non traded derivatives (i.e. all interest expense on unhedged variable to variable cross currency swaps was reclassified from Other Banking Income to Net Interest Income), a reclassification of $29 million between Net Interest Income and Other Banking Income occurred in Financial Year 2006. There was no impact on total banking income or on profit.

(2)		Which new Bank, refers to incremental expenses associated with the Which new Bank program.

(3)		Minority interests includes preference dividends paid to holders of preference shares in ASB Capital.

Full Year Ended

Jun 06 vs

Shareholder Summary

30/06/06

30/06/05

Jun 05 %

Dividend per share – fully franked (cents)

224

197

Dividend cover – statutory (times) ⁽¹⁾

1.4

1.3

n/a

Dividend cover – cash (times) ⁽²⁾

1.4

1.3

n/a

Earnings per share (cents)

Statutory – basic

308.2

259.6

Statutory – fully diluted

303.1

255.3

Cash basis – basic

315.9

264.8

Cash basis – fully diluted

310.5

260.5

Dividend payout ratio (%)

Statutory

73.3

77.0

(370)bpts

Cash basis

71.0

74.9

(390)bpts

Weighted avg no. of shares – statutory basic (M)

1,275

1,260

Weighted avg no. of shares – cash basic (M)

1,283

1,269

Return on equity – cash (%)

21.3

18.8

250bpts


(1)		Net profit attributable to members of the Bank after preference share dividends divided by dividends on ordinary shares for the financial year.

(2)		Net profit attributable to members of the Bank (“cash basis”) after preference share dividends divided by dividends on ordinary shares for the financial year.

Capital Management

The Group believes that it maintains a strong capital position. This is reflected in its credit ratings which remained unchanged for the 2006 Financial Year.

Credit Ratings

Long–term

Short–term

Affirmed

Fitch Ratings

F1+

Jun 06

Moody’s Investor Services

Aa3

P-1

Jun 06

Standards & Poor’s

AA-

A-1+

Jun 06

Ratings are not a recommendation to purchase, hold or sell securities, and may be changed, suspended or withdrawn at any time. Additional information regarding the Bank’s capital is disclosed in Note 35 to the Financial Statements.

8 Commonwealth Bank of Australia Form 20-F 2006

Highlights


	As at
	30/06/06		30/06/05		Jun 06 vs
Balance Sheet Summary	$M		$M		Jun 05 %

Lending assets ⁽¹⁾		266,096		235,862		13

Total assets		369,103		337,404		9
Total liabilities		347,760		314,761		10

Shareholders’ Equity		21,343		22,643		(6	)


Assets held and funds under administration
On-Balance Sheet:
Banking assets		340,254		304,620		12
Insurance funds under administration		20,792		22,959		(9	)
Other insurance and internal funds management assets		8,057		9,825		(18	)

		369,103		337,404		9
Off-Balance Sheet:
Funds under administration		130,721		100,105		31

		499,824		437,509		14


(1)		Lending assets comprise Loans, Advances, and Other Receivables (gross of provisions for impairment and excluding securitisation) and bank acceptances of customers.

Full Year Ended

Jun 06 vs

Key Performance Indicators

30/06/06

30/06/05

Jun 05 %

Banking

Net profit after tax (“statutory basis”) ($M)

3,203

2,782

Net interest margin (%)

2.34

2.43

(9)bpts

Average interest earning assets ($M) ⁽¹⁾

274,798

244,708

Average interest bearing liabilities ($M) ⁽¹⁾

255,100

255,597

Expense to income (%)

47.7

50.6

Funds Management

Net profit after tax (“statutory basis”) ($M)

309

309

—

Operating income to average funds under administration (%)

1.12

1.08

4bpts

Funds under administration – spot ($M)

151,513

123,064

Expense to average funds under administration (%)

0.71

0.72

Insurance

Net profit after tax (“statutory basis”) ($M)

416

309

Inforce premiums ($M)

1,223

1,265

)

Expense to average inforce premium (%)

36.7

45.5

Capital Adequacy

Tier 1 (%)

7.56

7.46

10bpts

Total (%)

9.66

9.75

(9)bpts

Adjusted Common Equity (%) ⁽²⁾

4.50

4.91

(41)bpts


(1)		Average interest earning assets and average interest bearing liabilities have been adjusted to remove the impact of securitisation. Refer to Note 4 to the Financial Statements, Average Balance Sheet.

(2)		Adjusted Common Equity (“ACE”) is one measure considered by Standard & Poor’s in evaluating the Group’s credit rating. The ACE ratio has been calculated in accordance with the Standard & Poor’s methodology.


Important Dates for Shareholders

Ex-Dividend Date		14 August 2006
Record Date		18 August 2006
Final Dividend Payment		5 October 2006
Annual General Meeting		3 November 2006
2007 Interim Results Announced		14 February 2007

Commonwealth Bank of Australia Form 20-F 2006 9

Financial Review


	Full Year Ended 30 June⁽¹⁾
	2006			2006			2005
				(A$ millions, except
Selected Consolidated Income Statement Data	US$M ⁽³⁾			where indicated)

AIFRS
Interest income		14,666			19,758			16,781
Interest expense		9,831			13,244			10,755
Net interest income		4,835			6,514			6,026
Charge for bad and doubtful debts		295			398			322
Non interest income		4,285			5,772			5,252
Operating expenses		4,475			6,029			5,944
Operating profit before income tax		4,349			5,859			5,012
Income tax expense attributable to operating profit		1,410			1,900			1,602
Operating profit after income tax		2,939			3,959			3,410
Outside equity interests		(23	)		(31	)		(10	)
Net Income		2,916			3,928			3,400


Dividend declared ($)		1,253			1,688			1,434
Weighted average number of shares (basic)		1,275			1,275			1,260
Earnings per share, basic (cents)		228. 8			308. 2			259.6
Earnings per share, fully diluted (cents)		225. 0			303. 1			255.3
Dividends per share (cents)		166. 3			224			197
Dividends payout ratio (%) ⁽²⁾		73. 3			73. 3			77.0


	Full Year Ended
	2006		2006		2005		2004		2003		2002
	US$M ⁽³⁾		(A$ millions, except where indicated)

Adjusted for US GAAP
Operating profit after income tax		1,771		2,370		3,553		2,043		3,000		1,682
Earnings per share (cents) – basic		139. 0		185. 9		271. 6		158. 3		235. 7		131.5
Earnings per share (cents) – diluted		138. 2		184. 9		266. 9		158. 2		235. 6		131.3


(1)		The Group adopted AIFRS accounting standards for the reporting period beginning 1 July 2004. As a result only the 2006 and 2005 results are presented on an AIFRS basis, and figures for 2004, 2003 and 2002 are not directly comparable. Unadjusted figures for 2004, 2003 and 2002 are included within Appendix A to this report for information.

(2)		Dividends per share divided by earnings per share.

(3)		US$ translated from A$ at 30 June 2006 (see period end rate for Financial Year 2006 in the table below).

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.


	Full Year Ended
	2006		2005		2004		2003		2002
	(expressed in US dollars per $1.00)

Period End		0.7423		0.7618		0.6952		0.6713		0.5628
Average Rate		0.7475		0.7534		0.7192		0.5897		0.5236

The Noon Buying Rate on 31 October 2006 was US$0.7743 = A$1.00.


	October		September		August		July		June		May		April
	(expressed in US dollars per $1.00)

High		0.7743		0.7704		0.7699		0.7664		0.7527		0.7781		0.7593
Low		0.7434		0.7461		0.7568		0.7407		0.7284		0.7509		0.7177

10 Commonwealth Bank of Australia Form 20-F 2006

Financial Review

Full Year Ended 30 June

2006

2005

(A$ millions, except

Consolidated Balance Sheet Data ⁽¹⁾

US$M ⁽⁶⁾

where indicated)

AIFRS

Assets

Cash and liquid assets

3,809

5,131

6,055

Receivables due from other financial institutions

5,276

7,107

6,087

Assets at fair value through the income statement:

Trading

11,697

15,758

14,631

Insurance

18,140

24,437

27,484

Other

2,185

2,944

—

Derivative assets

7,182

9,675

—

Available-for-sale investments

8,316

11,203

—

Investment securities

—

10,838

Loans, advances and other receivables

192,386

259,176

228,346

Bank acceptances of customers

13,592

18,310

16,786

Investment property

192

258

252

Property, plant and equipment

975

1,314

1,132

Investments in associates

141

190

Intangible assets

5,797

7,809

7,656

Deferred tax assets

482

650

651

Other assets

3,816

5,141

17,434

Total Assets

273,985

369,103

337,404

Liabilities

Deposits and other public borrowings

128,586

173,227

168,026

Payables due to other financial institutions

8,302

11,184

8,023

Liabilities at fair value through the income statement

10,252

13,811

—

Derivative liabilities

8,032

10,820

—

Bank acceptances

13,592

18,310

16,786

Current tax liability

281

378

833

Deferred tax liability

992

1,336

921

Other provisions

609

821

871

Insurance policy liabilities

16,498

22,225

24,694

Debt issues

58,338

78,591

70,765

Managed fund units on issue

823

1,109

—

Bills payable and other liabilities

4,493

6,053

17,551

Total Liabilities

250,797

337,865

308,470

Loan capital ⁽²⁾

7,345

9,895

6,291

Total liabilities and loan capital

258,142

347,760

314,761

Net Assets

15,843

21,343

22,643

Total Shareholders’ Equity ⁽³⁾

15,843

21,343

22,643

Preference share capital

—

687

Other equity instruments

697

939

1,573

Total Shareholders’ Equity excluding hybrid financial instruments

15,146

20,404

20,383


	2006		2006		2005		2004		2003		2002
	US$M ⁽⁶⁾		(A$ millions, except where indicated)

Adjusted for US GAAP
Total Assets		265,190		357,254		327,591		303,437		264,387		247,563
Shareholders’ Equity ⁽⁴⁾		13,394		18,044		18,705		17,504		17,291		16,299
Consolidated Operating Data (number) (at year end)
Full time staff equivalent ⁽⁵⁾				36,664		35,313		36,296		35,845		37,245
Branches/service centres (Australia)				1,005		1,006		1,012		1,014		1,020
Agencies (Australia)				3,836		3,864		3,866		3,893		3,936


(1)		The Group adopted AIFRS accounting standards for the reporting period beginning 1 July 2004. As a result only the 2006 and 2005 results are presented on an AIFRS basis, and figures for 2004, 2003 and 2002 are not directly comparable. Unadjusted figures (presented on an AGAAP basis) for 2004, 2003 and 2002 are included within Appendix A to this report for information. AGAAP is not, and should not be considered to be, comparable to information prepared in accordance with AIFRS.

(2)		Represents interest bearing liabilities qualifying as regulatory capital.

(3)		Includes minority interests (see Note 34 to the Financial Statements for details).

(4)		Exclusive of minority interest.

(5)		Staff numbers include all permanent full time staff, part time staff equivalents and external contractors employed by third party agencies.

(6)		US$ translated from A$ at 30 June 2006 (see period end rate for Financial Year 2006 in the table on page 10).

Commonwealth Bank of Australia Form 20-F 2006 11

Financial Review


	Full Year Ended 30 June
	2006		2006		2005
			(A$ millions, except
Consolidated Ratios and Operating Data	US$M ⁽⁷⁾		where indicated)

AIFRS
Profitability
Net interest margin (%) ⁽¹⁾				2.34		2.43
Interest spread (%) ⁽²⁾				1.98		2.08
Return on average Shareholders’ Equity (%) ⁽³⁾				20.4		18.2
Return on average total assets (%) ⁽³⁾				1.1		1.1

Productivity
Total operating income per full time (equivalent) employee ($)		244,592		329,506		314,388
Staff expense/total operating income (%) ⁽⁴⁾				23.4		24.1
Total operating expenses excluding goodwill amortisation/total operating income (%) ⁽⁴⁾				49.6		52.9
Ratio of earnings to fixed charges ⁽⁵⁾				1.4		1.5

Capital Adequacy (at year end)
Risk weighted assets		160,662		216,438		189,559
Tier 1 capital		12,140		16,354		14,141
Tier 2 capital		4,992		6,725		6,087
Total capital ⁽⁶⁾		15,526		20,916		18,479
Tier 1 capital/risk weighted assets (%)				7.56		7.46
Tier 2 capital/risk weighted assets (%)				3.10		3.21
Total capital/risk weighted assets (%)				9.66		9.75
Average Shareholders’ Equity/average total assets (%)				5.4		5.6


	Full Year Ended
	2006		2005		2004		2003		2002

Adjusted for US GAAP
Net Income as a percentage of year end:
Total assets		0.66		1.08		0.67		1.13		0.68
Shareholders’ Equity		13.13		19.00		11.67		17.35		10.32
Dividends as a percentage of Net Income		70.40		40.35		64.37		35.52		116.36
Shareholders’ Equity as a percentage of total assets		5.05		5.71		5.77		6.54		6.58

Ratio of earnings to fixed charges ⁽⁵⁾		1.3		1.5		1.4		1.6		1.4


(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)		Net profit before tax and fixed charges (interest expense and rental costs) divided by fixed charges.

(6)		Represents Tier 1 capital and Tier 2 capital less deductions under statutory guidelines imposed by APRA. Refer note 35 of the Financial Statements for further details.

(7)		US$ translated from A$ at 30 June 2006 (see period end rate for Financial Year 2006 in the table on page 10).

12 Commonwealth Bank of Australia Form 20-F 2006

Financial Review


	Full Year Ended 30 June
	2006		2006		2005
			(A$ millions, except
Consolidated Ratios and Operating Data ⁽¹⁾	US$M ⁽⁸⁾		where indicated)

AIFRS
Asset Quality Data ⁽²⁾
Non accrual loans ⁽³⁾		242		326		395
Total impaired assets ⁽⁴⁾		242		326		376
Specific provisions for impairment ⁽⁵⁾		n/a		n/a		157
General provisions for impairment ⁽⁵⁾		n/a		n/a		1,390
Individually assessed provisions for impairment		127		171		157
Collective provisions for impairment		776		1,046		1,390
Net impaired assets (net of interest reserved)		115		155		219
Total provisions for impairment/average credit risk (%) ⁽⁶⁾				0.4		0.5
Charge for bad and doubtful debts/average credit risk (%) ⁽⁶⁾				0.1		0.1
Gross impaired assets/credit risk (%) ⁽⁷⁾				0.1		0.1
Net impaired assets/total Shareholders’ Equity (%)				0.7		1.0
General provision for impairment/risk weighted assets (%)				n/a		0.7
Collective provision for impairment/risk weighted assets (%)				0.5		n/a


(1)		The Group adopted AIFRS accounting standards for the reporting period beginning 1 July 2004. As a result only the 2006 and 2005 results are presented on an AIFRS basis, and figures for 2004, 2003 and 2002 are not directly comparable. Unadjusted figures (presented on an AGAAP basis) for 2004, 2003 and 2002 are included within Appendix A to this report for information. AGAAP is not, and should not be considered to be, comparable to information prepared in accordance with AIFRS.

(2)		All impaired asset balances and ratios are net of interest reserved.

(3)		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.

(4)		Total impaired assets comprise non accrual loans, restructured loans, Other Real Estate Owned (OREO) assets and Other Assets Acquired Through Security Enforcement (OAATSE).

(5)		Upon transition to AIFRS, since 1 July 2005 impairment provisions have been assessed under AIFRS, which does not distinguish between “specific” and “general” provisions for impairment, as was the case under AGAAP. In accordance with AIFRS transitional rules the 30 June 2005 provisions have not been retrospectively restated for AIFRS. Refer to page 6 for further details.

(6)		Average credit risk is based on gross credit risk less unearned income. Averages are based on current and previous year end balances.

(7)		Gross credit risk less unearned income.

(8)		US$ translated from A$ at 30 June 2006 (see period end rate for Financial Year 2006 in the table on page 10).

Summary Cash Flow Data

Further details of the Bank’s cash flow are on pages 97 to 98 and 252 to 253.


	Full Year Ended 30 June
	2006			2006			2005
Summary Cash Flow	US$M ⁽¹⁾			$M			$M

Net Cash provided by/(used in) operating activities		866			1,166			(336	)
Net Cash (used in) investing activities		(289	)		(390	)		801
Net Cash provided by Financing Activities		(10	)		(14	)		(2,188	)

Net (decrease)/increase in cash and cash equivalents		566			762			(1,723	)
Cash and Cash Equivalents at beginning of period		947			1,276			2,999
Cash and Cash Equivalents at end of period		1,513			2,038			1,276


(1)		US$ translated from A$ at 30 June 2006 (see period end rate for Financial Year 2006 in the table on page 10).

Commonwealth Bank of Australia Form 20-F 2006 13

Financial Review

Forward-Looking Statements

This “Financial Review” contains certain forward-looking statements. See “Special Note Regarding Forward-Looking Statements”.

Segment Performance

Performance summaries for the major segments of the Group (Banking, Funds Management and Insurance) for Financial Years 2005 and 2006 are set forth on pages 15 to 31, and are detailed in Note 37 to the Financial Statements.

Risk Factors

This section describes the principal risk factors that could materially affect the Group’s businesses, its revenues, operating income, Net Income, net assets, liquidity and capital resources. The factors below should be considered in connection with the special note regarding forward-looking statements on page 4 and the Integrated Risk Management section as detailed on pages 40 to 44. 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.

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 primarily dependent on the state of the Australian and New Zealand economies, 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 and New Zealand economies, 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 difficulty in meeting their obligations. In particular, a significant decrease in the Australian and New Zealand housing market or property valuations could adversely affect our home mortgage portfolio. Furthermore, 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, funds management 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 that increase the level of regulatory capital the Group is required to maintain 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 Basel II and other regulatory changes are contained in Capital Adequacy — Regulatory Changes on page 207 to 211 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 43 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 under ‘Integrated Risk Management’ commencing on page 40.

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, particularly 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 55 and 56 of this report

14 Commonwealth Bank of Australia Form 20-F 2006

Banking Analysis

Forward-Looking Statements

This “Banking Analysis” contains certain forward-looking statements. See “Special Note Regarding Forward-Looking Statements”.

Financial Performance and Business Review

Performance Highlights

For the Financial Year 2006 net profit after tax (“statutory basis”) of $3,203 million for the Banking business increased 15% on the prior year.

The performance during the year was underpinned by:

•

Continued strong volume growth in home loans, up 10% since June 2005 to $155 billion;

•

Domestic deposit volume growth of 7% since June 2005 to $151 billion including 11% growth in savings accounts;

•

Significant improvement in business lending volumes, up 20% since June 2005 to $76 billion;

•

Net interest margin decreased nine basis points over the year in a competitive market;

•

Operating expenses increased 4% compared with the prior year; and

•

Credit quality of the overall portfolio remaining sound.

More comprehensive disclosure of business highlights by key product category is contained on pages 19 to 24.

Net Interest Income

Net interest income for Financial Year 2006 increased by 8% to $6,514 million. The growth was driven by an increase in average interest earning assets of 12% offset by a nine basis point reduction in net interest margin. The introduction of AIFRS has not had a material impact on the growth rates for the year.

Average Interest Earnings Assets

Average interest earning assets increased by $30 billion over the financial year to $275 billion, reflecting a $27 billion increase in average lending interest earning assets and a $3 billion increase in average non-lending interest earning assets.

Home lending growth continued to be the largest contributor to the increase in average interest earning assets. Average home loan balances increased by 12% since 30 June 2005. Following a slight decline in the six months to 31 December 2005, the Group’s share of the Australian home loan market (Lending volume in dollars, source: APRA) remained stable over the second half of the financial year. In New Zealand, ASB Bank continued to grow ahead of the industry (source: Reserve Bank of New Zealand).

Personal Lending average balances increased by 11% during the Financial Year 2006. This result has been driven by strong growth in margin loans. Credit card and personal loan growth has been impacted by the repayment of low margin student loans and strong price based competition particularly in credit cards.

Average balances for Business, Corporate and Institutional lending increased 17% during the Financial Year 2006, due to strong business and corporate lending together with increases in Bills of Exchange and structured deals.

Net Interest Margin

Net interest margin of 2.34% decreased nine basis points during the Financial Year 2006. The key drivers of the margin reduction were:

AIFRS: impact of introduction of AIFRS (specifically reclassification of hybrid instruments as debt) resulted in increased volatility contributing to a reduction of two basis points.

Pricing: includes asset and deposit price margin which contributed a reduction of three basis points. Most of the price margin pressure was due to strong competition in the business and corporate segment. Both home loan and deposit margins were relatively stable over the year;

Funding mix: average lending asset growth of 13% continues to outpace average retail deposit growth of 8%, resulting in a greater reliance on wholesale funding which has moved from 43% in June 2005 to 45% in June 2006. The change in funding mix resulted in a two basis point margin contraction; and

Asset mix: strength in business and corporate lending out-paced home loan growth. This increased total margin by one basis point. Average non lending interest earning assets increased by $3 billion resulting in margin reduction of three basis points.

NIM Movement in Financial Year 2006

Additional information, including the average Balance Sheet, is set out in Note 4 to the Financial Statements.

Commonwealth Bank of Australia Form 20-F 2006 15

Banking Analysis


	Full Year Ended
	30/06/06			30/06/05			Jun 06 vs
Key Performance Indicators	$M			$M			Jun 05 %

Net interest income		6,514			6,026			8
Other banking income		3,036			2,845			7

Total banking income		9,550			8,871			8
Operating expenses		4,558			4,380			(4	)
Which new Bank ⁽¹⁾		—			112			—

Total operating expenses		4,558			4,492			(1	)
Bad debts expense		398			322			(24	)

Net profit before income tax		4,594			4,057			13
Income tax expense		1,339			1,220			(10	)
Minority interests		28			3		large

Net profit after tax (“cash basis”)		3,227			2,834			14

Defined benefit superannuation plan expense		(24	)		(52	)		53

Net profit after tax (“statutory basis”)		3,203			2,782			15


(1)		Which new Bank, refer to incremental expenses associated with the Which new Bank program.


Productivity and other measures

Net interest margin (%)	2.34	2.43		(9)bpts
Expense to income (%)	47.7	50.6			6
Effective corporate tax rate (%)	29.1	30.1		(100)bpts


Total Banking Net Profit After Tax (“Statutory Basis”)

Australian Retail Products	1,794	1,589			13
Premium, Business & Corporate and Institutional Products	1,038	1,009			3
Asia Pacific	364	291			25
Which new Bank expenses	—	(79	)
Other	7	(28	)		29

Total Banking Net profit After Tax (“Statutory Basis”)	3,203	2,782			11


	Full year
	30/06/06			30/06/05		Jun 06 vs
Other Banking Income	$M			$M		Jun 05 %

Commissions		1,635			1,545		6
Lending fees		800			733		9
Trading income		505			440		15
Other income		175			127		38

		3,115			2,845		9
Non trading derivatives		(79	)		—		—

Other banking income		3,036			2,845		7

During the Financial Year 2006 other banking income increased 7% to $3,036 million compared with $2,845 million in the prior year.

The introduction of AIFRS requires certain derivatives to be continually measured at fair value which may result in increased volatility in Other Banking Income in future periods.

Other Banking Income

Factors impacting Other Banking Income were:

•

Commissions: increased by 6% on the prior year to $1,635 million. The increase was mainly driven by volume increases including a 30% increase in CommSec (retail securities broking business) trading volume;

•

Lending fees: increased by 9% compared with the prior year to $800 million. After adjusting for AIFRS Transition, which required $25 million of net fee income to be deferred, lending fee growth was up 13% compared with the prior year. The result was driven by an increase in lending volumes in the business and corporate lending portfolios together with higher volumes in overdraft facilities;

•

Trading income: increased 15% on the prior year to $505 million reflecting favourable market conditions; and

•

Other income: increased by $48 million on the prior year. The current year includes $32 million in relation to the Mastercard initial public offering. The prior year includes $52 million relating to tax consolidation legislation impacting the leasing business. Excluding these items, the increase of $68 million was mainly due to structured transactions and leasing income.

16 Commonwealth Bank of Australia Form 20-F 2006

Banking Analysis

Operating Expenses

Operating expenses within the Banking business increased by 4% to $4,558 million during the Financial Year 2006. Operating expenses were impacted by:

•

Average salary increases of 4% reflecting labour market movements and other inflation-related expense increases;

•

Commencement of a number of projects supporting the strategic priorities of the Bank (including customer service and business banking initiatives) totalling $40 million; partly offset by

•

Ongoing realisation of expense savings as a result of efficiency initiatives implemented as part of the Which new Bank program.

Banking Expense to Income Ratio

The Banking operating expense to income ratio improved from 50.6% in the Financial Year 2005, to 47.7% in the Financial Year 2006. The improvement reflects strong income growth and good expense control, including the ongoing realisation of Which new Bank savings.

Bad Debts Expense

The total charge for Bad Debts for the Financial Year 2006 was $398 million, which is 18 basis points of Risk Weighted Assets, up 1 basis point from the prior year. This was the first year where provisions were calculated in accordance with AIFRS.

Gross impaired assets were $326 million as at 30 June 2006, compared with $395 million at June 2005.

The Bank believes it remains well provisioned, with total provisions for impairment as a percentage of gross impaired assets of 373%.

Taxation Expense

The corporate tax charge for the Financial Year 2006 was $1,339 million, an effective tax rate of 29.1% compared with 30.1% in the prior year.

Provisions for Impairment

Impairment provisions as at 30 June 2006 have been assessed under AIFRS, which does not distinguish between “specific” and “general” provisions for impairment as was the case under AGAAP. The 30 June 2005 provisions have not been restated for AIFRS.

Total provisions for impairment at 30 June 2006 were $1,217 million excluding the pre-tax equivalent General Reserve for Credit Losses ($500 million). The addition of the collective provision and General Reserve for Credit Losses (which is required by APRA) is 0.71% expressed as a percentage of risk weighted assets. The current level continues to reflect:

•

A major portion of the credit portfolio is in home loans which have a lower risk weighting compared with other portfolios;

•

The continuing strong asset quality in the Bank’s business lending book; and

•

A level of impaired assets which is at the lower end of levels achieved over the past decade.

Risk Weighted Assets On-Balance Sheet as at June 30 ($M)

Gross Impaired Assets as at June 30 ($M)

Commonwealth Bank of Australia Form 20-F 2006 17

Banking Analysis


	As at
	30/06/06			30/06/05			Jun 06 vs
Total Banking Assets & Liabilities	$M			$M			Jun 05 %

Interest earning assets
Home loans including securitisation		167,121			150,678			11
Less: securitisation		(12,607	)		(10,818	)		17

Home loans		154,514			139,859			10
Personal		17,228			15,668			10
Business and corporate		76,044			63,549			20

Loans, advances and other receivables ⁽¹⁾		247,768			219,076			13
Non lending interest earning assets		40,283			36,273			11

Total interest earning assets		288,069			255,349			13
Other assets ⁽²⁾		52,185			49,271			6

Total assets		340,254			304,620			12


Interest bearing liabilities
Transaction deposits		37,079			34,694			7
Savings deposits		41,421			38,461			8
Investment deposits		67,364			66,087			2
Other demand deposits		20,325			21,806			(7	)

Total interest bearing deposits		166,189			161,048			3
Deposits not bearing interest		7,037			6,978			1

Deposits and other public borrowings		173,226			168,026			3
Other interest bearing liabilities		99,976			72,935			37

Total interest bearing liabilities		266,165			233,983			14
Securitisation debt issues		13,505			12,144			11
Non interest bearing liabilities		44,515			41,422			7

Total liabilities		324,185			287,549			13


Provisions for Impairment
Collective Provisions		1,046			1,390			(25	)
Individually assessed provisions		171			157			9

Total provisions		1,217			1,547			(21	)
General reserve for credit losses (pre-tax equivalent)		500			—			—

Total provisions including general reserve for credit losses		1,717			1,547			11


	Full Year Ended
	30/06/06		30/06/05		Jun 06 vs
Asset Quality ⁽³⁾	$M		$M		Jun 05 %

Risk weighted assets ($M) ⁽⁴⁾		216,438		189,559		14
Net impaired assets ($M)		155		219		(29	)
General provisions as a % of risk weighted assets ⁽⁵⁾		—		0.73		—
Collective provisions plus general reserve for credit losses (pre-tax equivalent)/risk weighted assets (%) ⁽⁵⁾		0.71		—		—
Specific provisions for impairment as a % of gross impairment assets net of interest reserved (%) ⁽⁵⁾		—		41.8		—
Individually assessed provisions for impairment as a % of gross impaired assets net of interest reserved ⁽⁵⁾		52.5		—		—
Bad debt expense as a % of risk weighted assets annualised (%)		0.18		0.17	1bpt

(1)		Gross of provisions for impairment which are included in “Other Assets”.

(2)		Other assets include Bank acceptances of customers, provision for impairment and securitisation assets.

(3)		Asset quality coverage ratios are not comparable to prior periods due to AIFRS Transition.

(4)		No AIFRS adjustment is made to Risk Weighted Assets in the prior periods as the APRA prudential requirement is to apply previous AGAAP.

(5)		Upon transition to AIFRS, since 1 July 2005 impairment provisions have been assessed under AIFRS, which does not distinguish between “specific” and “general” provisions for impairment, as was the case under AGAAP. In accordance with AIFRS transitional rules the 30 June 2005 provisions have not been retrospectively restated for AIFRS. Refer to page 6 for further details.

18 Commonwealth Bank of Australia Form 20-F 2006

Banking Analysis

Australian Retail

The Australian Retail Product segment performed strongly during the Financial Year 2006, with net profit after tax (“statutory basis”) increasing by 13% to $1,794 million. This result is highlighted by strong revenue growth, effective expense control and productivity gains. Total banking income of $5,138 million increased $445 million or 9% relative to the prior year.

Business Review

During the Financial Year 2006, a number of initiatives were introduced to improve the service experience for our customers including:

•

The rollout of CommSee, the Bank’s new customer management system, across our 1,000 strong branch network and seven call centres;

•

The implementation of CommServe, a training program designed to enable our people to obtain maximum value from CommSee in seeking to improve Sales and Service outcomes. Over 14,000 staff undertook CommServe training during the Financial Year 2006;

•

The refurbishment of a further 133 branches, taking to 384 the number of branches refurbished over the past three years into a design/layout the Bank believes is more conducive to effective sales and service;

•

An additional 450 frontline customer service staff;

•

Improved access to Australia’s largest electronic banking and branch network through two new Streamline products with flat monthly fees, and the removal of transaction fees from NetBank;

•

The introduction of a low interest rate credit card (“Yellow”) to meet growing customer demand in this segment of the market; and

•

The pilot of a new customer service model which enables our frontline staff to spend more time on customer service and empowers our branch managers to make decisions about their business best suited to local conditions.

Home Loans

Home loan income increased 16% relative to the prior year. Income was impacted by AIFRS Transition, which required $35 million of net expenses to be deferred. Adjusting for AIFRS Transition, home loan income increased 13% during the Financial Year 2006 and was driven by solid volume growth of 11% and stable margins over the year.

Australian home lending balance market share fell by 26 basis points during the Financial Year 2006 to 18.8%. Substantially all of this reduction occurred in the first half of the year, when the Bank’s internal distribution channels underperformed due in part to the changes to systems and training required. The Bank’s Australian market share has stabilised over the second half of the year through improved sales in proprietary channels, and selective product changes to raise competitiveness.

Full year average margins have been stable, but were lower in the second half of the financial year mainly due to timing factors relating to passing on the May 2006 cash rate increase together with a higher volume of lower margin fixed rate home lending towards the end of the year.

Consumer Finance (Personal Loans and Credit Cards)

Total income in the Consumer Finance portfolio grew by 11% during the Financial Year 2006. This included $32 million in relation to the Mastercard initial public offering.

Total Consumer Finance balances (combined Personal Loans and Credit Cards) decreased by 1% over the year to $11 billion. Growth was impacted by the repayment of low margin student loans in the first half of the year. The market has been characterised by strong price based competition particularly in credit cards.

In March, the Bank launched a new low-rate credit card (“Yellow”) to meet customer demand in this segment of the market. Early results have been encouraging, with approximately 80,000 accounts opened since it launched.

Deposits

Revenue earned from reinvestment of deposits increased 6% in the Financial Year 2006, reflecting a combination of strong volume growth, relatively stable margins and higher other banking income.

Deposit balances grew by 8% over the year to $77 billion, with cyclical factors resulting in relatively stronger growth in the first half of the year. NetBank Saver deposit account balances grew by $4 billion, with approximately 63% being new funds to the Bank. Total deposit growth was slightly below market, as the Bank continues to pursue a balanced strategy aimed at optimising both growth and revenue outcomes. Net interest margin reduced slightly over the year due to competitive pressures.

In May, the Bank announced new pricing options on its main personal transaction account “Streamline”, allowing customers unlimited transactions for a fixed monthly fee. These changes provide customers with a greater level of certainty in their day-to-day banking whilst further consolidating the Bank’s competitive position in this segment of the market.

Operating Expenses

Expenses increased by 3% during the Financial Year 2006. This result reflects an increase in frontline employee expenses partially offset by productivity and other expense savings elsewhere in the business. The expense to income ratio fell from 46.2% as at June 2005 to 43.6% as at June 2006. Employee numbers increased by 475 full-time equivalents to 17,253 full-time equivalents as at June 2006, reflecting increases in frontline customer service employees.

Bad Debts

Total Bad Debts Expense for retail products for the Financial Year 2006 was $354 million, an increase of 33% on the prior year. Credit quality on the home loan portfolio remained high with percentage losses (losses as a percentage of the portfolio balance) at historic lows. Credit card losses as a percentage of balances were stable at 1.96%. Personal loan losses peaked mainly as a result of business booked in 2004. Subsequent tightening of policy and the introduction of new scorecards has improved the quality of more recent business.

Key Australian Market Share percentages for Australian retail products are as follows:


Australian Market Share Percentage	30/06/06		30/06/05

Home Loans ^{(1) (4)}		18.8		19.0
Credit Cards ^{(1) (2) (4)}		20.5		22.8
Personal lending (APRA and other households) ^{(3) (4)}		16.1		16.7
Household Deposits ⁽⁴⁾		29.3		29.8
Retail deposits ⁽⁵⁾		22.2		23.0

(1)		Comparatives have been restated due to a reclassification between home loans and personal loans by another Authorised Deposit — Taking Institution (ADI).

(2)		As at 31 May 2006. Source: Reserve Bank of Australia (“RBA”). (3) Personal lending market share includes personal loans and margin loans.

(4)		Source: Australian Prudential Regulation Authority (“APRA”), June 2006 Report. (Credit Cards market share lags by one month) (5) Source: RBA June 2006 Report.

Commonwealth Bank of Australia Form 20-F 2006 19

Banking Analysis

Full Year to 30 June 2006

Net

Other

Total

Interest

Banking

Net Profit

Income

Expenses

Bad Debts

after Tax

Australian Retail

Home loans

1,239

151

1,390

Consumer finance

727

368

1,095

Retail deposits ⁽¹⁾

1,953

700

2,653

Australian Retail products

3,919

1,219

5,138

2,240

354

1,794

Full Year to 30 June 2005

Total

Banking

Net Profit

Income ⁽²⁾

Expenses

Bad Debts

after Tax

Home loans

1,194

Consumer finance

985

Retail deposits ⁽¹⁾

2,514

Australian Retail products

4,693

2,168

266

1,589


(1)		Represents income earned from reinvestment of retail deposits.

(2)		Prior year breakdown of total banking income not available.


	As At
	30/06/06		30/06/05		Jun 06 vs
Major Balance Sheet Items (gross of impairment)	$M		$M		Jun 05 %

Home loans (incl securitisation)		144,834		129,913		11
Consumer finance ⁽¹⁾		10,640		10,720		(1	)

Total assets — Australian Retail products		155,474		140,633		11

Home loans (net of securitisation)		132,227		119,094		11


Transaction deposits		16,993		16,382		4
Savings deposits		38,071		34,061		12
Other demand deposits		19,818		19,197		3
Deposits not bearing interest		2,362		2,172		9

Total liabilities — Australia Retail products		77,244		71,812		8


(1)		Retail Consumer Finance includes personal loans and credit cards.

20 Commonwealth Bank of Australia Form 20-F 2006

Banking Analysis

Premium, Business & Corporate and Institutional

The Premium, Business & Corporate and Institutional product segment delivered net profit after tax (“statutory basis”) of $1,038 million for the Financial Year 2006, an increase of 3% compared to the prior year. Total banking income of $3,073 million increased $110 million or 4% relative to the prior year. The result has been impacted by the transition to AIFRS, which required $55 million of Net Income to be deferred, and one-off inclusion of income recognised in relation to tax consolidation legislation changes in the prior year of $52 million.

Business Review

The Premium, Business & Corporate and Institutional product segment performed well over the year, with the performance highlights including:

•

Development of dedicated mobile lenders, strong servicing for third party brokers, the introduction of a dedicated acquisition sales force for corporate clients and foreign exchange sales force;

•

Establishment of five distribution teams being Institutional Banking, Corporate Financial Services, Agribusiness, Local Business Banking and Private Client Services which all provide greater focus on each of these segments as the Bank expands its business banking footprint;

•

The introduction of the Business Online Saver high yield investment account, the Commonwealth Portfolio Loan product and the Business Line of Credit, all of which have reached $1 billion in balances;

•

Successful implementation of the CommSee customer management system across the business providing Bank employees with a common IT platform and access to common client information; and

•

Further extended specialised client service teams that are now capable of supporting all business clients centrally for most servicing activities.

Outcomes by key product category are summarised below.

Corporate Banking

Corporate Banking includes commercial and corporate transaction services and merchant acquiring transaction processing.

This line of business achieved income growth of 1% for the Financial Year 2006 reflecting an increasingly competitive environment. Merchant acquiring in particular has been subject to intense competition in the second half of the year but has increased transaction volumes over the year, which allows the Bank to continue to leverage its scale position.

Financial Markets

Financial Markets includes financial markets and wholesale operations, equities broking (including CommSec) and structured products, capital markets services (including IPOs and placements) and margin lending.

Financial markets income has increased 14% in the Financial Year 2006 compared to the prior year following improved trading conditions and increased customer flows. Continued strength in investment markets has also resulted in strong CommSec trading volumes while margin lending balances increased 34% over the year.

Lending and Finance

Lending and Finance includes asset finance, structured finance and general business lending.

Lending and Finance income of $1,192 million for the year was impacted by the transition to AIFRS which required $55 million of Net Income to be deferred. In addition, the one-off inclusion of income recognised in relation to tax consolidation legislation changes impacted the leasing business, resulting in the recognition of $52 million of income in the prior year.

Lending and Finance assets have increased $16 billion or 18% in the Financial Year 2006 compared with the prior year. The increase has been driven by continued growth in the Australian and New Zealand syndicated loan market and an increase in volume in structured finance transactions. Bank acceptances have increased by 9% during the Financial Year 2006 which was primarily driven by general market growth.

Operating Expenses

Operating expenses of $1,570 million increased 2% compared to the prior year. This was driven by general salary increases and higher employee numbers, mainly to support volume growth in the Financial Markets business, partly offset by significant IT related savings following lower volume charges and the inclusion of one off system development expenses in the prior year.

Market Share

Australian business lending market share (including bank acceptances) declined during the year by 10 basis points to 13.1%. Institutional lending is particularly sensitive to major funding requirements and is heavily impacted by relative levels of participations in syndicated loan deals.

Asset Finance market share declined by 90 basis points to 14.5% since June 2005. The decline reflects the maturity of this business segment, which has been characterised by aggressive price competition coupled with competitor expansion.

Equities Trading market share increased 70 basis points over the year. This result was supported by a 51% increase in value traded compared to market growth of 26%.


Market Share Percentage	30/06/06		30/06/05

Business Lending ⁽¹⁾		13.1		13.2
Asset finance ⁽²⁾		14.5		15.4
Equities trading (CommSec) ⁽³⁾		4.3		3.6


(1)		Source: RBA, June 2006 Report.

(2)		Source: Australian Equipment Leasers Association (“AELA”), June 2006 Report.

(3)		Source: Australian Stock Exchange (“ASX”), IRESS system June 2006.

Commonwealth Bank of Australia Form 20-F 2006 21

Banking Analysis

Premium, Business & Corporate and Institutional

Full Year to June 2006

Net

Other

Total

Interest

Banking

Net Profit

Income

Expenses

Bad Debts

after Tax

Corporate Banking

558

394

952

Financial Markets

287

642

929

Lending and Finance

751

441

1,192

Premium, Business & Corporate and Institutional products

1,596

1,477

3,073

1,570

1,038

Full Year to June 2005

Total

Banking

Net Profit

Income ⁽¹⁾

Expenses

Bad Debts

after Tax

Corporate Banking

945

Financial Markets

814

Lending and Finance

1,204

Premium, Business & Corporate and Institutional products

2,963

1,536

1,009


(1)		Prior year breakdown of total banking income not available.


	As At
	30/06/06		30/06/05		Jun 06 vs
Major Balance Sheet Items (gross of impairment)	$M		$M		Jun 05 %

Interest earning lending assets		66,343		51,584		29
Bank acceptances of customers		18,310		16,786		9
Non lending interest earning assets		35,471		33,993		4
Margin loans		5,758		4,311		34
Other assets ⁽¹⁾		19,947		19,773		1

Total assets — Premium, Business & Corporate and Institutional products ⁽²⁾		145,829		126,447		15

Transaction deposits		16,426		14,457		14
Other demand deposits		37,821		34,601		9
Deposits not bearing interest		3,520		3,651		(4	)
Certificates of deposits and other		20,178		16,367		23
Dues to other financial institutions		11,333		7,964		42
Liabilities at fair value through the Income Statement		2,085		1,580		32
Debt issues		77,848		65,463		19
Loan capital		9,744		8,356		17
Other non interest bearing Liabilities		36,703		32,927		11

Total liabilities — Business, Corporate and Institutional products Australia ⁽²⁾		215,658		185,366		16


Banking Sheet by Product Segment

Assets
Corporate Banking	3,546	3,299	7
Financial Markets	36,228	34,104	6
Lending and Finance	101,601	85,935	18
Other ⁽²⁾	4,454	3,109	43

Total assets — Premium, Business & Corporate and Institutional products	145,829	126,447	15

Liabilities
Corporate Banking	20,799	18,659	11
Financial Markets	71,594	67,398	6
Lending and Finance	27,303	21,658	26
Other ⁽²⁾	95,962	77,651	24

Total liabilities — Business, Corporate and Institutional products Australia	215,658	185,366	16


(1)		Other assets include intangible assets and derivative assets.

(2)		Includes Group Funding, Balance Sheet Management and other capital not directly attributed to the product based segments above.

22 Commonwealth Bank of Australia Form 20-F 2006

Banking Analysis

Asia Pacific

Asia Pacific Banking incorporates the Bank’s retail, business/commercial and rural banking operations in New Zealand, Fiji, Indonesia and China.

In the Financial Year 2006 net profit after tax (“statutory basis”) for Asia Pacific businesses increased 25% to $364 million compared to the prior year. Total banking income of $1,066 million was $149 million or 16% above the prior year. ASB Bank in New Zealand represents the majority of the business.

ASB Bank

The New Zealand economy was characterised during the Financial Year 2006 by higher interest rates under the Reserve Bank of New Zealand’s tightening of monetary policy and strong competition in both deposits and lending. Despite these pressures ASB Bank again achieved solid growth in its asset and liability products. New Zealand lending balances grew strongly again in 2006, however, growth rates were slower than the prior year due to tighter economic conditions. Home lending balances grew by 18% to NZD 26.0 billion, commercial loans by 13% to NZD 4.5 billion and rural loans also by 13% to NZD 3.8 billion.

Retail deposit balances of NZD 20.4 billion were 12% higher than the prior year. FastSaver and term investments contributed most of the growth in deposits.

ASB Bank net profit after tax (“cash basis”) for the year was NZD 400 million, an increase of 22% over the prior year. This was driven by:

•

Strong growth in commercial/business and rural lending;

•

Success of the Fastsaver deposit product introduced in November 2004 with balances growing by more than 75% by the end of June 2006;

•

Net interest margin pressure over the year in a very competitive environment. Most of this pressure was evidenced in the first half with net interest margin flat in the second half;

•

Continued productivity improvements with expense to income ratio of 43.1% for the year, down from 44.8% in the prior year; and

•

Sound credit quality.

Other Asia Pacific Business

The highlights in this region during the year were:

•

Purchase of the remaining 49% of the Colonial National Bank in Fiji from the Fiji Government in January 2006. Fiji loans and advances increased by 34% during 2006 to $484 million although liquidity and interest rate volatility issues in the Fiji economy resulted in a more subdued performance in the second half of the year;

•

Acquisition of a 19.9% interest in Hangzhou City Commercial Bank (HZB) for $102 million. HZB is one of the top five City Commercial Banks by assets in mainland China. When combined with our investment in Jinan City Commercial Bank, the Bank now holds interests in two of the top 10 City Commercial Banks in China;

•

Introduction of the Capability Transfer Program, a skills transfer program including the seconding of employees, with Jinan City Commercial Bank;

•

Development of a mortgage broking business in Shanghai; and

•

Continuation of the branch expansion program in PT Bank Commonwealth in Indonesia with six new branches added during the year.

Market Share

Market share in New Zealand increased in all major asset categories and retail deposits. Home loan market share increased seven basis points to 23.1% ranking ASB Bank second in the market.

Retail deposit market share in New Zealand was 20.3% at 30 June 2006, an increase of 82 basis points from June 2005.

Fiji lending asset market share increased from 20.5% at 30 June 2005 to 22.5% as at 31 May 2006.


Market Share Percentage	30/06/06		30/06/05

NZ lending for housing ⁽¹⁾		23.1		23.0
NZ retail deposits ⁽¹⁾		20.3		19.5


(1)		Source: Reserve Bank of New Zealand (“RBNZ”) June 2006 Report.

Commonwealth Bank of Australia Form 20-F 2006 23

Banking Analysis

Asia Pacific

Full Year to June 2006

Net

Other

Total

Interest

Banking

Net Profit

Income

Expenses

Bad Debts

after Tax

ASB

680

291

971

Other

Asia Pacific

723

343

1,066

521

364

Full Year to June 2005

Total

Banking

Net Profit

Income ⁽¹⁾

Expenses

Bad Debts

after Tax

ASB

878

Other

Asia Pacific

917

490

291


(1)		Prior year breakdown of total banking income not available.


	As At
	30/06/06		30/06/05		Jun 06 vs
Major Balance Sheet Items (gross of impairment) ⁽¹⁾	$M		$M		Jun 05 %

Home lending		22,287		20,765		7
Other lending assets		10,531		12,132		(13	)
Non lending interest earning assets		4,812		3,664		31
Other assets		1,321		979		35

Total Assets — Asia Pacific		38,951		37,540		4


Debt Issues		744		6,939		(89	)
Deposits ⁽²⁾		18,040		23,006		(22	)
Liabilities at fair value through the Income Statement		11,727		—		—
Other Liabilities		772		426		81

Total Liabilities — Asia Pacific		31,283		30,371		3


Balance Sheet by Segment

Assets
ASB	36,724	35,593		3
Other	2,227	1,947		14

Total Assets — Asia Pacific	38,951	37,540		4


Liabilities
ASB	29,306	29,658		(1	)
Other	1,977	713	large

Total Liabilities — Asia Pacific	31,283	30,371		3


(1)		30 June 2006 Balance Sheet impacted by deterioration of the NZD (11% over the full financial year).

(2)		Asia Pacific Deposits exclude deposits held in other overseas countries (30 June 2006: A$4 billion and 30 June 2005: A$4 billion).

24 Commonwealth Bank of Australia Form 20-F 2006

Funds Management Analysis

Forward-Looking Statements

This “Funds Management Analysis” contains certain forward-looking statements. See “Special Note Regarding Forward-Looking Statements”.

Financial Performance and Business Review

Performance Highlights

The Financial Year 2006 net profit after tax (“statutory basis”) of $310 million was in line with the prior year for the Funds Management business. Net profit after tax (“cash basis”) of $410 million increased 17% on the prior year, reflecting strong revenue growth across the business.

Net profit before tax increased by 27%. The after tax result was impacted by $27 million due to a significantly higher effective tax rate primarily due to the phasing out of the transitional tax relief by the Australian Tax office on investment style products within the life insurance entities, which ceased at the end of the last financial year.

Funds under administration grew to $152 billion as at 30 June 2006 which is up 23% on the prior financial year. The growth in funds under administration was the result of strong net fund flows and favourable investment markets.

Business Review

Industry growth has been positive and inflow of funds in the retail markets has remained strong over the year.

Total funds flow performance for the year was strong with $11 billion of net inflows (up $10 billion on the prior financial year) due to the continuing success of FirstChoice (platform business), significant inflows into Avanteos (platform business), including $5 billion in net flows from an alliance with Goldman Sachs JB Were, excellent sales results in the International businesses and good inflows into domestic wholesale funds. An improvement in fund flows was achieved across most channels, including Independent Financial Advisors, Institutional Clients and the Bank Network.

The success of FirstChoice has underpinned recent growth in retail market share, with the Bank increasing share and maintaining its number one position in the overall retail market. In the Plan for Life ⁽¹⁾ market share statistics, FirstChoice received in excess of 25% of net flows in the platform market over the year. A survey published by ASSIRT in May 2006 showed that 50% of advisors in the market used FirstChoice as one of their platforms.

Investment performance during the Financial Year 2006 was good, in both absolute terms and in the Bank’s view against relevant benchmarks and this contributed to the improving fund flows.

Other key developments within the business during the financial year included:

•

Continued platform enhancements and new product offerings including the development of a self managed super offering “YourChoice”, to capitalise on this rapidly growing sector of the market;

•

Further improvement in Bank planner performance, with a 16% increase in productivity for the year. Productivity is defined as gross sales per advisor;

•

Acquisition, in October 2005, of the Gandel Group’s interests in the Colonial First State Property Retail Trust Limited and Gandel Retail Management Trust Ltd, which provides funds management and property management services to a number of Colonial First State Retail Property trusts;

•

The continued rationalisation of legacy systems and products; and

•

Strengthening of the control and operating environment, particularly around unit pricing of investment style products within the life insurance entities.

Investment Performance

Investment performance has been good with 14 out of 18 major funds exceeding relevant benchmarks to such funds on a one year basis and 11 out of 18 major funds exceeding benchmark on a three year basis. Relevant benchmarks are determined by the Group using industry guidelines on a fund by fund basis and the determination is dependant on fund objectives, asset class and investment strategy.

Importantly, the investment performance of the two flagship Australian Equity funds were well ahead of benchmark on a one year basis with rankings in first and second quartiles.

Operating Income

Operating income for the Financial Year 2006 increased by 23% to $1,552 million. Income growth was supported by a 23% increase in funds under administration to $152 billion at 30 June 2006 and a significant improvement in sales, particularly within the offshore businesses. The acquisition of Gandel’s Joint Venture interest in October 2005 has also contributed $45 million in revenue during the year. This contributed three basis points to gross margin.

Margin increased by four basis points. This reflects the acquisition of Gandel’s joint venture interest, good margins on FirstChoice, strong inflows into higher margin International products and the maintenance of funds under administration levels on the higher margin legacy retail products.

Operating Expenses

Total operating expenses for the Financial Year 2006 of $989 million increased by $155 million or 19% on the prior year.

This was primarily due to:

•

The acquisition, in October 2005, of Gandel’s Joint Venture interest in the Colonial First State Property Retail Trust Ltd and Gandel Retail Management Trust Ltd which increased the Bank’s share of operating expenses, resulting in an increase of expenses by $28 million in the current financial year;

•

Expenses in relation to the Unit Pricing control and process improvement program, totalling $55 million. This is expected to incur additional expenses of $20-30 million during the next financial year; and

•

Volume expenses, driven predominantly by stronger sales and growth in funds under administration, increased 44%.

Excluding the expenses associated with Gandel and the Unit Pricing initiative, expenses increased 6% compared to the prior year, reflecting average salary increases of 4% and performance based remuneration within the asset management business.

Expenses to average funds under administration for the financial year was 0.71%, an improvement on the prior year of one basis point.

Taxation

The corporate tax expense for the Financial Year 2006 was $164 million, representing an effective tax rate of 28.4% compared with 21.9% for the prior year. The increase in the effective tax rate, amounting to $27 million, is due to the phasing out of transitional tax relief by the Australian Tax office on investment style funds management products within life insurance legal entities.

(1)

Source: Plan for Life March 2006 Report.

Commonwealth Bank of Australia Form 20-F 2006 25

Funds Management Analysis


	Full Year Ended
	30/06/06			30/06/05			Jun 06 vs
Key Performance Indicators	$M			$M			Jun 05 %

Operating income – external		1,543			1,247			24
Operating income – internal		9			10			(10	)

Total operating income		1,552			1,257			23
Shareholder investment returns		14			33			(58	)

Funds management income		1,566			1,290			21
Volume expense		224			156			(44	)
Operating expenses		765			642			(19	)
Which new Bank ⁽¹⁾		—			36			—

Total operating expenses		989			834			(19	)

Net profit before income tax (“cash basis”)		577			456			27

Corporate tax expense ⁽²⁾		164			100			(64	)
Minority interests		3			7			(57	)

Net profit after income tax (“cash basis”)		410			349			17

Treasury shares		(100	)		(39	)

Net profit after income tax (“statutory basis”)		310			310			—


(1) Which new Bank, refer to incremental expenses associated with the Which new Bank program.

(2) For purpose of presentation, Policyholder tax benefit and Policyholder tax expense are shown on a net basis (2006: $193 million).

Funds under Administration

Funds under administration – average		139,082			116,262			20
Funds under administration – spot		151,513			123,064			23
Net flows		10,830			456		large
Total retail net flows		8,235			2,190		large


Productivity and Other Measures

Operating income to average funds under administration (%)		1.12			1.08		4bpts
Operating expenses to average funds under administration (%)		0.71			0.72			1
Effective corporate tax rate (%)		28.4			21.9		large

26 Commonwealth Bank of Australia Form 20-F 2006

Funds Management Analysis

Funds under Administration

Funds under Administration increased by 23% over the year to $152 billion as at 30 June 2006. The growth in Funds under Administration has been driven by a combination of positive net fund flows, strong investment markets, and positive absolute investment performance which exceeded relevant benchmark across many of our funds. Net inflows for the year were $11 billion, and investment returns contributed $17 billion for the same period.

Average Funds under Administration of $139 billion were 20% higher than the prior financial year.

The key drivers of net funds flows were:

•		Continuation of market leading flows into FirstChoice capturing in excess of 25% ⁽¹⁾ of the market net flows. FirstChoice exceeded $25 billion in funds under administration in less than four years;

•		Significant inflows associated with the Goldman Sachs JB Were strategic alliance of $5 billion;

•		Reduced net outflows on Australian equity funds due to improved investment performance;

•		A turnaround in net flows into wholesale products, which achieved positive net flows of $1.3 billion for the year following net inflows from several key mandates;

•		Good flows into higher margin equity products and mandates in the International business market following improved investment performance and strong equity markets;

•		Net outflows from the cash management product due to competition from competitively priced retail deposit products;

•		Property net outflows following the planned sell-down of assets within a closed end fund; and

•		Net outflows in other retail products including closed legacy products, which is consistent with prior periods.


(1)		Nine months to March 2006 (source: Plan for Life).

Market Share

The Group’s Australian retail market share increased from 14.5% at 30 June 2005 to 15.7% at 31 March 2006. The business has achieved strong net flows in retail Funds under Administration in Financial Year 2006 and has also been favourably impacted by the inflow from the alliance with Goldman Sachs JB Were which contributed 1% to market share growth.

The most recent Plan for Life survey (March 2006) showed the Bank ranking No. 1 for total retail net flows and No. 1 for retail flows excluding cash trusts. Improvement in investment performance has also aided market share gains.


Market Share Percentage⁽²⁾	30/06/06		30/06/05

Australian retail – administrator view ⁽³⁾		15.7		14.5
New Zealand retail ⁽⁴⁾		15.0		15.2
Platforms (Masterfunds) ⁽³⁾		12.5		10.2


(2)		2006 figures are as at 31 March.

(3)		Source: Plan for Life March 2006 Report. The administrator view considers market share from the perspective of the company which administers the product, and also includes branded products distributed by separate entities.

(4)		Source: Fund Source Research March 2006 Report.

Commonwealth Bank of Australia Form 20-F 2006 27

Funds Management Analysis


	Full Year Ended 30 June 2006
	Opening									FX⁽³⁾ &			Closing
	Balance							Investment		Other			Balance
	30/06/05		Inflows		Outflows			Income		Movements⁽⁴⁾			30/06/06
Funds under Administration	$M		$M		$M			$M		$M			$M

FirstChoice & Avanteos		19,069		19,219		(5,886	)		3,190		(217	)		35,375
Cash management		4,182		2,417		(3,061	)		152		—			3,690
Other retail ⁽¹⁾		36,069		3,450		(7,904	)		4,353		(413	)		35,555


Australian retail		59,320		25,086		(16,851	)		7,695		(630	)		74,620
Wholesale		24,894		13,099		(11,810	)		3,682		(50	)		29,185
Property		13,456		1,074		(2,144	)		1,520		3			13,909
Other ⁽²⁾		2,886		192		(481	)		454		657			3,708

Domestically sourced		100,556		39,451		(31,286	)		13,351		(20	)		122,052
Internationally sourced		22,508		12,097		(9,432	)		3,835		453			29,461

Total – Funds under Administration		123,064		51,548		(40,718	)		17,186		433			151,513


	Full Year Ended 30 June 2005
	Opening									FX ⁽³⁾ &			Closing
	Balance							Investment		Other			Balance
	30/06/04		Inflows		Outflows			Income		Movements⁽⁴⁾			30/06/05
Funds under Administration	$M		$M		$M			$M		$M			$M

FirstChoice & Avanteos		12,075		10,377		(4,265	)		1,153		(271	)		19,069
Cash management		4,414		2,961		(3,425	)		232		—			4,182
Other retail		34,705		4,417		(7,875	)		3,951		871			36,069


Australian retail		51,194		17,755		(15,565	)		5,336		600			59,320
Wholesale		23,955		10,841		(13,350	)		3,177		271			24,894
Property		12,624		1,207		(1,172	)		1,668		(871	)		13,456
Other		3,033		248		(786	)		391		—			2,886

Domestically sourced		90,806		30,051		(30,873	)		10,572		—			100,556
Internationally sourced		19,077		9,209		(7,931	)		2,453		(300	)		22,508

Total – Funds under Administration		109,883		39,260		(38,804	)		13,025		(300	)		123,064


(1)		Includes stand alone retail and legacy retail products.

(2)		Includes life company assets sourced from retail investors but not attributable to a funds management product (e.g. premiums from risk products). These amounts do not appear in retail market share data.

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

(4)		Other movements represent the re-alignment of funds to correctly classify source of funds.

28 Commonwealth Bank of Australia Form 20-F 2006

Insurance Analysis

Forward-Looking Statements

This “Insurance Analysis” contains certain forward-looking statements. See “Special Note Regarding Forward-Looking Statements”.

Financial Performance and Business Review

Performance Highlights

The Insurance business has delivered a strong result for the Financial Year 2006 with net profit after tax (“statutory and cash basis”) increasing by 35% to $416 million.

The result was underpinned by:

•		Solid inforce premium and operating margin growth in Australia and New Zealand;

•		Positive experience variations; and

•		Good expense control.

The full year result included the profit from the sale of the Hong Kong insurance business of $145 million. Excluding the profit on sale of the Hong Kong insurance business, net profit after tax decreased by 12% primarily due to lower shareholder investment returns, resulting from a more conservative investment mix.

The Bank estimates it is the largest life insurer in the Australian, New Zealand and Fiji markets by market share.

Business Review

Australia

The Australian business, CommInsure, delivered a strong result for the year. Highlights include:

•		Maintaining number one market share position for Australian risk premiums with 13.5% of the life insurance risk market.⁽¹⁾

•		Launch of a Guaranteed Index Tracked Annuity Product and a Travel Insurance product; and

•		Productivity improvements through continued simplification and rationalisation of systems and processes.

Net profit after tax (“statutory basis”) was $181 million compared to $186 million in the prior year.

Key drivers of the performance for the year were:

•		Life and General Insurance premium growth, with inforce premiums increasing by 8% for the year reflecting consistent growth across the business;

•		Sales volume growth, particularly within General Insurance (up 13%) and Group Risk products (up 8%) with higher volumes in home and contents, new business and renewals;

•		Positive claims experience in both Life and General Insurance products, despite the impact of claims associated with Cyclone Larry in the second half of the year; offset by

•		Lower investment returns on Shareholder funds.

New Zealand

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

Sovereign’s net profit after tax (“statutory basis”) was $94 million for the year, compared to $74 million in the prior year. The main drivers of this result were:

•		Strong growth in new business sales of risk products resulting in market share growth and improved margins;

•		Positive persistency experience; and

•		Good investment returns.

Asia

The Hong Kong based life insurance, pensions administration and financial planning businesses were sold to Sun Life Financial on 18 October 2005.

The Asian insurance businesses now consist of the joint venture life insurance businesses in China, Vietnam and Indonesia.

The net profit after tax (“statutory basis”) in the Asia business was $141 million, which included profit on sale of the Hong Kong insurance business.

Operating Income

Life insurance income decreased 3% and reflects the sale of the Hong Kong insurance business offset by strong volume growth and favourable claims experience in both the Australian and New Zealand businesses.

General Insurance income of $73 million was up 35% on the prior year. The result was supported by inforce premium growth of 10% over the year together with favourable claims experience despite the impact of claims associated with Cyclone Larry.

Operating Expenses

Operating expenses for the year of $456 million were down from $553 million in the prior year reflecting the sale of the Hong Kong insurance business.

Expenses to average inforce premiums for the year of 36% exceeded the Which new Bank target of 42%. Productivity improved over the second half following continued strength in revenue growth.

Corporate Taxation

The effective corporate tax rate for the year was 19.7% compared with 22.4% in the prior year. Excluding the impact of the sale of the Hong Kong insurance business, the effective tax rate for the current year was 27.3%. The increase in the effective corporate tax rate is due to recognition of tax losses in the prior year.


(1)		Source: Plan for Life March 2006 Report.

Commonwealth Bank of Australia Form 20-F 2006 29

Insurance Analysis


	Full Year Ended
	30/06/06		30/06/05		Jun 06 vs
Key Performance Indicators	$M		$M		Jun 05 %

Insurance
Life insurance operating income		669		693		(3	)
General insurance operating income		73		54		35

Total operating income		742		747		(1	)
Shareholder investment returns		87		204		(57	)
Profit on sale of the Hong Kong insurance business		145		—		—

Total insurance income		974		951		2

Volume expense		181		218		17
Other operating expenses ⁽¹⁾		275		333		17
Which new Bank		—		2		—

Total operating expenses		456		553		18

Net profit before income tax		518		398		30

Corporate tax expense		102		89		(15	)

Net profit after income tax (“Statutory and cash basis”)		416		309		35


Productivity and Other Measures
Expenses to average inforce premiums (%)		36.7		45.5		19	%
Effective corporate tax rate including impact of profit on sale of Hong Kong insurance business (%)		27.3		22.4	large


(1)		Operating expenses include $9 million internal expenses relating to the asset management of shareholder funds (June 2005: $10 million).


	Full Year Ended
	30/06/06		30/06/05				Jun 06 vs
Sources of Profit from Insurance Activities	$M		$M			Jun 05 %

The Margin on Services profit from ordinary activities after income tax is represented by:
Planned profit margins		146		122				20
Experience variations		48		27				78
Other		—		(8	)			—
General insurance operating margins		21		13				62

Operating margins		215		154				40
After tax shareholder investment returns		56		155				(64	)
Profit on sale of the Hong Kong insurance business		145		—				—

Net profit after income tax (“statutory and cash basis”)		416		309				35

Geographical Analysis of Business Performance


	Full Year Ended
	Australia				New Zealand				Asia					Total
	30/06/06		30/06/05		30/06/06		30/06/05		30/06/06			30/06/05		30/06/06		30/06/05
Net Profit after Income Tax	$M		$M		$M		$M		$M			$M		$M		$M

Operating margins		125		94		77		52		13			8		215		154
After tax shareholder investment returns		56		92		17		22		(17	)		41		56		155
Profit on sale of Hong Kong business		—		—		—		—		145			—		145		—

Net profit after income tax		181		186		94		74		141			49		416		309

30 Commonwealth Bank of Australia Form 20-F 2006

Insurance Analysis


	Full Year Ended 30 June 2006
	Opening										Closing
	Balance		Sales/New					Other			Balance
	30/06/05		Balances		Lapses			Movements⁽²⁾			30/06/06
Annual Inforce Premiums⁽¹⁾	$M		$M		$M			$M			$M

General insurance ⁽³⁾		215		70		(49	)		—			236
Personal life		785		137		(81	)		(109	)		732
Group life		265		71		(48	)		(33	)		255

Total		1,265		278		(178	)		(142	)		1,233


Australia		856		231		(166	)		—			921
New Zealand		296		47		(12	)		(29	)		302
Asia ⁽⁴⁾		113		—		—			(113	)		—

Total		1,265		278		(178	)		(178	)		1,223


	Full Year Ended 30 June 2005
	Opening									Closing
	Balance		Sales/New					Other		Balance
	30/06/04		Balances		Lapses			Movements⁽²⁾		30/06/05
Annual Inforce Premiums⁽¹⁾	$M		$M		$M			$M		$M

General insurance ⁽³⁾		192		62		(39	)		—		215
Personal life		703		164		(89	)		7		785
Group life		272		74		(87	)		6		265

Total		1,167		300		(215	)		13		1,265


Australia		815		228		(187	)		—		856
New Zealand		258		48		(15	)		5		296
Asia ⁽⁴⁾		94		24		(13	)		8		113

Total		1,167		300		(215	)		13		1,265


(1)		Inforce premium relates to risk business. Savings products are disclosed within Funds Management.

(2)		Includes foreign exchange movements.

(3)		General insurance inforce premiums includes approximately $46 million of badged premium (June 2005: $40 million).

(4)		Other movements represent the sale of the Hong Kong insurance business.

Inforce Premiums

Annual Inforce premiums (general and life insurance) decreased during the Financial Year 2006 impacted by the sale of the Hong Kong insurance business and the deterioration of the New Zealand dollar against the Australian dollar in the first half of the financial year. Excluding these factors, inforce premiums increased 9% on the prior year, reflecting consistent growth in both Australian and New Zealand operations. Australian inforce premium growth was driven by good performances in Retail and Wholesale Risk. The New Zealand business continues to increase its market share through a focus on new business market share which is supported by a strong service culture. General Insurance premiums increased by 10% in the financial year, due to increases in volume in home and contents, new business and renewals. Life insurance premiums decreased by 6% in the financial year due to the sale of the Hong Kong insurance business.

The Australian business maintained its leading position of inforce premiums with 13.5% of market share in total life insurance at 31 March 2006. (Source: Plan for Life)


Market Share Percentage – Annual Inforce Premiums	30/06/06		30/06/05

Australia (total risk) ^{(1) (2)}		13.5		13.8
Australia (individual risk) ^{(1) (2)}		12.4		13.0


(1)		As at 31 March 2006.

(2)		Source: Plan for Life March 2006 Report.

Commonwealth Bank of Australia Form 20-F 2006 31

Shareholder Investment Returns


	Full Year Ended
	30/06/06		30/06/05		Jun 06 vs
Shareholder Investment Returns	$M		$M		Jun 05 %

Funds management business		14		33		(58	)
Insurance business ⁽¹⁾		87		204		(57	)
Profit on sale of Hong Kong insurance business		145		—		—

Shareholder investment returns before income tax		246		237		4
Income tax expense		35		60		42

Shareholder investment returns after tax		211		177		19


(1)		Excluding profit on sale of the Hong Kong insurance business.

As at 30 June 2006

Australia

New Zealand

Asia

Total

Shareholder Investment Asset Mix ($M)

Local equities

—

International equities

—

Property

307

—

315

Sub-total

348

—

382

Fixed interest

342

191

556

Cash

823

132

964

Income

1,165

323

1,520

Total

1,513

357

1,902


	As at 30 June 2006
	Australia		New Zealand		Asia		Total
Shareholder Investment Asset Mix (%)	%		%		%		%

Local equities		3		—		—		2
International equities		—		7		—		1
Property		20		2		—		17

Sub-total		23		9		—		20

Fixed interest		23		54		72		29
Cash		54		37		28		51

Income		77		91		100		80

Total		100		100		100		100

Shareholder investment returns of $246 million pre tax include a $145 million profit on the sale of the Bank’s Hong Kong insurance business.

Australian and international investment markets performed strongly for the year to 30 June 2006, with the benchmark S&P/ASX200 price index increasing by 19% and the MSCI World index by 15%. All other asset classes (fixed interest, property and cash) posted positive returns.

Excluding the profit on sale of the Hong Kong insurance business, shareholder investment returns for the year of $101 million (pre tax) represent a significant decrease on the prior year. This decrease was primarily due to a reduction of 24% in total Shareholder Investment Assets due to the sale of the Hong Kong insurance business.

32 Commonwealth Bank of Australia Form 20-F 2006

Group Operating Expenses

The following table sets out the Group’s operating expenses for Financial Years 2006 and 2005.


	Group
	2006		2005		June 06 vs
	$M		$M		June 05 %

Staff Expenses
Salaries and wages		2,419		2,274		6
Share based compensation		39		74		(47	)
Superannuation contributions		8		7		14
Provisions for employee entitlements		66		67		(1	)
Payroll tax		123		115		7
Fringe benefits tax		34		32		6
Other staff expenses		134		104		29

Comparable business		2,823		2,673		6
Which new Bank ⁽¹⁾		—		50		(100	)

Total Staff Expenses		2,823		2,723		4


Occupancy and Equipment Expenses
Operating lease rentals		338		331		2
Depreciation:
Buildings		22		21		5
Leasehold improvements		56		58		(3	)
Equipment		64		63		2
Operating lease assets		9		8		13
Repairs and maintenance		73		71		3
Other		59		61		(3	)

Comparable business		621		613		1
Which new Bank ⁽¹⁾		—		13		(100	)

Total Occupancy and Equipment Expenses		621		626		1


Information Technology Services
Projects and development		364		331		10
Data processing		227		248		(8	)
Desktop		137		150		(9	)
Communications		201		204		(1	)
Amortisation of software assets		43		17		253
IT equipment depreciation		13		6		217

Comparable business		985		956		3
Which new Bank ⁽¹⁾		—		52		(100	)

Total Information Technology Services		985		1,008		(2	)


Other Expenses
Postage		118		112		5
Stationery		98		108		(9	)
Fees and commissions		636		614		4
Advertising, marketing and loyalty		307		288		7
Amortisation of other intangible assets (excluding software)		6		3		100
Non lending losses		116		103		13
Other		284		249		14

Comparable business		1,565		1,477		6
Which new Bank ⁽¹⁾		—		35		(100	)

Total Other Expenses		1,565		1,512		4


Comparable business		5,994		5,719		5
Which new Bank ⁽¹⁾		—		150		(100	)

Total Operating Expenses before defined benefit superannuation plan expense		5,994		5,869		2

Defined benefit superannuation plan expense		35		75		(53	)

Total Operating Expenses		6,029		5,944		1


(1)		Which new Bank, refer to incremental expenses associated with the Which new Bank program.

Commonwealth Bank of Australia Form 20-F 2006 33

Group Operating Expenses

For the Financial Year 2006 the Group’s operating expenses were $6,029 million, an increase of $85 million, or 1%. This increase was primarily due to higher staff related expenses, partially offset by lower Information Technology costs. For the Financial Year 2005, operating expenses were $5,944 million and included $150 million in Which new Bank expenses.

The table below details the Group’s staff numbers as at 30 June 2006, and 2005.


	Full Year Ended
Staff Numbers	2006		2005

Australia		29,423		27,991
New Zealand		4,907		4,719
Other Overseas		2,334		2,603

Full time staff equivalent		36,664		35,313

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.


	Full Year Ended
	2006		2005
Income Tax Expense	$M		$M

Banking		1,328		1,197
Funds Management – Corporate		139		88
Insurance – Corporate		102		89

Corporate tax		1,569		1,374
Policyholder		331		228

Total Income Tax Expense		1,900		1,602


Effective tax rate
Banking		29.1		30.1
Funds Management – Corporate		30.8		21.8
Insurance – Corporate		19.7		22.4

For the Financial Year 2006 the income tax increased $298 million or 19% as a result of the increase in profit. The effective tax rates remained relatively flat.

Segment tax expense and rates are discussed in the Banking, Funds Management and Insurance analysis sections.

34 Commonwealth Bank of Australia Form 20-F 2006

Liquidity and Capital Resources

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 as “Level 1”) and for the Bank and its banking subsidiaries (known 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 primarily 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 primarily consists of the collective provision for impairment losses, the General Reserve for Credit Loss and other hybrid and debt instruments acceptable to APRA. The tangible element of the investment in life insurance and funds management businesses is deducted from the sum of Tier One and Tier Two Capital to arrive at the Capital Base.

In accordance with APRA’s methodology, measuring risk requires one of a number of risk weights to be applied to each asset on the Balance Sheet and to Off-Balance Sheet obligations. The 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 Bank actively manages its capital to balance the requirements of various stakeholders (regulators, rating agencies and shareholders), while maintaining adequate capital ratios throughout the financial year. The Bank believes liquidity is sufficient to meet its present requirements.

The regulatory capital ratios of the Bank are shown on page 37. Details of the principal movements in the capital measures are shown on pages 36 to 37 and 209 to 210.

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 Profits 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 2006 ASB Bank Limited had a Tier One ratio of 9.8% and a Total Capital ratio of 10.6%.

Regulatory Capital Requirements for Life Insurance and Funds Management Business

The Group’s life insurance businesses in Australia are regulated by APRA. The Life Insurance Act 1995 includes a framework for the calculation of the regulatory capital requirements for life insurance companies. There are two tiers to the regulatory capital requirements – ‘solvency’ and ‘capital adequacy’. The capital adequacy test for statutory funds is always equal to or greater than the solvency test ⁽¹⁾. At 30 June 2006, for Australian life insurance companies, the estimated excess over capital adequacy within life insurance statutory funds amounted to $191 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”).

There are no regulatory capital requirements for life insurance companies in New Zealand, though the directors of any company must certify its solvency under the Companies Act 1993. The Group determines the minimum capital requirements for its New Zealand life insurance business according to the Prudential Reserving Guidance Note of the New Zealand Society of Actuaries.

Fund 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 $642 million excess over regulatory capital requirements at 30 June 2006 in aggregate.

On 10 October 2006 the Colonial Group (a subsidiary of the Bank) issued $700 million of hybrid securities, called Funds Management Securities (“FMS”), which provides capital for the Colonial Group. The FMS pay a floating rate coupon of BBSW plus 1%, until they become callable at the option of the Colonial Group in 2011.

The Group’s life insurance businesses in Australia are required to maintain assets — adjusted for risk margins and excluding ineligible assets (such as intangible assets), in excess of policy holder liabilities. In addition, transfers from statutory funds require recommendation and approval of the appointed actuary. These requirements may restrict the transfers of funds from those businesses.

Group Subsidiaries which conduct funds management business are subject to licensing requirements which may restrict the transfers of funds from those businesses.

The Group also conducts business with special purpose entities, such as securitisation transactions. In most cases the assets held within these special purpose entities are not available to be repatriated to the Bank.


(1)		The shareholders fund is subject to a separate capital requirement.

Commonwealth Bank of Australia Form 20-F 2006 35

Liquidity and Capital Resources

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. The Basel II Framework introduces a capital requirement for operational risk and, for both credit and operational risk, allows a choice between three approaches. The Bank is intending to implement the Advanced Internal Ratings Based Approach (“AIRB”) for credit risk and the Advanced Measurement Approach (“AMA”) for operational risk. Under both these approaches the Bank will be allowed to use its internal models and data for calculating regulatory capital. The Basel II Framework has also introduced a requirement to calculate a capital charge for Interest Rate Risk in the Banking Book. Other than this change, the current capital requirements for market risk are not expected to be significantly affected.

The Bank lodged its Accreditation application for the AIRB and AMA Approaches with APRA on 30 September 2005 and is advanced in finalising solutions to the remaining requirements. The Bank is working closely with APRA through the Accreditation process. The implementation of Basel II in Australia is expected to take place on 1 January 2008.

International Financial Reporting Standards

The Bank adopted AIFRS on 1 July 2005. However, APRA required reporting under prior AGAAP accounting principles to continue for regulatory capital purposes until the introduction of revised prudential standards, which took effect on 1 July 2006. However, APRA has granted transition relief in relation to changes to their prudential regulations from 1 July 2006 until 31 December 2007.

When the transition period ends the revised prudential standards will impact Tier One Capital and the Capital Base.

Total transition relief is $1,715 million comprised of $1,641 million relief for Tier One Capital and $74 million relief for Upper Tier Two Capital.

Transition relief principally relates to:

•		Excess of Market Value Over Net Assets (“EMVONA”) $1,339 million;

•		Software capitalised expenses $229 million; and

•		Defined benefit deficit $45 million.

The Adjusted Common Equity (“ACE”) ratio at 30 June 2006 was 4.50%. At 1 July 2006, ACE was 4.39% as Standard & Poor’s has not granted transition relief for the impact of software capitalised expenses and defined benefit deficit. EMVONA is already excluded from ACE.

Conglomerate Groups

APRA has advised that a third level of capital adequacy (“Level 3”) will be implemented to coincide with the introduction of 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, no assurance can be given that our models will meet APRA’s requirements or that the Bank meets the Level 3 capital requirements.

Active Capital Management

The Bank maintains a strong capital position. The Tier One Capital Ratio increased from 7.46% to 7.56% during the year reflecting the issue of hybrid securities during the second half of the year. The Total Capital Ratio decreased from 9.75% at 30 June 2005 to 9.66% at 30 June 2006 impacted by the growth in Risk Weighted Assets. Risk Weighted Assets increased from $190 billion at 30 June 2005 to $216 billion at 30 June 2006 due to strong growth in lending assets particularly in the business/corporate sector. The Bank’s credit ratings remained unchanged.

The following significant initiatives were undertaken in Financial year 2006 to actively manage the Bank’s capital:

Tier One Capital

•		Issue of $262 million and $219 million ordinary shares in October 2005 and April 2006 respectively to satisfy the Dividend Reinvestment Plan (“DRP”) in respect of the final dividend for 2004/05 and interim dividend for 2005/06;

•		In accordance with APRA guidelines, the issue of $303 million shares to satisfy the DRP in respect of the final dividend for 2005/06;

•		Issue of US$700 million Tier One trust preferred securities in March 2006;

•		Redemption of $700 million PERLS in April 2006;

•		Issue of $1,166 million PERLS III in April 2006; and

•		Completion of a $500 million on-market share buyback.

36 Commonwealth Bank of Australia Form 20-F 2006

Liquidity and Capital Resources

Share Buyback

On 16 June 2006 the Bank announced the successful completion of an on-market share buyback. A total of 11,139,988 shares were bought back at a total cost of $500 million in cash, resulting in an equivalent reduction in the Group’s share capital. Shares were purchased for between $41.08 and $46.79. Full details of the share buyback are disclosed in Note 33 to the Financial Statements.

Tier Two Capital

•		Issue of the equivalent of $840 million Lower Tier Two Capital;

•		In accordance with APRA guidelines, the reduction in Tier Two note and bond issues of $278 million due to amortisation;

•		The call and maturity of the equivalent of $78 million of Tier Two note and bond issues; and

•		Increase in the value of Tier Two note and bond issues of $66 million resulting from changes in foreign exchange movements (whilst these notes are hedged, the unhedged value is included in the calculation of regulatory capital in accordance with APRA regulations).

Deductions from Total Capital

The following movements in deductions have occurred during the period:

•		An increase in deductions due to the Bank’s acquisition of a 19.9% interest in Hangzhou City Commercial Bank for $102 million;

•		An increase in deductions due to a $291 million increase in net tangible assets arising from the retention of profits in the Colonial Group; and

•		A decrease in deductions due to the $145 million profit realised on the sale of CMG Asia in October 2005 being repatriated to the Bank. The balance of the proceeds of sale of $463 million was used to repay part of the non-recourse debt funding in the Bank’s life and funds management business.


	Group
	2006			2005
	Actual			Actual
Risk-Weighted Capital Ratios	%			%

Tier One		7.56			7.46
Tier Two		3.10			3.21
Less deductions		(1.00	)		(0.92	)

Total		9.66			9.75


Adjusted Common Equity ⁽¹⁾		4.50			4.91


	Group
	2006		2005
Regulatory Capital	$M		$M

Total Tier One Capital		16,354		14,141
Total Tier Two Capital		6,725		6,087
Total Capital		23,079		20,228
Capital Base		20,916		18,479


(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.

Share Capital

(for further details refer to Note 33 to the Financial Statements)

Trust Preferred Securities

On 15 March 2006 the Bank issued USD 700 million (AUD 947 million) of trust preferred securities into the US capital markets. These securities offer a non-cumulative fixed rate of distribution of 6.024% per annum payable semi-annually until March 15 2016, and thereafter quarterly in arrears at the rate of LIBOR plus 1.740% per annum. These securities qualify as Tier One capital of the Bank.

PERLS III

On 7 April 2006, a wholly owned entity of the Bank (Preferred Capital Limited) issued $1,166,456,200 of Perpetual Exchangeable Repurchaseable Listed Shares (PERLS III). These securities qualify as Tier One capital of the Bank.

Commonwealth Bank of Australia Form 20-F 2006 37

Liquidity and Capital Resources


	Group
	2006		2005
Commitments for Capital Expenditure Not Provided for in the Accounts	$M		$M

Not later than one year		36		13


Total Commitments for Capital Expenditure Not Provided for in the Accounts		36		13


	Group
	2006		2005
Debt Issues (for further details see Note 28)	$M		$M

Short Term Debt Issues		22,838		26,864
Long Term Debt Issues		55,753		43,901

Total Debt Issues		78,591		70,765


Short Term Debt Issues
AUD Promissory Notes		1,081		1,214
AUD Bank Bills		505		624
US Commercial Paper		6,861		10,661
Euro Commercial Paper		4,248		4,976
Other		6		—
Long Term Debt Issues with less than one year to maturity		10,137		9,389

Total Short Term Debt Issues		22,838		26,864


Long Term Debt Issues
USD Medium Term Notes		29,475		22,967
AUD Medium Term Notes		12,479		7,122
JPY Medium Term Notes		1,785		868
GBP Medium Term Notes		4,088		4,401
Other Currencies Medium Term Notes		5,102		6,596
Offshore Loans (all JPY)		147		—
Develop Australia bonds (all AUD)		217		—
Eurobonds		2,460		1,947

Total Long Term Debt Issues		55,753		43,901


Maturity Distribution of Debt Issues
Less than 3 months		8,138		12,443
Between 3 months to 12 months		14,700		17,681
Between 1 year and 5 years		40,874		30,656
Greater than 5 years		14,879		9,985

Total Debt Issues		78,591		70,765

38 Commonwealth Bank of Australia Form 20-F 2006

Liquidity and Capital Resources

The following table details the current debt programmes and issuing shelves along with programme or shelf size and outstandings as at 30 June 2006. Access in a timely and flexible manner to a diverse range of debt markets and investors is provided by the following programmes as at 30 June 2006.

Debt Programmes and Issuing Shelves


Programme/Issue Shelf	Outstanding as at 30 June 2006	Programme/Issuing Shelf Type

Australia
No Limit	A$ 1,671 million	Transferable Certificates of Deposit Programme
No Limit	A$ 25 million	Debt Issuance Programme
No Limit	A$ 5,039 million	Medium Term Note Programme

Euro Market
US$ 7 billion	US$3,079 million ⁽¹⁾	Euro Commercial Paper Programme
US$ 35 billion	US$30,175 million ⁽¹⁾	Euro Medium Term Note Programme ⁽²⁾

Japan
JPY 500 billion	JPY 57 billion	Uridashi shelf ⁽³⁾

United States
US$ 12 billion	US$6,135 million	Commercial Paper Programme
US$ 1 billion	US$300 million	Securities Exchange Commission registered shelf
US$ 15 billion	US$1,702 million	US Medium Term Note Programme


(1)		Outstandings are recorded at historic exchanges rates (per programme documentation).

(2)		ASB Bank Limited is also an issuer under this program.

(3)		Amounts are also reflected under the $35 billion Euro Medium Term Note Programme.

An analysis of our borrowings and outstandings from existing debt programmes and issuing shelves including the maturity profile, currency and interest rate structure can be found in Notes 28 and 31 to the Financial Statements.

Commonwealth Bank of Australia Form 20-F 2006 39

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 task assurance roles.

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

Economic capital required is defined as the potential risk of loss of one year’s earnings, measured at a standard consistent with an AA credit rating.⁽¹⁾

Economic capital is derived from underlying exposures to credit, market, operational and insurance risks in the banking, and wealth management (insurance and funds management) businesses of the Bank. In the banking business, economic capital is a measure of the potential risk of loss of cash earnings. In the wealth management businesses, economic capital is a measure of the potential risk of loss of the fair value of the business. This is then adjusted so as to allow comparison between the banking and wealth management businesses economic capital.

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. 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. This includes consideration of the probability of default (“PD”) and the loss given default (“LGD”) that would consequently be experienced.

Various risks are considered when calculating both PD and LGD. Such consideration includes the potential for default by a borrower due to management, industry, economic, environmental and/or other risks. Similarly, consideration is given to any potential adverse impact arising from these risks in relation to any security offered in support of loan facilities.

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 Bank uses a diversified portfolio approach for the management of credit risk (refer to Note 16 to the Financial Statements) 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:

Retail Segment:

Comprises exposures that are generally less than $1 million and is dominated by the housing loan portfolio. Secured commercial lending within this limit is presently being trialled using a scorecard model. Other consumer products managed within this segment are credit cards, personal loans and some leasing business.

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.

Provisions for impairment are raised where there is objective evidence of impairment and at an amount adequate to cover assessed credit related losses. Credit losses arise primarily from loans but also from other credit instruments such as bank acceptances, contingent liabilities, guarantees and other financial instruments and assets acquired through security enforcement.

A centralised exposure management system records all significant credit exposures of the Bank. 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 capital, collective provision requirements, and credit portfolio stress testing.

Off-Balance Sheet Arrangements

As detailed in Note 1 (ii), the Bank 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 Bank in accordance with the Australian Prudential Regulation Authority (“APRA”) Prudential Guidelines. These liquidity facilities are disclosed within Contingent Liabilities as commitments to provide credit.

The Bank is involved with a number of special purpose entities (“SPEs”) in the ordinary course of business, primarily to provide funding and financial services to our customers. Under AIFRS 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 including consideration of exposure to the majority of benefits or risks of the SPE, and accordingly, determination of the existence of control involves management judgment. The Bank has no Off-Balance Sheet financing entities that it is considered to control. For further information on the Bank’s Off-Balance Sheet arrangements, see pages 45 to 47.


(1)		This is equivalent to having a 99.95% confidence level that we will have sufficient capital to cover losses.

40 Commonwealth Bank of Australia Form 20-F 2006

Integrated Risk Management

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 Bank 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 Bank’s market risk is contained in Note 43 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 Bank.

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 back-tested 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.

The following table provides a summary of VaR by product.


	Average VaR During			Average VaR During			Average VaR During			Average VaR During
VaR Expressed based on 97.5%	June 2006			December 2005			June 2005			December 2004
confidence	Half Year $M			Half Year $M			Half Year $M			Half Year $M

Group
Interest rate risk		3.16			2.65			3.44			3.68
Exchange rate risk		0.65			0.53			0.26			0.58
Implied volatility risk		0.61			0.61			0.49			0.53
Equities risk		0.10			0.08			0.04			0.22
Commodities risk		1.20			0.36			0.18			0.34
Prepayment risk		0.33			0.28			0.38			0.54
ASB Bank		0.30			0.36			0.22			0.26
Diversification benefit		(2.26	)		(1.40	)		(0.98	)		(1.64	)

		4.09			3.47			4.03			4.51
Credit spread		5.97			5.74			4.85			4.67

Total		10.06			9.21			8.88			9.18


	Average VaR During			Average VaR During			Average VaR During			Average VaR During
VaR Expressed based on 99.0%	June 2006			December 2005			June 2005			December 2004
confidence	Half Year $M			Half Year $M			Half Year $M			Half Year $M

Group
Interest rate risk		4.01			3.36			4.78			4.72
Exchange rate risk		0.77			0.62			0.31			0.70
Implied volatility risk		0.80			0.95			0.73			0.70
Equities risk		0.13			0.09			0.05			0.30
Commodities risk		1.61			0.45			0.21			0.41
Prepayment risk		0.33			0.28			0.38			0.54
ASB Bank		0.40			0.48			0.32			0.34
Diversification benefit		(3.04	)		(1.93	)		(1.28	)		(2.01	)

		5.01			4.30			5.50			5.70
Credit spread		7.09			6.81			5.75			5.54

Total		12.10			11.11			11.25			11.24

Commonwealth Bank of Australia Form 20-F 2006 41

Integrated Risk Management

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 include 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, overnight interbank loans and high quality securities. More detailed comments on the Bank’s liquidity and funding risks are provided in Note 43 to the Financial Statements.

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. Wherever possible, the Bank 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 are held for investment linked policies where the policyholder takes the risk of falls in the market value of the assets.

A smaller proportion of policyholder’s assets are held to support policies where life companies have guaranteed either the principal invested or the investment return (‘guaranteed policies’) where investment mandates for these classes of policies emphasise lower volatility assets such as cash and fixed interest. The Bank no longer sells guaranteed policies. Inforce business contains guaranteed policies sold in the past and on which the Bank continues to collect premiums.

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

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, all Australian banks are 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.

In Australia, the Group continues to obtain the majority of its Australian dollar funding from a stable retail deposit base which has a lower interest cost than wholesale funds. The retail funding percentage has decreased to 55% in June 2006 (June 2005: 60%). The Bank believes that the relative size of the its 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 that pay interest based upon Deeming Rates which are determined by the Federal Government.

The cost of funds for Financial Year 2006, calculated as a percentage of interest expense to average interest bearing liabilities, was 4.93% on a group basis compared with the 4.53% on a group basis for Financial Year 2005.

The Group obtains a significant proportion of its funding for the Australian Balance Sheet from wholesale sources – approximately 45% (2005: 40%), 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 Bank 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 Bank’s financial markets activities. Derivatives are also used to manage the Bank’s own exposure to market risk. The Bank participates in both exchange traded and Over the Counter (“OTC”) derivatives markets.

The Bank recognises all derivative financial instruments in the Balance Sheet at their fair value. Refer Note 1 (ff) to the Financial Statements for further information.

42 Commonwealth Bank of Australia Form 20-F 2006

Integrated Risk Management

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 lodgement of initial and variation margins in cash or other collateral at the Exchange, which guarantees ultimate settlement.

OTC Traded Derivatives

The Bank 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 Bank’s interests should the counterparty default, and provides the ability to net outstanding balances in jurisdictions where the relevant law allows.

Hedging

The Bank manages its exposures to market rate movements outside its trading activities by modifying its asset and liability mix, either directly or through the use of derivative financial instruments, including interest rate swaps, futures, and options such as interest rate caps and floors as well as cross currency swaps and foreign exchange contracts. The Bank designates at inception whether the derivative contract is considered hedging or non-hedging for accounting purposes. The hedge relationship must be formally documented at inception, detailing the particular risk management objective and strategy for the hedge, which includes the hedged item, the risk hedged and the derivative being used, as well as how effectiveness will be assessed and ineffectiveness measured. Fair value hedges are used to limit the Bank’s exposure to changes in the fair value of its fixed interest-earning assets or interest-bearing liabilities that are due to interest rate or foreign exchange volatility. Cash flow hedges are used to minimise the variability in cash flows of interest-earning assets or interest-bearing liabilities or forecasted transactions caused by interest rate or foreign exchange fluctuations. The effectiveness of cash flow hedging relationships is evaluated on a retrospective and prospective basis using regression analysis. The prospective effectiveness of fair value hedging relationships is evaluated by matching the critical terms of the hedging instrument with those of the hedged item. The hedge relationship is expected to be highly effective where all the principal terms of the hedging instrument and the hedged item match. The retrospective effectiveness of fair value hedging relationships is evaluated using regression analysis. Any hedge ineffectiveness is immediately recorded in profit and loss.

Operational and Strategic Business Risk

The Bank’s operational and strategic business risk management framework supports the achievement of its 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.

Each business manager is responsible for the identification and assessment of these risks, and for maintaining appropriate internal controls. The Bank’s operational risk framework and governance structures supports these efforts through a suite of risk mitigating policies, the reporting of internal loss incidents and key risk indicators, qualitative and quantitative assessment of risk exposures, and skilled operational risk professionals embedded throughout the Bank.

The Bank’s operational risk measurement methodology combines expert assessment of individual risk exposures with internal loss data to calculate operational risk economic capital and determine potential loss.

The Bank continues to benchmark and monitor its insurance risk transfer program for efficiency and effectiveness. This is primarily achieved through a methodology that optimises total shareholder returns and determines the most appropriate blend of insurance risk transfer and economic capital.

Business Continuity Management

Business Continuity Management (“BCM”) within the Bank 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 Bank’s risk management process by providing a controlled response to potential operational risks that could have a significant impact on the Bank’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 implemented across all business units.

Commonwealth Bank of Australia Form 20-F 2006 43

Integrated Risk Management

Compliance Risk Management

Compliance risk is the risk of legal or regulatory sanctions, material financial loss, or loss of reputation that the Bank may suffer as a result of its failure to comply with the requirements of relevant laws, industry and Bank standards and codes, principles of good governance and accepted community and ethical standards.

The Bank’s Compliance Risk Management Framework (CRMF) is a key element of the Bank’s integrated risk management framework. The CRMF is broadly consistent with the Australian Standard on Compliance Programs; as such it fulfils the Bank’s obligations under the Corporations Act 2001 and its Australian Financial Services Licence. The CRMF incorporates a number of components including Minimum Group Standards, Group Obligations Register and Guidance Notes that detail specific requirements and accountabilities. These are complemented by Business Unit compliance frameworks including obligations registers, standards and procedures.

The Framework provides for the assessment of compliance risks, implementation of controls, monitoring and testing of framework effectiveness, the escalation, remediation and reporting of compliance incidents and control weaknesses.

The Bank’s compliance strategy is based on two fundamental principles:

•

Line Management in each Business Unit are responsible for ensuring their business is and remains compliant with legislative, regulatory, industry code and organisational requirements by implementing and monitoring controls; and

•

Business Unit Compliance and Group Compliance work together to independently monitor, overview and report on compliance to management, compliance committees and the Board.

Security Risk

Security risk is defined as threats associated with theft and fraud, information and IT security, protective security and crisis management.

The Bank’s security risk management framework forms part of the operational risk framework and sets out the key roles, responsibilities and processes for security risk management across the Bank.

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, by retaining the right to amend premiums on risk policies where appropriate and through the use of reinsurance. The experience of the Bank’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 Group are excluded.

At 30 June 2006, the Group’s cross-border outstandings in the finance and insurance industry within the United States of America, with cross border outstandings of $3.7 billion, was 1% of the Group’s total assets. At 30 June 2005, the finance and insurance industry within the United States of America, with cross-border outstandings of $3.1 billion, was the only individual country by industry category exceeding 1% of the Group’s total assets.

At 30 June 2006, the United States of America and Germany, with cross border outstandings of $3.8 billion and $3.4 billion respectively, were the only countries to exceed 0.75% of the Group’s total assets. At 30 June 2005, the United States, with $3.3 billion, was the only country with cross border outstandings greater than 0.75% of the Group’s total assets.

44 Commonwealth Bank of Australia Form 20-F 2006

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 Consolidated Income Statement from these Off-Balance Sheet arrangements is not material. Other than in relation to the Balance Sheet gross up effect of asset securitisation (due to the consolidation of the assets and liabilities of the securitisation SPV’s), there are no other significant differences between AIFRS 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 AIFRS 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 under AIFRS. Under US GAAP, the criteria for consolidation differ from AIFRS. See the section below 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 sponsored 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.

Under AIFRS the assets and liabilities of some of the issuers are deemed to be controlled and therefore consolidated into the Group’s Consolidated Balance Sheet. AIFRS requires the consolidation of certain special purpose vehicles that were not consolidated under the prior Australian GAAP. For US GAAP, the issuers are a type of variable interest entity (“VIE”) as defined by FASB Interpretation 46-R, “Consolidation of Variable Interest Entities”. Under the provisions of 46-R, a VIE is deemed to be controlled by the Group, if the Group is expected to absorb a majority of the VIE’s expected losses, expected residual returns, or both. As a result of the application of FIN 46-R, under US GAAP some additional entities are consolidated by the Group and some of the entities that are consolidated under AIFRS are required to be deconsolidated.

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:


	2006		2005
Group Arrangements with Issuers	$M		$M

Management fee paid to the Group		3		2
Liquidity facilities utilised by Issuers		—		—
Derivatives face value provided to Issuers		42		51

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 category of commitments is the $82,162 million of commitments to provide credit, of which $70,705 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 42 Contingent Liabilities.

Commonwealth Bank of Australia Form 20-F 2006 45

Off-Balance Sheet Arrangements

Face Value

Credit Equivalent

2006

2005

2006

2005

Group Credit Risk Related Instruments

Guarantees

2,592

2,438

2,592

2,438

Standby letters of credit

342

321

342

321

Bill endorsements

230

276

230

276

Documentary letters of credit

613

185

123

Performance related contingents

1,753

1,095

876

547

Commitments to provide credit

82,162

76,162

16,135

13,421

Other commitments

8,048

8,279

1,179

942

Total Credit Risk Related Instruments

95,740

88,756

21,477

17,982

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

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

Bill endorsements relate 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 letters of credit represent 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 contingents involve undertakings by the Group to pay third parties if a customer fails to fulfil a contractual non-monetary obligation.

Commitments to provide credit include all obligations on the part of the Group to provide credit facilities. These credit facilities are both fixed and variable.

Fixed rate or fixed spread commitments extended to customers that allow net settlement of the change in value of the commitment are written options and are recorded at fair value. Refer Note 11 to the Financial Statements.

Other commitments include the Group’s obligations under sale and repurchase agreements, outright forward purchases and forward deposits and underwriting facilities. Other commitments also include obligations, not already disclosed to extend credit that are irrevocable because they cannot be withdrawn at the discretion of the Bank without the risk of incurring significant penalty or expense. In addition commitments to purchase or sell loans are included in other commitments.

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 the 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. The amounts reflected assume that the amounts may be fully advanced. The contractual amount of these instruments is the maximum amount at risk if the customer fails to meet its obligations. The risk is similar to the risk involved in extending loan facilities.

As 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:


	Group
	As at 30 June 2006
	Less than		1 to 3 years		3 to 5 years		Over 5 years		Total		Carrying
	1 year										Value
	$M		$M		$M		$M		$M		$M

Guarantees		2,585		2		—		5		2,592		4.9
Standby letters of credit		214		23		35		70		342		0.2
Bill endorsements		230		—		—		—		230		2.7
Documentary letters of credit		613		—		—		—		613		0.1
Performance related contingents		1,749		—		3		1		1,753		24.7

Total		5,390		24		38		76		5,529		32.7


	As at 30 June 2006
	Less than		1 to 3 years		3 to 5 years		Over 5 years		Total		Carrying
	1 year										Value
	$M		$M		$M		$M		$M		$M

Guarantees		2,431		—		—		7		2,438		7.9
Standby letters of credit		234		17		10		60		321		1.0
Bill endorsements		276		—		—		—		276		0.9
Documentary letters of credit		185		—		—		—		185		0.6
Performance related contingents		1,095		—		—		—		1,095		3.5

Total		4,221		17		10		67		4,315		13.9

46 Commonwealth Bank of Australia Form 20-F 2006

Off-Balance Sheet Arrangements

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 market sector (refer Market Risk – Note 43). 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 AIFRS these loans are recorded on the Group’s Consolidated Balance Sheet. For US GAAP purposes the conditions to allow securitised loans to be removed from the Consolidated Balance Sheet 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 these requirements of US GAAP and as a result does not consolidate the SPE under US GAAP.

The outstanding balance of securitised loans at 30 June 2006 was $12,607 million (2005: $10,818 million). No credit losses were incurred by the Group in relation to these securitised loans during the Financial Years 2006 and 2005. 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. As the SPE is consolidated under AIFRS, these liquidity facilities are not disclosed within Contingent Liabilities as commitments to provide credit within Note 42 to the Financial Statements (2006: $224 million, 2005: $337 million). Interest rate swaps (2006: $18 million, 2005: $14 million) are not disclosed within the Derivatives Note. These commitments are considered 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 under US GAAP. Under AIFRS these are eliminated on consolidation of the SPE. 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 securitization fee and residual income is not a material component of the Group’s fee income.

Cashflows paid to the Bank from the SPE in Financial Years 2006 and 2005 were:


	2006		2005
	$M		$M

Servicing fee		21		20
Management fee		4		2
Excess servicing fee		50		30
Proceeds from sale of mortgage loans		5,464		5,989
Interest rate swaps		18		14

Total cash receipts		5,557		6,055

Commonwealth Bank of Australia Form 20-F 2006 47

Contractual and Commercial Commitments

Forward-Looking Statements

This “Contractual and Commercial Commitments” contains certain forward-looking statements. See “Special Note Regarding Forward-Looking Statements”.

Contractual and Commercial Commitments

At the end of Financial Year 2006 the Group had commitments for capital expenditure (see Note 40) and lease commitments (see Note 41). These commitments are minor in the totality of the Group’s commitments.

The Group also had 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 36 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

Payments due by period at 30 June 2006

Less than

Total

1 year

1 to 3 years

3 to 5 years

Over 5 years

On-Balance Sheet

Debt issues

78,591

22,838

22,626

18,248

14,879

Deposits and other borrowing

173,227

170,201

2,629

309

Loan capital

9,895

1,338

488

1,478

6,591

Total On-Balance Sheet

261,713

194,377

25,743

20,035

21,558

Off-Balance Sheet

Credit risk related instruments

95,740

77,889

10,700

5,473

1,678

Commitments for Capital Expenditure Not Provided for in the Accounts

—

Lease commitments – Property, Plant and Equipment

1,285

298

422

310

255

Total Off-Balance Sheet

97,061

78,223

11,122

5,783

1,933


	Payments due by period at 30 June 2005
			Less than
	Total		1 year		1 to 3 years		3 to 5 years		Over 5 years
	$M		$M		$M		$M		$M

On-Balance Sheet
Debt issues		70,765		30,124		18,463		12,193		9,985
Deposits and other borrowing		168,026		163,613		2,982		1,292		139
Loan capital		6,291		392		1,033		1,405		3,461

Total On-Balance Sheet		245,082		194,129		22,478		14,890		13,585


Off-Balance Sheet
Credit risk related instruments		88,756		74,186		6,386		6,727		1,457
Commitments for Capital Expenditure Not Provided for in the Accounts		13		13		—		—		—
Lease commitments – Property, Plant and Equipment		1,146		297		386		249		214

Total Off-Balance Sheet		89,915		74,496		6,772		6,976		1,671

Leases

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. In a small number of cases, the Group as lessee has a right of first refusal if the premises are to be sold.

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.

Long Term Contracts

In July 2006, the Bank entered into an agreement for lease with Colonial First State Property Limited as trustee for both the Site 6 Homebush Bay Trust and for the Site 7 Homebush Bay Trust, relating to the provision of accommodation. The development is a campus style multi-building facility at Sydney Olympic Park to accommodate around 5000 employees. The average lease term is 10 years.

In June 2006, the Bank entered into a 6 year contract with EDS (Australia) Pty Ltd, relating to the provision of Information Technology Services. The contract was signed on 30 June 2006 and it is effective from 1 July 2006.

In 1997, the Bank entered into a ten year contract with EDS (Australia) Pty Ltd, relating to the provision of Information Technology Services. This arrangement is in place until 10 October 2007.

48 Commonwealth Bank of Australia Form 20-F 2006

Contractual and Commercial Commitments

In 2000, the Bank entered into a five year agreement with TCNZ Australia Pty Ltd for the provision of telecommunications services. In late 2005, the Bank entered into two separate agreements with Gen-i Pty Ltd for the provision of Network Perimeter Security Services from 1 January 2006 until 1 January 2008 as well as Data Communications Services effective from 1 September 2005 until 1 September 2008. The remainder of telecommunication services, with the exception of Eftpos and Remote Access Services, currently provided under the Telecommunications Services Agreement by Gen-i to the Bank, were extended until 1 September 2008.

In 2004, the Bank entered into an agreement with Optus Pty Ltd for the provision of Eftpos Telecommunications Services from 21 October 2004 until 21 October 2007.

In 2005, the Bank entered into an agreement with Telstra Corporation Pty Ltd for the provision of Remote Access Services from 14 July 2005 until 14 July 2008.

Failure to Settle Risk

The Bank is subject to a credit risk exposure in the event that another financial institution fails to settle for its payments clearing activities in accordance with the regulations and procedures of the following clearing systems of the Australian Payments Clearing Association Limited: The Australian Paper Clearing System (“Clearing Stream 1”), The Bulk Electronic Clearing System (“Clearing Stream 2”), The Consumer Electronic Clearing System (“Clearing Stream 3”) and the High Value Clearing System (“Clearing Stream 4”, only if operating in ‘bypass mode’). This credit risk exposure is unquantifiable in advance, but is well understood, and is extinguished upon settlement at 9am each business day.

Service Agreements

The maximum contingent liability for termination benefits in respect of service agreements with the Chief Executive Officer and other Group Key Management Personnel at 30 June 2006 was $6.3 million (2005: $7.1 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 33 to the Financial Statements. The impact of these plans have historically had no material impact on the Group’s Statement of Financial Performance.

Commonwealth Bank of Australia Form 20-F 2006 49

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 and determining whether certain entities should be consolidated. An explanation of these policies and the related judgements and estimates involved is set out below.

Provisions for Impairment

Provisions for impairment are raised where there is objective evidence of impairment and at an amount adequate to cover assessed 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.

Individually Assessed Provisions

Individually assessed provisions are raised where there is objective evidence of impairment and full recovery of principal is considered doubtful.

Individually assessed 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 and are measured as the difference between the asset’s carrying amount and the present value of the expected future cash flows (excluding future credit losses that have not been incurred), discounted at the financial asset’s original effective interest rate. Short term balances are not discounted.

Individually Assessed provisions (in bulk) are also made against statistically managed segments 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 credit risks identified in specific segments in the credit risk rated portfolio. These provisions are derived primarily by reference to historical ratios of write-offs to balances in default.

Individually assessed provisions are provided for from the collective provision.

Collective Provision

All other loans and advances that do not have an individually assessed provision are assessed collectively for impairment.

The collective provision is maintained to reduce the carrying amount of portfolios of similar loans and advances to their estimated recoverable amounts at the Balance Sheet date.

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

In the credit risk rated 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 retail 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 collective provision to the level assessed is taken to profit and loss as set out in Note 15 to the Financial Statements.

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.⁽¹⁾

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 set out in Notes 1 (hh) and 38 to the Financial Statements details the key actuarial assumptions.

Consolidation of Special Purpose Entities

The Group assesses whether a special purpose entity should be consolidated based on the risks and rewards of each entity and whether the majority pass to the Group. Such assessments are predominately required in the context of the Group’s securitisation program and structured transactions.

(1) The measurement basis is outlined in Note 1 (hh)

50 Commonwealth Bank of Australia Form 20-F 2006

Critical Accounting Policies and Estimates

Pensions

The Group sponsors a range of superannuation plans for its employees world wide. Details of the Bank’s major defined benefit superannuation plans including the Bank’s contributions to these plans and the Bank’s disclosures of these plans under AIFRS are set out in Note 44 to the Financial Statements. The Bank expects the financing of these defined benefit plans will not materially affect the Group’s cash flows in the Financial Year 2007.

With the introduction of AIFRS from 1 July 2005, the surpluses and/or deficits that arise within individual defined benefit superannuation plans must be recognised in the Balance Sheet. There is a choice of three options for the recognition of actuarial gains and losses related to defined benefit superannuation plans, i.e. direct recognition in Profit of all of actuarial gain or loss, direct recognition in Retained Earnings of all of the actuarial gain or loss or the ‘corridor’ approach which progressively recognises a certain portion of the gain or loss within Profit over the expected average remaining working lives of employees within the plan. The Bank has selected direct recognition in Retained Earnings as the method of accounting for its defined benefit plans under AIFRS.

Direct recognition of actuarial gains/losses in Retained Earnings is not permitted under US accounting standard SFAS 87 “Employers’ Accounting for Pensions”. For US GAAP, the Bank continues to apply the ‘corridor’ approach.

On transition to AIFRS, Retained Earnings at 1 July 2004 increased by $389 million to reflect the net accounting surplus of $556 million (pre tax) at 1 July 2004. The net accounting surpluses recognised on the Bank’s Balance Sheet and actuarial gains and losses (which are recognised through retained earnings) are:


	Net Accounting		Actuarial
	Surplus		Gains/Losses
Date	$M		$M

30 June 2005		638		145
30 June 2006		1,163		554

A break-up of the actuarial gains (losses) for the Financial Year 2005 is set out in Note 44 to the Financial Statements. Recent upturn in investment markets resulted in strong actuarial gains during the Financial Year 2005 and the Financial Year 2006. Volatility in the discount rate assumption resulted in an actuarial loss for the year to 30 June 2005 and an actuarial gain for the year to 30 June 2006. There was also a one-off actuarial loss following the adoption of more conservative pensioner mortality assumptions at 30 June 2005 to align with the actuarial practices of the Bank’s life insurance business.

Application of the ‘corridor’ approach under US GAAP meant that the Bank’s US GAAP Balance Sheet and Shareholders’ Equity included prepaid pension costs of $1,173 million (pre-tax). Further, actuarial losses of $617 million (pre-tax) were unrecognised at 30 June 2004. Subsequent values of these items are:

Net Accounting

Prepaid

Unrecognised

Surplus

Pension Costs

Surplus (Loss)

Date

30 June 2005

638

1,088

(450

)

30 June 2006

1,163

1,059

104

Adoption of AIFRS also resulted in the Bank recognising in its Income Statement a non cash expense of $53 million (after tax) or $75 million (pre tax) for Financial Year 2005 and $25 million (after tax) or $35 million (pre-tax) for Financial Year 2006.

The difference in the pension expense determined under the ‘retained earnings’ approach and the ‘corridor’ approach is the recognition of net gains (losses) outside the ‘corridor’. Application of the ‘corridor’ approach under US GAAP resulted in the recognition of a net loss of $17 million during the Financial Year 2005 and $2 million for the Financial Year 2006.

Note 44 to the Financial Statements also sets out the key economic assumptions adopted to calculate the above and the basis for determining these assumptions.

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 return on assets assumptions for the Financial Year 2005 and the Financial Year 2006 was 7.50% per annum (after tax).

For the Financial Year 2006, a one percentage increase in the return on assets assumption for the OSF would decrease the Bank’s pension expense by $40 million (pre-tax), whilst a one percentage decrease in the return on assets assumption would increase the pension expense by $42 million (pre tax).

To align the reporting of the Bank’s pension obligations under SFAS 87 “Employers’ Accounting for Pensions” with the requirements of AIFRS, effective from 30 June 2004, the discount rate assumption is based on the yield on 10 year Australian government securities. The discount rate assumptions will vary in line with market movements in the yield on 10 year Australian government securities.

A one percentage increase in the discount rate assumption for the OSF would affect the Bank’s staff superannuation AIFRS disclosures as follows:

•

increase the pension expense by $8 million (pre tax) for the Financial Year 2006

•

decrease the 30 June 2005 fund liabilities by $467 million (pre tax)

•

decrease the 30 June 2006 fund liabilities by $400 million (pre-tax)

Correspondingly, a one percentage decrease in the discount rate assumption for the OSF would affect the Bank’s AIFRS staff superannuation disclosures as follows:

•

decrease the pension expense by $3 million (pre tax) for the Financial Year 2005

•

increase the 30 June 2005 fund liabilities by $595 million (pre tax)

•

increase the 30 June 2006 fund liabilities by $501 million (pre tax).

Application of the ‘corridor’ approach under US GAAP meant that a one percentage decrease in the discount rate assumption resulted in the recognition of net loss of $66 million during the Financial year 2006 and an increase in US GAAP superannuation (pension) expense under US GAAP of $63 million (pre tax).

International Financial Reporting Standards

On 1 July 2005 the Bank commenced application of the Australian equivalent of International Financial Reporting Standards (“AIFRS”). This is in line with the conversion deadline set out by the Financial Reporting Council of Australia.

Descriptions of the key AIFRS issues are set out in Note 1 (nn) to the Financial Statements.

Commonwealth Bank of Australia Form 20-F 2006 51

Critical Accounting Policies and Estimates

Significant US GAAP adjustments

For US GAAP reporting purposes a number of adjustments are required (see note 51 to the Financial Statements) to reconcile AIFRS 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 calculating life insurance and deferred acquisition costs is different under US GAAP compared to AIFRS (results in a $12 million decrease in Net Income for Financial Year 2006, $51 million decrease in Net Income for Financial Year 2005);

•

Derivatives – The Group does not seek to apply the hedge accounting rules applicable under US GAAP to all of the transactions for which hedge accounting has been applied under AIFRS. Therefore many of the derivative hedges under AIFRS do not comply with the specific hedge criteria of US GAAP. In any given period this may result in a significant difference between reported profit under AIFRS and Net Income under US GAAP. The difference for the Financial Year 2006 was a decrease in Net Income of $2,114 million, and the difference for the Financial Year 2005 was an increase in Net Income of $490 million;

•

Pensions – Under AIFRS the Group recognises movements in actuarial gains and losses directly in retained earnings, whereas under US GAAP the Group selected the “corridor” approach for their recognition in profit (results in a $2 million decrease in Net Income for Financial Year 2006 and $13 million decrease in Net Income for Financial Year 2005). For more details in relation to pensions see above; and

•

Gain on sale of the Hong Kong insurance business – Differences in the US GAAP accounting for the insurance policyholder liabilities, deferred acquisition costs and the related foreign currency translation reserve component, the profit on sale of the Hong Kong insurance business increases by a net $49 million on a US GAAP basis.

Events After the end of the Financial Year 2006

On 11 July 2006 the appointment of Mr. David Turner as a Director was announced. Mr. Turner’s appointment is effective from 1 August 2006.

On 20 July 2006 the Bank concluded agreements to dispose of all holdings in its Loy Yang investment to several parties, for total net proceeds of approximately $175 million. This has resulted in a profit on sale of approximately $79 million.

On 25 July 2006 the appointment of Mr. David Craig as Chief Financial Officer was announced. Mr. Craig’s appointment commenced in September 2006.

On 8 August 2006 the retirement of Mr Tony Daniels and Ms Barbara Ward from the Board of the Bank and the appointment of Mrs Jane Hemstritch as a Director of the Bank was announced. Mr Daniels and Ms Ward retired at the Bank’s Annual General Meeting on 3 November 2006 and Mrs Hemstritch’s appointment took effect from 9 October 2006.

On 10 October 2006 the Colonial Group (a subsidiary of the Bank) issued $700 million of hybrid securities, called Funds Management Securities (“FMS”) which provides capital for the Colonial Group. The FMS pay a floating rate coupon of BBSW plus 1%, until they become callable at the option of the Colonial Group in 2011.

The Directors are not aware of any other 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.

52 Commonwealth Bank of Australia Form 20-F 2006

Remuneration of Auditors

The following table sets out the Remuneration of Auditors disclosure adjusted for SEC definitions:


	Group
	2006		2005
	$’000		$’000

Audit fees payable to:
Ernst & Young		12,790		9,166
Other Auditors		176		114

Total amounts paid or payable for audit services		12,966		9,280


Amounts paid or payable for non-audit services to:
Ernst & Young:
Audit related fees		2,000		832
Tax fees		—		16
All other fees:
Other services		1,236		327

Total amounts paid or payable for non-audit services		3,236		1,175

Total Remuneration of Auditors		16,202		10,455

Fees for audit services includes fees associated with statutory audit services, review of the Group’s half year Financial Statements, and other services in relation to statutory and regulatory requirements.

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. Of the total amount of fees paid by the Group to Ernst & Young in the year ended 30 June 2006 NZ$5,600, approximately 0.0014% of fees paid or payable for non-audit services (0.0004% of fees paid or payable for audit services) were approved by the Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X of the SEC. No other fees paid by the Group to Ernst & Young in that year were approved by the Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

Audit related services fees include reviews, attestations and assurance services, and primarily relate to compliance with SEC and Sarbanes Oxley requirements and other services that only the external auditor can provide, as well as investigations and reviews of internal control systems and financial or regulatory information.

Taxation services fees include income tax and GST compliance and related advice, and tax technology and related training.

All other fees principally include assurance services relating to Sarbanes Oxley compliance, agreed upon procedures and comfort letters for debt raisings.

Commonwealth Bank of Australia Form 20-F 2006 53

Description of Business Environment

Forward-Looking Statements

This “Description of Business Environment” contains certain forward-looking statements. See “Special Note Regarding Forward-Looking Statements”.

Overview

Commonwealth Bank of Australia provides a comprehensive range of banking, financial, life and risk business insurance and funds management services in Australia, New Zealand, throughout Asia and in the United Kingdom. The Bank is Australia’s largest bank in terms of housing loans and retail deposits. At 30 June 2006, the Group had total consolidated assets of over $369 billion and loans outstanding of $266 billion. The Group’s net profit after tax (“statutory basis”) was $3,928 million for Financial Year 2006.

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

Banking

The Group’s banking operations contributed approximately 82% of its total net profit after tax for Financial Year 2006 and represented approximately 92% of the Group’s total assets at 30 June 2006. 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 2006 the funds management operations contributed $309 million (8% of the Group) in net profit after tax (“statutory basis”). As at 30 June 2006 the funds management operations held $152 billion in Funds under Administration.

Insurance

The Group’s insurance operations consist primarily of Commonwealth Life Limited, Colonial Mutual Life Assurance (CMLA), ASB Life Limited, Sovereign Group, 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 11% ($416 million) of the Group’s net profit after tax for Financial Year 2006.

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, Wealth Management, 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, Enterprise IT and People Services.

International Financial Services (IFS)

International Financial Services is leading the Bank’s international strategy by focusing on identifying and developing offshore growth opportunities for the Bank in the Asia Pacific region.

The Bank is represented in 12 countries, operating full retail banks in New Zealand (ASB Bank), Fiji (Colonial National Bank) and Indonesia (PT Bank Commonwealth).

IFS has recently expended its banking presence in China and India, making two investments in Chinese city commercial banks, Jinan City Commercial Bank and Hangzhou City Commercial Bank, and establishing a Representative Office in India.

Life insurance and fund management businesses are operating in China, Singapore, Indonesia, Vietnam, Fiji and New Zealand. The Bank also has global market activities in London, New York, Tokyo, Hong Kong, Singapore and Malta.

Wealth Management

Wealth Management brings together the Group’s funds management, platform, master funds, superannuation, insurance and financial advice support divisions. These businesses include the external brands of Colonial First State, Colonial First State Global Asset Management, Commonwealth Investment Management and CommInsure.

Wealth Management operates in Australia, Hong Kong, Singapore and the United Kingdom. Through the Colonial First State Global Asset Management business, it also recently entered into a joint venture in China to provide further opportunities to expand offshore growth opportunities in funds management. This arrangement compliments the Bank’s recent investment in Chinese banks, as detailed above.

Wealth Management has distribution strength across the Third Party Independent Financial Advisers channel (IFA), Bank planners and insurance consultants and advisers within the Bank’s aligned dealership groups.

The Bank’s funds management operations consists primarily of Colonial First State Global Asset Management (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 2006, the funds management businesses achieved a profit after tax of $309 million. As at 30 June 2006, the funds management operations held $152 billion in Funds under Administration.

Premium Business Services (PBS)

Premium Business Services (PBS) provides wealth and relationship management for the Bank’s premium clients (personal, business, corporate and institutional).

PBS undertakes financial markets activities in foreign exchange, debt and equity, and derivatives. Australia’s leading online broking service, CommSec, is also part of PBS.

Retail Banking Services (RBS)

Retail Banking Services is responsible for the development and delivery of innovative and competitive products and services to almost 10 million retail customers. The business is responsible for the largest retail banking network in Australia comprising branches, 24 hour call centres, area offices, third party banking and support office. The retail bank is also responsible for the Bank’s ATM network, also the largest in Australia, and its online banking service, NetBank.

We believe we have Australia’s most accessible bank facilities based on our extensive branch network, online banking and ATM network relative to our competitors, and provide service to customers across a wide range of outlets.

54 Commonwealth Bank of Australia Form 20-F 2006

Description of Business Environment

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 sold through a public offer its remaining 50.4% shareholding in the Bank. 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 to 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 (the bank acquired 75% of ASB Group in February 1989).

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 (acquired on 13 June 2000).

Competition

Australia

Competitive Landscape

Financial services providers in Australia offer a wide range of products and services to retail and business customers, encompassing for the most part banking, funds management and insurance.

The domestic competitive landscape includes the four major banks (including Commonwealth Bank of Australia), regional banks, smaller players (including foreign banks) and both local and international non-bank financial intermediaries.

Each of the major banks offers a full range of financial products and services through branch networks, electronic channels and third party intermediaries across Australia. The regional banks, whilst smaller than the majors, now mostly operate across state borders, or nationally. They have experienced strong growth primarily in mortgage lending, facilitated by the proliferation of non-bank mortgage originators and brokers. 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. Other non-bank financial intermediaries include investment banks, fund managers, finance companies, and a diverse range of product and service specialists.

In recent years, a number of local and global new entrants are attacking segments of the market where margins are typically the widest, including product markets such as deposits, housing loans and credit cards, and on distribution markets such as mortgage broking and business banking broking.

Trends

The Australian financial services sector has performed strongly in the last decade, largely driven by strong growth in lending. More recently however, the expectation is for lower credit growth going forward. This, together with the encroachment of new entrants, may lead to intensifying competition and to ongoing downward pressure on margins.

Substantial growth has also occurred 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 private superannuation and compulsory employer pension contributions, as well as the recent establishment of the Future Fund (designed to address the public sector’s superannuation liabilities). This growth potential continues to attract new entrants to this market, from international fund managers to boutique players. The major

Commonwealth Bank of Australia Form 20-F 2006 55

Description of Business Environment

banks have expanded into funds management and/or insurance, either through acquisition or through agreements with third parties. The corporate bond market in Australia has also benefited from the growth in funds under management with many of the major Australian corporates now directly accessing capital markets domestically and around the world.

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.

New Zealand

As in Australia, the New Zealand banking system is characterised by strong competition. The Bank’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. 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. There is also the Government-owned Kiwibank, operating nationwide, and TSB Bank, operating in the main centres. Both banks offer retail and business banking services through branches. In addition, there are several financial institutions operating largely in the wholesale banking sector.

Through its wholly owned subsidiaries, Sovereign Group and ASB Group Investments, ASB Group also competes in the New Zealand insurance and investment market.

Employees

The Commonwealth Bank Group employs approximately 36,600 employees on a full time equivalent basis.

The Bank views that having engaged, passionate and valued people who work together with trust & team spirit as being central to achieving its vision “to be Australia’s finest financial services organisation through excelling in customer service”. During the year, the Bank completed a number of activities as part of our people strategy.

•

Improvement in the Bank’s Occupational Health & Safety systems, to achieve a culture where workplace behaviours ensure the safety and health of all employees, contractors and customers, is a continuing priority.

•

The Bank’s performance management system provides managers and team members with an opportunity to engage in regular conversations about job performance. The system has been aligned closely with the Bank’s customer service and business objectives. Performance is measured against workplace behaviours as well as business outcomes. The relationship between individual and team performance and recognition and reward has been strengthened.

•

There is a continuous program of process simplification which draws on the techniques from “Lean Manufacturing” and “Six Sigma”. These methods support employee engagement by encouraging staff participation in the improvement of work systems which can reduce cycle times and costs.

•

The Bank has continued to use employee equity plans aligned to shareholder interests. One example is the Employee Share Acquisition Plan, which provides staff with a grant of up to $1,000 worth of free shares if the Bank meets its overall performance targets. In nine of the last ten years, an annual grant of shares has been offered to staff. In respect of the Financial Year 2006 all eligible employees will receive shares to the value of $1,000.

•

The Bank’s performance and remuneration systems are reviewed regularly to ensure good quality people continue to be attracted to the Bank and motivated to excel in customer service.

•

Talent management systems have been enhanced. The Bank makes a significant contribution to the training & personal development of its employees, including a Bankwide leadership program and extensive sales & service training and cultural improvement.

•

The Bank is a committed Equal Employment Opportunity (EEO) employer. The Bank has been named an Employer of Choice for Women by the Equal Opportunity for Women in the Workplace Agency (EOWA) and has maintained this status since the award’s inception in 2001.

•

The Bank has conducted a twice yearly performance culture survey which measures progress against cultural aspirations.

•

The Bank has continued to support its extensive range of flexible working and wellbeing practices for staff – for example, part-time work, job share, career break, twelve weeks paid maternity leave, paternity & adoption leave, child care, staff influenza vaccines, health checks, access to advice & information for dependent care and health services and the ability to purchase up to four weeks additional leave each year.

2004 Enterprise Bargaining Agreements (“EBAs”).

The Bank’s collective Enterprise Bargaining Agreement (“EBAs”) and the employment conditions contained in them, although expired, continue to operate until they are replaced. A pay increase of 4% for staff covered by these EBAs was implemented by the Bank on 1 July 2005 and a further 4% on 1 July 2006. The Bank continues to offer, where appropriate, an Australian Workplace Agreement (“AWA”), or other forms of individual contract as an alternative to EBAs.

Financial System Regulation in Australia

Australia has by international standards a high quality financial system which in general regulates financial products and services consistently regardless of the type of financial institutions providing them.

Since July 1998, financial services regulators in Australia at the Commonwealth level 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 agency has system wide responsibilities for the different objectives of Commonwealth Government oversight of the financial system. A description of these agencies and their general responsibilities and functions is set out below.

56 Commonwealth Bank of Australia Form 20-F 2006

Description of Business Environment

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

Australian Prudential Regulation Authority (“APRA”) – has responsibility for the prudential supervision of banks, building societies and credit unions, life and general insurance companies, friendly societies and most superannuation funds (pension funds). Unless a body corporate is authorised under the Banking Act 1959 or exempted by APRA, it is prohibited from carrying on any banking business in Australia (other than in the case of State banking).

Australian Securities and Investments Commission (“ASIC”) – has responsibility for monitoring, regulating and enforcing company and financial services laws and promoting market integrity and consumer protection across the financial services sector and the payments system.

Australian Competition and Consumer Commission (“ACCC”) – has responsibility to ensure that individuals and businesses comply with Commonwealth competition, fair trading and consumer protection laws across all sectors of the economy.

The Corporations Act 2001 provides for a single licensing regime for sales, advice and dealings in financial products and services, consistent and comparable financial product disclosure and a single authorisation procedure for financial exchanges and clearing and settlement facilities. The current financial services regulatory framework is intended to facilitate innovation and promote business while at the same time ensuring consumer protection and market integrity.

The Government passed into law in June 2004 a package of proposals (known as CLERP 9) dealing with audit reform and corporate disclosure. CLERP 9 is part of a program 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 1959 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 and other requirements 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 II. For information on the capital position of the Bank and Basel II, see Note 35 to the Financial Statements.

(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, AUD Certificates of Deposits/Bills of other banks and AUD overnight interbank loans) and other highly liquid market securities. More detailed comments on the Group’s liquidity and funding risks are provided in Note 43 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. 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 16 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 ACCC in relation to 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) 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.

Commonwealth Bank of Australia Form 20-F 2006 57

Description of Business Environment

(vi) Fit & Proper and Governance

From 1 October 2006, all ADIs are subject to APRA’s new “Fit and Proper” and “Governance” prudential standards. All ADIs are now required to have and implement a Board approved Fit and Proper policy covering all of their responsible persons (directors and designated members of senior management etc). ADIs also have to comply with APRA’s Governance prudential standard which sets out requirements for board size and composition, independence of directors and other APRA governance matters.

(vii) Supervision of Non-Bank Group Entities

The Australian life insurance company subsidiaries, general insurance company subsidiaries and the superannuation trustees 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. Trustees operating APRA regulated superannuation entities are now required to hold a Registrable Superannuation Entity (“RSE”) licence from APRA.

General insurance companies are subject to prudential standards including capital adequacy, liability valuation, risk management and reinsurance arrangements. Compliance with APRA regulation for general insurance companies is monitored through regular returns, lodgement of an audited annual return, and auditor certification covering prudential matters.

The financial condition of life insurance companies is monitored through regular financial reporting, lodgement of audited accounts, the preparation of a financial conditions report (prepared by the company’s approved actuary) and supervisory inspections.

From 1 October 2006 life and general insurance companies are now subject to similar Fit & Proper and Governance requirements as those to apply to ADIs.

(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 Basel 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.

58 Commonwealth Bank of Australia Form 20-F 2006

Corporate Governance

Board of Directors

Charter

The role and responsibilities of the Board of Directors are set out in the document entitled “Board Charter and Description of Board and Management Roles”. 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, and approving the strategies and financial objectives;

	-		Approving major corporate and capital initiatives and approving capital expenditure in excess of limits delegated to management;

	-		Establishing appropriate systems of risk management; and

	-		Monitoring the performance of management;

•

Approving documents (including reports and statements to shareholders) required by the Bank’s Constitution and relevant regulation;

•

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.

The Board carries out the legal duties of its role in accordance with the Bank’s values of trust, honesty and integrity and having regard to the interests of the Bank’s customers, staff, shareholders and the broader community in which the Bank operates.

The Board delegates to the Chief Executive Officer the authority to achieve the Bank’s objective of creating long term shareholder value for its shareholders through providing financial services to its customers and providing sustained best-in-industry performance in safety, community reputation and environmental impact.

Composition

There are currently 11 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:

Board Membership

Committee Membership

Board Performance

People

Director ⁽¹⁾

& Renewal

& Remuneration

Audit

Risk

J M Schubert

Non-Executive, independent

Chairman

Member

R J Norris

Executive

Chief Executive Officer

Member

R J Clairs

Non-Executive, independent

Chairman

Member

A B Daniels ⁽²⁾

Non-Executive, independent

Member

C R Galbraith

Non-Executive, independent

Member

S C H Kay

Non-Executive, independent

Member

W G Kent

Non-Executive, independent

Member

F D Ryan

Non-Executive, independent

Chairman

Member

F J Swan

Non-Executive, independent

Member

Chairman

B K Ward ⁽²⁾

Non-Executive, independent

Member

D Turner ⁽³⁾

Non-Executive, independent

Member

J Hemstritch ⁽⁴⁾

Non-Executive, independent


(1)		Mr. D V Murray retired as Chief Executive Officer and Director on 22 September 2005

(2)		Mr. A B Daniels and Ms. B K Ward retired at the Bank’s Annual General Meeting on 3 November 2006.

(3)		Mr. D Turner was appointed to the Board with effect from 1 August 2006. In accordance with the Bank’s Constitution and the ASX Listing Rules, he will stand for election at the Annual General Meeting to be held on 3 November 2006.

(4)		Mrs. J Hemstritch was appointed to the Board with effect from 9 October 2006. In accordance with the Bank’s constitution and the ASX Listing Rules, she will stand for election at the Annual General Meeting to be held on 3 November 2006.

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 the number of directors shall be 12; 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).

Commonwealth Bank of Australia Form 20-F 2006 59

Corporate Governance

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;

•

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

•

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

•

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 other 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 program 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 process includes an assessment of the performance of the Board Committees and 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 Board Performance and Renewal Committee has developed a set of criteria for director appointments which have been adopted by the Board. The criteria are aimed at creating a Board capable of challenging, stretching and motivating management to achieve sustained outstanding company performance in all respects. These criteria, which are reviewed annually, aim to ensure that any new appointee is able to contribute to the Board constituting a competitive advantage for the Bank and:

•

Be capable of operating as part of an exceptional team;

•

Contribute outstanding performance and exhibit impeccable values;

•

Be capable of inputting strongly to risk management, strategy and policy;

•

Provide skills and experience required currently and for the future strategy of the Bank;

•

Be excellently prepared and receive all necessary education,

•

Provide important and significant insights, input and questions to management from their experience and skill; and

•

Vigorously debate and challenge management.

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 Board Performance and Renewal 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.

60 Commonwealth Bank of Australia Form 20-F 2006

Corporate Governance

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 and relevant Board policies including time commitment, code of ethics and continuing education. All current Directors have been provided with a letter confirming the terms of their appointment. A copy of the form of letter of appointment appears on the Bank’s website.

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 Board Performance and Renewal, People & 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 regularly 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 the date of the annual general meeting until 14 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:

•

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

•

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

Remuneration Arrangements

Details of the governance arrangements and policies relevant to remuneration are set out in the Directors’ Report — Remuneration Report.

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 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 Corporations Act and the Securities and Exchange Commission (“SEC”) of the USA.

Commonwealth Bank of Australia Form 20-F 2006 61

Corporate Governance

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 Committee, at least annually, meets separately with each of the chief internal audit executive and the external auditor, without management, as part of the process of ensuring independence of the audit functions.

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 Board has also determined that Fergus Ryan is independent within the meaning of the definition of audit committee member independence used by the New York Stock Exchange.

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 Independent Auditor Services Policy which only permits the Independent Auditor to carry out audit services which are required by statute and related services which are an extension of, or an adjunct to, those audit services. All other non-audit services are prohibited unless the Audit Committee determines otherwise in any particular case. The objective of this policy is to avoid prejudicing the independence of the Auditors.

The policy also ensures that the Auditors do not:

•

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;

•

Require an indemnification from the Bank to the Auditor;

•

Seek contingency fees; or

•

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;

•

Related services connected with the lodgement of statements or documents with the 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.

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.

On October 19, 2006, the Bank announced its intention to undertake a formal tender process to appoint a new auditor with the appointment being effective from the beginning of the Commonwealth Bank Group’s 2008 fiscal year. Two firms, KPMG and PricewaterhouseCoopers, have been invited to participate in the next phase of the tender process. The Bank’s current auditor, Ernst &Young, who have been involved in the Bank’s audit for more than ten years, will remain responsible for the completion of the audit for the 2007 fiscal year.

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

The 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.

62 Commonwealth Bank of Australia Form 20-F 2006

Corporate Governance

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. In 2004, Ernst & Young 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.

In 2006, Ernst & Young reported to the Bank’s Audit Committee that certain New Zealand-based employees of the Group attended a management-style training program in fiscal years 2003, 2004, 2005 and 2006. This program was offered to the broader New Zealand business community and was not directed specifically at those New Zealand employees. None of the employees was in a financial reporting oversight role for the Bank or any of its subsidiaries, and the approval of the Audit Committee was not sought prior to their attendance at the program. It is unclear whether the presentation of the program to the New Zealand employees should be considered a service performed by Ernst & Young for the Group. If, however, the presentation of the program to the New Zealand employees is considered to be a service performed by Ernst & Young for the Group, that service would be permitted under the SEC’s rules if pre-approval of the Bank’s Audit Committee had been sought and obtained.

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 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.

The Committee meets, at least annually, with the Chief Risk Officer, in the absence of other management to allow the Committee to form a view on the independence of the function.

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 this Annual Report entitled Integrated Risk Management and in Notes 16 and 43 to the Financial Statements.

Board Performance and Renewal Committee

The Board Performance and Renewal 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 of Australia 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. A Disclosure Committee has been formed to provide advice on the requirements for disclosure of information 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.

Commonwealth Bank of Australia Form 20-F 2006 63

Corporate Governance

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;

•

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.

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 excel in customer service.

There are various policies and systems in place to enable achievement of these goals, including:

•

Fair Treatment Review;

•

Equal Employment Opportunity;

•

Occupational Health and Safety;

•

Recruitment and selection;

•

Performance management;

•

Talent management and succession planning;

•

Remuneration and recognition;

•

Employee share plans; 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” or “Sarbanes Oxley”), was enacted. A number of provisions of the SOX Act apply to the Group because it has certain securities registered with the SEC under the US 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.

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 at 30 June 2006. 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 2006 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Code of Ethics

The Group is required to disclose in its annual report on Form 20-F whether it has adopted a written code of ethics that applies to its Chief Executive Officer, Chief Financial Officer and principal accounting officers or controllers or persons performing similar functions. The Group has adopted such a code.

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 of Australia since 1994.

From 1985-1994, he was a solicitor with the Bank’s Legal Department.

He has a Bachelor of Laws degree from Sydney University and was admitted as a solicitor in New South Wales. He is a Fellow of Chartered Secretaries Australia and a Member of the Australian Institute of Company Directors.

Carla Collingwood was appointed a Company Secretary to the Bank in July 2005

From 1994 until 2005, she was a solicitor with the Bank’s Legal Services Department, before being appointed to the position of General Manager, Secretariat. She holds a Bachelor of Laws degree (Hons.) and a Graduate Diploma in Company Secretary Practice from Chartered Secretaries Australia.

64 Commonwealth Bank of Australia Form 20-F 2006

Directors’ Details

Set forth on pages 65 to 90 below is an extract from the Directors’ Report included in the Bank’s Annual Report to Shareholders. This “Directors’ Details” contains certain forward-looking statements. See “Special Note Regarding Forward-Looking Statements”.

The Directors of the Commonwealth Bank of Australia submit their report, together with the financial report of the Commonwealth Bank of Australia (the ‘Bank’) and of the Group, being the Bank and its controlled entities, for the year ended 30 June 2006.

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 M Schubert, Chairman

Dr Schubert has been a member of the Board since 1991 and Chairman since November 2004. He is Chairman of the Board Performance & Renewal Committee and a member of the Risk and People & Remuneration Committees. He holds a Bachelor’s Degree and PhD in Chemical Engineering and has executive 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: G2 Therapies Limited.

Director: BHP Billiton Limited, BHP Billiton Plc, and Qantas Airways Limited.

Other Interests: Academy of Technological Science and Engineering (Fellow), Institute of Engineers (Fellow), and AGSM Advisory Board (Member).

Dr Schubert is a resident of New South Wales. Age 63.

Ralph J Norris, DCNZM, Managing Director and Chief Executive Officer

Mr Norris was appointed as Managing Director and Chief Executive Officer with effect from 22 September 2005. Mr Norris has been Chief Executive Officer and Managing Director of Air New Zealand since February 2002 and had been a Director of that company since August 1998. He retired from that Board in August 2005 to take up his position with the Bank. He is a member of the Risk Committee.

Prior to his appointment at Air New Zealand, Mr Norris had a 30 year career in banking. He was Chief Executive Officer of ASB Bank Limited from March 1991 until September 2001 and Head of International Financial Services from August 1999 until 2001.

In August 2005, Mr Norris retired from the Board of Fletcher Building Limited where he had been a Director since 2001.

Other Interests: New Zealand Institute of Management (Fellow) and New Zealand Computer Society (Fellow).

Mr Norris is a resident of New South Wales. Age 57.

Reg J Clairs, AO

Mr Clairs has been a member of the Board since March 1999 and is Chairman of the People & Remuneration Committee and a member of the Risk Committee. As the former Chief Executive Officer of Woolworths Limited, he had thirty-three years experience in retailing, branding and customer service.

Director: David Jones Limited and The Cellnet Group.

Other Interests: Australian Institute of Company Directors (Member).

Mr Clairs is a resident of Queensland. Age 68.

A B (Tony) Daniels, OAM, retired 3 November 2006

Mr Daniels has been a member of the Board since March 2000 and is a member of the People & 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. In addition to serving as a director of various public companies, he has also worked with government in superannuation, competition policy and export facilitation. Mr. Daniels retired from the Board at the Annual General Meeting on 3 November 2006.

Director: 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 71.

Colin R Galbraith, AM

Mr Galbraith has been a member of the Board since June 2000 and is a member of the Board Performance & Renewal Committee, and the Audit and Risk Committees. He is a special advisor for Gresham Partners Limited.

Chairman: BHP Billiton Community Trust.

Director: GasNet Australia (Group) and OneSteel Limited.

Other Interests: CARE Australia (Director) and Royal Melbourne Hospital Neuroscience Foundation (Trustee). Allens Arthur Robinson (Special Advisor).

Mr Galbraith is a resident of Victoria. Age 58.

S Carolyn H Kay

Ms Kay has been a member of the Board since March 2003 and is also a member of the People & Remuneration and Risk Committees. 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: Symbion Health Limited, Brambles Industries Ltd, Brambles Industries Plc.

Other Interests: Australian Institute of Company Directors (Fellow). Allens Arthur Robinson (External Member of the Board), Starlight Foundation (Director).

Ms Kay is resident in New South Wales. Age 44.

Warwick G Kent, AO

Mr Kent has been a member of the Board since June 2000 and is a member of the Audit and Risk Committees. 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: Hoyts Corporation Pty Ltd.

Other Interests: Walter and Eliza Hall Trust (Trustee), Australian Institute of Company Directors (Fellow), Australian Society of CPAs (Fellow), Finsia (Senior Fellow) and the Chartered Institute of Company Secretaries (Fellow).

Mr Kent is a resident of Western Australia. Age 70.

Commonwealth Bank of Australia Form 20-F 2006 65

Directors’ Details

Fergus D Ryan

Mr Ryan has been a member of the Board since March 2000 and is Chairman of the Audit Committee and a member of the Risk Committee. 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 Chairman of the Partnership Sub Committee on Corporate Social Responsibility.

Director: Australian Foundation Investment Company Limited, Clayton Utz, National Australia Day Council and Deputy Chairman for National Library of Australia.

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 63.

Frank J Swan

Mr Swan has been a member of the Board since July 1997 and is Chairman of the Risk Committee and a member of the Board Performance and Renewal Committee. 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.

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 65.

Barbara K Ward, retired 3 November 2006

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. Ms Ward retired from the board at the Annual General Meeting on 3 November 2006.

Chairperson: Country Energy.

Director: Lion Nathan Limited, Allco Finance Group Limited, 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 52.

David V Murray, retired 22 September 2005

Mr Murray had been a member of the Board and Chief Executive Officer since June 1992 and was a member of the Risk Committee. He holds a Bachelor of Business, Master of Business Administration, an honorary PhD from Macquarie University and has thirty-eight years experience in banking.

Chairman: Future Fund Australia and Business/Industry/Higher Education Collaboration Council.

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 57.

David J Turner, appointed 1 August 2006

Mr Turner is CEO of Brambles, having occupied that role since October 2003. He joined Brambles as Chief Financial Officer in August 2001 having previously been Finance Director of GKN plc. Mr Turner has also served as a member of the Board of Whitbread plc from December 2000 until March 2006. He is a Fellow of The Institute of Chartered Accountants in England and Wales and has wide experience in finance, international business and governance.

Director: Brambles Enterprises Limited, Brambles Finance Limited, Brambles Holdings (UK) Limited, Brambles Industries Limited, Brambles Industries plc, Brambles Limited, CHEP International Inc.

Mr Turner is a resident of New South Wales. Age 61.

Jane Hemstritch, appointment effective 9 October 2006

Mrs Hemstritch is Managing Director — Asia Pacific, Accenture Limited, having been appointed to that role in November 2004. She is a member of Accenture’s global executive leadership team and oversees the management of Accenture’s business portfolio in Asia Pacific. Mrs Hemstritch joined the company in 1982, became a partner in 1988 and has held several leadership roles within that organisation prior to being appointed to her current position. She holds a Bachelor of Science Degree in Biochemistry and Physiology and has professional expertise in technology, communications, change management and accounting. She also has experience across the financial services, telecommunications, government, energy and manufacturing sectors and in business expansion in Asia.

Other Interests: Institute of Chartered Accountants in Australia (Fellow), Institute of Chartered Accountants in England and Wales (Fellow), Business Council of Australia (Member) and Chief Executive Women Inc. (Member)

Mrs Hemstritch is a resident of Victoria. Age 53.

66 Commonwealth Bank of Australia Form 20-F 2006

Directors’ Details

Other Directorships

The Directors held directorships on other listed companies within the last three years as follows:


			Date of Ceasing
Director	Company	Date Appointed	(if applicable)

J M Schubert	BHP Biliton Limited	01/06/2000
	BHP Biliton Plc	29/06/2001
	Qantas Limited	23/10/2000
	Worley Group Limited	28/11/2002	28/02/2005

R J Norris	Air New Zealand Limited	18/02/2002	30/08/2005
	Fletcher Building Limited	17/04/2001	09/08/2005

R J Clairs	David Jones Limited	22/02/1999
	Cellnet Group Limited	01/07/2004

A B Daniels	The Australian Gas Light Company	04/08/1999	18/10/2005
	Orica Limited	01/03/1995	17/12/2003

C R Galbraith	OneSteel Limited	25/10/2000
	GasNet Australia Group	17/12/2001

S C H Kay	Symbion Health Limited	28/09/2001
	Brambles Industries Limited	01/06/2006
	Brambles Industries Plc	01/06/2006

W G Kent	West Australian Newspaper Holdings Limited	02/02/1998
	Coventry Group Limited	01/07/2001
	Perpetual Trustees Australia Limited (Group)	01/05/1998	31/07/2005

F D Ryan	Australian Foundation Investment Company Limited	08/08/2001

F J Swan	Foster’s Group Limited	25/10/1999
	National Foods Limited	11/03/1997	30/06/2005
	Southcorp Limited	26/05/2005	29/07/2005

B K Ward	Lion Nathan Limited	20/02/2003
	Multiplex Group	26/10/2003
	Allco Finance Group Limited	29/04/2005

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 of Australia during the financial year were:


	No. of Meetings		No. of Meetings
Director	Held ⁽¹⁾		Attended

J M Schubert		9		9
R J Norris		7		7
R J Clairs		9		9
A B Daniels		9		9
C R Galbraith		9		9
S C H Kay		9		9
W G Kent		9		9
F D Ryan		9		9
F J Swan		9		9
B K Ward		9		9
D V Murray		2		2


(1)		The number of meetings held during the time the Director was a member of the Board.

Commonwealth Bank of Australia Form 20-F 2006 67

Directors’ Details

Committee Meetings


									People & Remuneration
	Risk Committee				Audit Committee				Committee
			No. of
	No. of Meetings		Meetings		No. of Meetings		No. of Meetings		No. of Meetings		No. of Meetings
Director	Held ⁽¹⁾		Attended		Held ⁽¹⁾		Attended		Held⁽¹⁾		Attended

J M Schubert		6		6		6		5		8		8
R J Norris		5		5
R J Clairs		6		6						8		8
A B Daniels		6		5						8		8
C R Galbraith		6		6		6		6
S C H Kay		6		6						8		8
W G Kent		6		6		6		6
F D Ryan		6		6		6		6
F J Swan		6		5
B K Ward		6		6		6		5
D V Murray		1		1


	Board Performance & Renewal
	Committee
	No. of Meetings		No. of Meetings
Director	Held ⁽¹⁾		Attended

J M Schubert		4		4
C R Galbraith		4		4
F J Swan		4		4


(1)		The number of meetings held during the time the Director was a member of the relevant committee

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, credit cards, retail deposits and discount stockbroking, and is one of Australia’s largest issuers of personal loans. 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 has full service banking operations in New Zealand, Fiji and Indonesia.

The Group also has wholesale banking operations in London, New York, Hong Kong, Singapore, Indonesia, China, Tokyo and Malta.

(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 (source: Plan For Life Report May 2006), and is Australia’s largest manager in retail superannuation pensions and annuities by funds under management (source: Plan For Life Report March 2006). The Group’s funds management business is managed as part of the Wealth Management 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, the UK and Asia.

(iii) Insurance

The Group provides term life insurance, investment contracts, annuities, master trusts, investment products and household general insurance.

The Group is Australia’s largest insurer based on life insurance assets held.

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 minority interests for the Financial Year ended 30 June 2006 was $3,928 million (2005: $3,400 million).

The net operating profit for the year ended 30 June 2006 after tax, and before superannuation plan expense, treasury share valuation adjustment, shareholder investment returns, and sale of the Hong Kong insurance business was $3,842 million. This is an increase of $422 million or 12% over the year ended 30 June 2005.

The principal contributing factors to the profit increase were strong growth in banking income following growth in average interest earning assets. Funds management and insurance income growth was also strongly supported by growth in Funds under Administration and solid growth in inforce premiums. Underlying Expense growth was 5%, driven by average salary increases, the commencement of spend on a number of strategic initiatives and, ongoing compliance expenditure partly offset by the realisation of expense savings from Which new Bank initiatives.

68 Commonwealth Bank of Australia Form 20-F 2006

Directors’ Details

During the period September 2003 to June 2006, the Bank implemented the Which new Bank program, a program of investment focused on improving customer service and people engagement and simplifying processes. The Bank made significant progress during this time, and financial targets for the program were met and, in some cases, exceeded.

In March 2006, the Bank announced an evolutionary strategic direction that builds directly on the progress achieved through Which new Bank and the Bank’s inherent strengths. The strategy focuses on four key priorities to lift business performance and growth: Customer Service; Business Banking; Technology and Operational Excellence; and Trust and Team Spirit.

Dividends

The Directors have declared a fully franked (at 30%) final dividend of 130 cents per share amounting to $1,668 million. The dividend will be payable on 5 October 2006 to shareholders on the register at 5pm on 18 August 2006. Dividends paid in the year to 30 June 2006 were as follows:

•

As declared in the 30 June 2005 Annual Report, a fully franked final dividend of 112 cents per share amounting to $1,434 million was paid on 23 September 2005. The payment comprised cash disbursements of $1,173 million with $261 million being reinvested by participants through the Dividend Reinvestment Plan; and

•

In respect of the year to 30 June 2006, a fully franked interim dividend of 94 cents per share amounting to $1,211 million was paid on 5 April 2006. The payment comprised cash disbursements of $992 million with $219 million being reinvested by participants through the Dividend Reinvestment Plan.

Review of Operations

An analysis of operations for the financial year is set out in the Highlights and Analysis sections for Banking, Funds Management and Insurance on pages 15 to 18, 25 to 26 and 29 to 30. A review of the financial condition of the Bank is set out in the Highlights on page 7.

Changes in State of Affairs

During the year, the Bank continued to make significant progress in implementing a number of strategic initiatives.

The initiatives are designed to ensure a better service outcome for the Bank’s customers.

Progress within the major initiatives included the following:

•

The implementation of CommServe, a training program designed to ensure our people are able to obtain maximum value from CommSee (the Bank’s state-of-the-art customer management system) in improving Sales and Service outcomes. Over 14,000 staff undertook CommServe training during 2006;

•

The refurbishment of a further 133 branches, taking to 384 the number of branches refurbished over the past 3 years into a design/layout more conducive to effective sales and service;

•

Improved access to Australia’s largest electronic banking and branch network through two new Streamline products with flat monthly fees, and the removal of transaction fees from NetBank;

•

The introduction of the Business Online Saver high yield investment account, the Commonwealth Portfolio Loan product and the Business Line of Credit, all of which have reached $1 billion in balances;

•

Continued platform enhancements and new product offerings including the development of a self managed super offering “YourChoice”, to capitalise on this rapidly growing sector of the market;

•

Strategic alliance formed between Avanteos and Goldman Sachs JB Were, which has contributed $5.0 billion of additional net funds flow;

•

Acquisition of the Gandel Group’s interests in the Colonial First State Property Retail Trust and Gandel Retail Management Trust, which provides funds management and property management services to a number of Colonial First State Retail Property trusts;

On 22 September 2005 the Managing Director and Chief Executive Officer Mr. David Murray retired from the Group, and the Board appointed Mr. Ralph Norris to take over the role. Mr. Norris was previously Managing Director and Chief Executive Officer of Air New Zealand Limited, and prior to that was Managing Director and Chief Executive Officer of ASB Bank Limited.

The Hong Kong insurance business was sold during the year for a profit of $145 million.

There were no other significant changes in the state of affairs of the Group during the financial year.

Events Subsequent to Balance Date

On 11 July 2006 the appointment of Mr. David Turner as a Director was announced. Mr. Turner’s appointment is effective from 1 August 2006.

On 25 July 2006 the appointment of Mr. David Craig as Chief Financial Officer was announced. Mr. Craig’s appointment commenced in September 2006.

Business Strategies and Future Developments

Accommodation Strategy

On 12 July 2006 the Bank announced its strategy to relocate approximately 5,000 staff from the Sydney central business district to Sydney Olympic Park or Parramatta by 2009-2010. This would result in rationalisation of the existing Sydney CBD property space.

At this stage, it is not anticipated this will have a material financial impact on the Bank’s financial results.

In the majority of cases the relocations are in line with the Bank’s lease expiry profile. Where lease expiries occur beyond the relocation dates opportunities will be taken to sub-let the space in order to avoid shortfalls in rentals.

Commonwealth Bank of Australia Form 20-F 2006 69

Directors’ Details

Business Strategies

The Which new Bank program has provided a strong platform on which to build for the future. In particular the successful roll out of CommSee within the Retail Bank has provided staff with the tools to deliver improved service to our customers. The Group has also extended CommSee to Business Banking which will help grow that business in the future.

With Which new Bank drawing to a close the Group has focused on how to build on its success to realise the vision of becoming Australia’s finest financial services organisation. The Group has identified four strategic priorities to lift business performance and growth: Customer service; Business Banking; Technology and Operational Excellence; and Trust and Team Spirit. In addition to these priorities the Group will continue to consider growth opportunities in selected markets.

Other business strategies, prospects and future developments, which may affect the operations of the Group in subsequent financial years, are referred to in the Highlights section on page 7. 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 held by Directors in the Commonwealth Bank or in a related body corporate are set out in the Remuneration Report within 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 hurdle for the 2001 ERP grant was met. All option grants have now met their specified performance hurdles. During the financial year and for the period to the date of this report 1,881,200 shares were allotted by the Bank consequent to the exercise of options granted under the EOP and ERP. Full details of the Plan are disclosed in Note 33 to the Financial Statements. No options have been allocated since the beginning of the 2001/2002 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.

For details of the options previously granted to the Chief Executive Officer, being a Director, refer to the Remuneration Report within this report.

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

Articles 19.1, 19.2 and 19.3 of the Commonwealth Bank of Australia’s Constitution provides:

“19. Indemnity

19.1 Persons to whom articles 19.2 and 19.4 apply

Articles 19.2 and 19.4 apply:

(a) to each person who is or has been a director, secretary or senior manager of the company; and

(b) to such other officers, employees, former officers or former employees of the company or of its related bodies corporate as the directors in each case determine,

(each an “Officer” for the purposes of this article).

19.2 Indemnity

The company must indemnify each Officer on a full indemnity basis and to the full extent permitted by law against all losses, liabilities, costs, charges and expenses (“Liabilities”) incurred by the Officer as an officer of the company or of a related body corporate.

19.3 Extent of indemnity

The indemnity in article 19.2:

(a) is enforceable without the Officer having to first incur any expense or make any payment;

(b) is a continuing obligation and is enforceable by the Officer even though the Officer may have ceased to be an officer of the company or its related bodies corporate; and

An indemnity for employees, who are not directors, secretaries or senior managers, is not expressly restricted in any way by the Corporations Act 2001.

The Directors, as named on pages 65 and 66 of this report, and the Secretaries of the Commonwealth Bank of Australia, being J D Hatton, H J Broekhuijse (resigned 12 July 2005) and C F Collingwood (appointed 12 July 2005) are indemnified under article 19.1, 19.2 and 19.3 as are all the senior managers of the Commonwealth Bank of Australia.

A deed poll has been executed by Commonwealth Bank of Australia consistent with the above articles in favour of each secretary and senior manager of the Bank, each director, secretary and senior manager of a related body corporate of the Bank (except where in the case of a partly owned subsidiary the person is a nominee of an entity which is not a related body corporate of the Bank unless the Bank’s Chief Executive Officer has certified that the indemnity shall apply to that person), and any employee of the Bank or any related body corporate of the Bank who acts as a director or secretary of a body corporate which is not a related body corporate of the Bank.

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.

70 Commonwealth Bank of Australia Form 20-F 2006

Directors’ Details — Remuneration Details

To assist readers a number of key terms and abbreviations used in the Remuneration Report are set out below


Term		Definition

Australian Equivalent to International Financial Reporting Standards (AIFRS)		The Australian equivalent to International Financial Reporting Standards (AIFRS) adopted by the Bank from 1 July 2005.

Australian Generally Accepted Accounting Principles (AGAAP)		The financial reporting standards adopted by the Bank up to the year ended 30 June 2005. The 2005 comparatives have been restated for AIFRS.

Base Compensation		Calculated on a total cost basis and includes any Fringe Benefits Tax charges related to employee benefits including motor vehicles.

Board		The Board of Directors of the Bank.

Committee		The People and Remuneration Committee of the Board of Bank.

Compensation		All forms of consideration paid, payable or provided by the Bank, or on behalf of the Bank, in exchange for services rendered to the Bank.

Earnings Per Share (EPS)		The portion of a company’s net profit after tax allocated to each outstanding share of common stock.

Equity Reward Plan (ERP)		The Bank’s long term incentive scheme.

Fixed Compensation		Consists of Base Compensation, as well as employer contributions to superannuation. For further details please refer to page 75.

Group		Commonwealth Bank of Australia and its subsidiaries.

International Financial Reporting Standards (IFRS)		Reporting standards which have been adopted by the International Accounting Standards Board (IASB), an independent, international organisation supported by the professional accountancy bodies. The objective is to achieve uniformity and transparency in the accounting principles used by businesses and other organisations for financial reporting globally.

Key Management Personnel		Persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity. In addition to Key Management Personnel, there are separate disclosure requirements for Directors and Executives of the Bank.

Long Term Incentive (LTI)		LTI grants to Executives are delivered in the form of ordinary shares in the Bank that vest if, and to the extent that, a performance hurdle is met. For further details please refer to page 75.

Options		A right to acquire a Bank share on payment of an exercise price if relevant performance hurdles are met.

Other Executives		Other Executives are those who are not Key Management Personnel but are amongst the Executives for whom disclosure is required in accordance with section 300A(1)(c) of the Corporations Act 2001.

Peer Group		The group of competitors that the Bank’s long term incentive plan is compared to in order to determine if the performance hurdle is met.

Performance Hurdle		The criteria relating to the Bank’s long term incentive plan that must be met in order for shares to partially or fully vest within the plan.

Reward Shares		Shares in the Bank granted under the Equity Reward Plan and subject to a performance hurdle.

Short Term Incentive (STI)		Compensation paid with direct reference to the individual’s performance over the preceding financial year. For further details please refer to page 75.

Salary Packaging		An arrangement where an employee agrees to forego part of his or her base compensation in return for non-cash benefits of a similar value.

STI Deferral		Withholding a portion of short term incentives in cash for one year for the CEO and Executives who, in a reporting sense, are no more than two levels removed from the CEO. For further details please refer to page 75.

Total Shareholder Return (TSR)		TSR is calculated by combining the reinvestment of dividends and the movement in the Bank’s share price. TSR is utilised as a performance hurdle for the Bank’s long term incentive plan.

72 Commonwealth Bank of Australia Form 20-F 2006

Directors’ Details — Remuneration Details

Introduction

This report details the Bank’s compensation policy for Directors and Key Management Personnel and the links between the performance of the Bank and individual compensation outcomes. Compensation arrangements, including details of equity holdings, loans and other transactions for Directors and Key Management Personnel of the Bank, are also disclosed. In compiling this report the Bank has met the disclosure requirements of accounting standard AASB124 as well as those prescribed by the Corporations Act 2001.

Changes since 2005

Changes arising from revision of Accounting Standards

The 2005 Remuneration Report was compiled in accordance with the disclosure requirements of accounting standard AASB1046 as well as those prescribed by the Corporations Act 2001. Following publication of the 2005 Report, AASB1046 was replaced by AASB124.

The key differences in reporting under the revised AASB124 are:

•

Disclosure of compensation for ‘Key Management Personnel’ as opposed to ‘Specified Executives’ previously. AASB1046 defined a ‘Specified Executive’ as someone who is directly accountable and responsible for the strategic and operational management of an organisation. In 2005, the Bank was required to disclose details of compensation for the five employees, excluding Directors, with the greatest authority in this area. The Bank took the view that all members of its Executive Committee have significant influence over the strategic direction of the Bank, and accordingly defined all nine of its Group Executives as Specified Executives for disclosure purposes. This approach is consistent with the definition of Key Management Personnel required under AASB124, used in compiling the 2006 report;

•

Changes in the sub-categories of compensation that are reported. AASB124 requires the breakdown to be in five categories – short term benefits, post-employment benefits, other long term benefits, termination benefits and share-based payments. This differs from AASB1046 which required four categories – primary benefits, post employment benefits, equity benefits and other benefits; and

•

AASB124 requires the Bank to use a fair value calculation to determine the value of reward shares to be disclosed for each Executive. The fair value approximates the number of shares that are expected to vest in the participants over the expected vesting period. This has resulted in changes in the calculation of long term incentives (LTI) values being disclosed since 2004/05, including some negative values for Executives who forfeited their entitlements to reward shares upon exiting the Bank.

Long Term Incentive (LTI) design change – Equity Reward Plan (ERP)

In 2006 the Bank reviewed and will implement the following changes to ERP design features for future grants:

•

Restriction of re-testing from four occasions to one occasion, 12 months after initial testing, at which time a maximum of 50% only of the original grant may vest; and

•

The use of a straight line vesting scale with 50% vesting at the 51st percentile, through to 100% vesting at the 75th percentile. Previous vesting commenced when Bank performance met the 50th percentile, with 100% vesting at the 75th percentile, but the scale was tiered with accelerated straight line vesting where performance exceeded the 67th percentile.

People & Remuneration Committee

The Bank’s compensation arrangements are overseen by the People & Remuneration Committee of the Board, which currently consists of Mr R J Clairs (Chairman), Mr A B Daniels, Ms S C H Kay and Dr J M Schubert. The Committee’s activities are governed by its terms of reference which is available on the Bank’s website at http://shareholders.commbank.com.au.

The Committee considers changes in compensation policy likely to have a material impact on the Bank and is informed of leadership performance, legislative compliance on employment issues, industrial agreements and incentive plans operating across the Bank.

The Committee also considers senior appointments and compensation arrangements for senior management. The full Board approves the compensation arrangements, performance reviews and talent reviews for the Chief Executive Officer (CEO) and Group Executives (senior direct reports to the CEO), as outlined in the Corporate Governance Statement.

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

Compensation Policy

The Bank’s compensation systems complement and reinforce its performance culture, leadership and talent management systems. The compensation systems aim to:

•

Attract and retain high calibre employees;

•

Align individual and Bank goals; and

•

Ensure total compensation is competitive by market standards. Fixed compensation is generally set at the market median and total compensation up to the 75th percentile for performance. In this regard the Bank is careful not to generate upward pressure on the market.

For Executives, this also aims to reward with an appropriate mix of compensation according to their level in the organisation, with a significant weighting towards both short term and long term variable (‘at risk’) pay linked to performance. This weighting increases at higher levels in the organisation. This focus aims to:

•

Reward Executives for Bankwide, business unit and individual performance against targets set by reference to appropriate benchmarks and against behavioural standards;

•

Align the interests of Executives with those of shareholders; and

•

Link Executive reward with the strategic goals and sustainable performance of the Bank.

In determining appropriate levels of Executive compensation, the People & Remuneration Committee engages an external consultant to provide independent advice. This ensures that the compensation of Executives is set competitively compared to the market. It also helps the Committee understand movements and trends in Executive compensation that should be factored into considerations regarding the compensation of Executives.

Compensation 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.

Commonwealth Bank of Australia Form 20-F 2006 73


Form 20-F Cross Reference Index			4
Financial Information Definitions			5
AIFRS Transition			6
Highlights			7
Financial Review			10
Banking Analysis			15
Funds Management Analysis			25
Insurance Analysis			29
Shareholder Investment Returns			32
Group Operating Expenses			33
Liquidity and Capital Resources			35
Integrated Risk Management			40
Off-Balance Sheet Arrangements			45
Contractual and Commercial Commitments			48
Critical Accounting Policies and Estimates			50
Remuneration of Auditors			53
Description of Business Environment			54
Corporate Governance			59
Directors’ Details			65
Two Year Financial Summary			91
Financial Statements			93
Income Statements			94
Balance Sheets			95
Statements of Recognised Income and Expense			96
Statements of Cash Flows			97
Notes to the Financial Statements			99
Independent Audit Report			277
Shareholding Information			278
Additional Information			287
Appendices			290
Signatures			316
Exhibits			317
International Representation			318
EX-2.1: TWENTY-FIRST SUPPLEMENTAL TRUST DEED
EX-2.2: SCHEDULE OF FORMS
EX-2.3: CONDITIONS OF THE NOTES FOR THE ISSUERS'US$35 BILLION EURO MEDIUM TERM NOTES PROGRAMME
EX-8: LIST OF CONTROLLED ENTITIES
EX-12: CERTIFICATIONS
EX-13: CERTIFICATIONS
EX-14: CONSENT OF ERNST & YOUNG
EX-15: STATEMENT OF RATIO OF EARNINGS TO FIXED CHARGES


Remuneration Details

Introduction			73

Changes since 2005			73

People & Remuneration Committee			73

Compensation Policy			73

Compensation Structure			74

Current Target Potential Compensation Mix for Executives			75

Short Term Incentive (STI) Arrangements			75

Long Term Incentive (LTI) Arrangements			75

Summary of performance hurdles for Employee Reward Plan (ERP) grants			76

Bank Performance			77

Short Term Performance – 2005/2006			77

Long Term Performance			78

LTI Grant Performance			78

Share Price			78

Dividends per Share			78

Directors’ Compensation			79

Managing Director and CEO			79

Non-Executive Directors			79

Details of Components of Non-Executive Directors’ fees			80

Directors’ Retirement Allowance Scheme			80

Compensation of Directors			81

Compensation of Executives			82

Termination Arrangements			83

STI Allocations to Executives for the Year Ended 30 June 2006			84

LTI Allocations to Executives (under 2005 ERP Grant) in the Year Ended 30 June 2006			84

Equity Holdings of Key Management Personnel and Other Executives			85

Shares held by Directors			85

Shares held by Executives			86

Option Holdings of Key Management Personnel and Other Executives			87

Shares Vested and Options Exercised During the Year			88

Loans to Key Management Personnel and Other Executives			89

Terms and Conditions of Loans			90

Other Transactions of Key Management Personnel, Other Executives and Related Parties			90

Audit			90