RNS Number:0902L
National Australia Bank Ld
14 May 2003
National Australia Bank Limited
Half Year
Results 2003
6 Months Ended 31 March 2003
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TABLE OF CONTENTS
Media Release
Section 2 - Financial Summary
Reporting Format
Divisional Performance Summary
Group Performance Summary
Cash Earnings by Region from Ongoing Operations
Summary of Financial Position
Group Key Performance Measures.
Section 3 - Management Discussion & Analysis
Overview
Restructuring Progress
Asset Quality
European Pension Schemes
Share Based Payments - Employee Benefits
Software Capitalisation
Integrated Systems Implementation (ISI) Program
Profitability
Net Interest Income
Net Life Insurance Income
Other Operating Income
Operating Expenses
Income Tax Expense
Capital and Performance Measures
Performance Measures
Capital Position
Share Buy-back Program
Total Banking
Retail Banking
Financial Services Australia.
Financial Services Europe
Financial Services New Zealand
Corporate & Institutional Banking.
Wealth Management
Other (incl. Excess Capital, Group Funding & Corporate Centre)
Section 4 - Detailed Financial Information
1. Performance Summary by Division.
2. Net Interest Income
3. Net Interest Margins & Spreads
4. Average Balance Sheet & Related Interest.
5. Gross Loans & Advances
6. Net Life Insurance Income.
7. Revenue
8. Expenses
9. Full Time Equivalent Employees
10. Doubtful Debts
11. Asset Quality
12. Income Tax Reconciliation
13. Significant Items
14. Exchange Rates
15. Capital Adequacy
16. Cash Earnings per Share
17. Risk Management
18. Financial Information for US Investors
Glossary of Terms
Alphabetical Index
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Media Release
NATIONAL LIFTS HALF YEAR DIVIDEND FOLLOWING STRONG BANKING RESULT
FINANCIAL HIGHLIGHTS
* Group cash earnings from ongoing operations of $2,131 million
* up 7.4% on March 2002
* up 8.9% on September 2002
* Group cash earnings per share
* up 4.0% on March 2002
* up 10.6% on September 2002
* Banking
* cash earnings up 11.4%
* 8.0% growth in underlying profit
* cost to income ratio improved to 47.3% from 48.0%
* Australian and New Zealand retail businesses performed strongly:
Financial Services Australia
* underlying profit up 13.7% on March 2002; up 5.9% on
September 2002;
* cost to income ratio improved to 45.6% from 48.9%
Financial Services New Zealand
* underlying profit up 32.1% on March 2002; up 19.1% on
September 2002
* cost to income ratio improved to 50.8% from 53.2%
* Group net profit of $1,877 million after a $205 million non-cash
reduction in the valuation of our Wealth Management business.
* Interim dividend of 80 cents up 11%, fully franked
* Return on equity of 17.1%
* EVA up 30% to $836 million
* Asset quality continues to be sound with gross non-accrual loans
to total loans lower at 0.59%
* All comparisons relate to the half year ended 31 March 2002 unless otherwise
stated
MANAGING DIRECTOR'S REVIEW
National Australia Bank Managing Director and Chief Executive Officer, Frank
Cicutto, said today that Group cash earnings from ongoing operations (before
significant items and revaluations) for the six months ended 31 March 2003 was
$2,131 million, up 7.4% on March 2002 and 8.9% higher than September 2002.
Mr Cicutto said: "This is a satisfactory result. The National continues to
improve returns for shareholders. The interim dividend for 2003 is 80 cents
(100% franked), which is 11% higher than March 2002 and 7% higher than the
September 2002 dividend. We also expect the full year dividend to be fully
franked.
"Initiatives undertaken last year to strengthen and focus our businesses have
benefited our first half result.
"We have seen solid growth in our core operations in the first half and remain
well positioned for future challenges.
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"The Group's banking operations generated $1,964 million in cash earnings, which
was 11.4% higher than the six months ended March 2002.
"The underlying profitability of our banking business was demonstrated again in
the March half, with an 8.0% increase on the previous corresponding period. In
particular, our retail businesses in Australia and New Zealand saw strong
underlying profitability and significantly improved their cost to income ratios.
"The Group achieved a half year net profit of $1,877 million after a $205
million non-cash reduction in the valuation of our Wealth Management business.
"Uncertain market conditions have affected our business mix with increased flows
into mortgages and retail deposits, slower than expected growth in business
lending and lower equity market returns. This has affected business performance
and Group margins.
Divisional performance
"Financial Services Australia, which contributed 44.6% of the Group's cash
earnings during the March half, achieved $904 million in cash earnings: 3.9%
higher on the same period last year. The strength of our Australian operation is
demonstrated by the 13.7% increase in underlying profitability and 330 basis
point improvement in the cost to income ratio to 45.6%. Home lending grew by
21.9% compared with March 2002. As at March 2003, the National has a market
share of 17.8% compared with 17.5% as at 30 September 2002. (Source RBA/
National)
"Financial Services New Zealand posted another record result with a 35.9%
increase in cash earnings at $159 million. Income was up 25.6% compared with the
previous corresponding half due to strong lending activity, deposit growth and
the strong NZ dollar.
"Financial Services Europe achieved $508 million cash earnings, which was up
1.4% on the March 2002 half and 9.2% higher than the September 2002 half.
Continued progress was made in building the European operations and we are
pleased that credit quality remains sound in a difficult operating environment.
"Cash earnings for Corporate & Institutional Banking was $416 million, 10.3%
higher than for the same period last year despite weaker money market
conditions. The improved performance was due to a lower charge for doubtful
debts, attention to cost control and lending growth as a result of an emphasis
on enhancing relationships with core clients.
"Operating conditions for our Wealth Management business proved challenging as
equity markets weakened further. Operating profit was more than double the
September half but significantly down on the March 2002 half. Our Wealth
Management business was impacted by a revaluation of $205 million, which is a
non-cash item.
"The value of Australian total funds under management has declined from $65.6
billion as at September 2002 to $65.1 billion as at March 2003 due to weak
market sentiment. This impacted retail funds under management market share,
however, Wealth Management has maintained its second place ranking (ASSIRT
Market Share Report, March 2003). Wealth Management currently has the leading
market share in platforms ie. Master Funds and Wraps (ASSIRT Market Share
Report, December 2002).
"The Australian retail risk insurance business continues to maintain its market
leading position, increasing to a 16.8% market share for the 12 months ended 30
September 2002. (Source: DEXX&R as at September 2002 Research Reports.)
"In the United Kingdom, despite lower than anticipated sales in difficult market
conditions, investment funds under management grew by 2% to $1.5 billion at a
time when the market fell by 23%.
"We have continued to invest in wealth management in all regions, because of our
confidence in our differentiated position and the long-term strategic
opportunities in this industry.
Asset quality
"In light of the uncertain global environment, a strong focus on asset quality
and credit risk management has been maintained. The Group's asset quality
remains sound. The ratio of gross non-accrual loans to total loans improved to
0.59% compared with 0.62% as at 30 September 2002.
"Deliquency levels across our consumer lending portfolios' are below long-term
trends and housing loss rates and delinquency rates remain at historical lows.
Housing prices and the consumer economic environment are presently stable, and
we are closely monitoring these areas.
"In relation to our business lending portfolio, fully secured business lending
has increased to 56.3% as at 31 March 2003 compared with 51.7% as at 31 March
2002.
"In relation to Corporate & Institutional Banking, 86% of the portfolio is
investment grade lending.
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"Our Agribusiness portfolio continues to be in a satisfactory position with
non-accrual loans relating to agriculture, forestry and fishing unchanged on 30
September 2002.
Productivity initiatives
"We have continued to restructure the business and drive productivity
improvements in line with our Positioning for Growth program. Cost savings
associated with the program are on track with $195 million of annual cost
savings achieved. This is 52.7% of the $370 million target to be achieved by the
end of the 2004 financial year. We are also making progress with the cost to
income targets set under the program. The banking cost to income ratio improved
to 47.3% from 48.0% as at 31 March 2002.
Investments for future growth
"We have invested to improve productivity and customer service across the Group.
Progress has been made in relation to the introduction of a number of new
technology platforms.
"Financial Services Australia has made a substantial investment in technology,
including Siebel-based sales and service desktop solutions for consumer lending
(eConsumer Lending) and business lending (eBusiness Lending) applications. Our
eConsumer Lending project is complete with this application now operating on
8,100 desktops around Australia. The deployment of the eBusiness Lending
application is also underway and is currently available on more than 700
desktops.
"The ISI program (Integrated Systems Implementation) continues to be on track.
To date it has successfully delivered: the first tranche of modules, covering
human resources, payroll and core finance (general ledger and procurement)
functionality in New Zealand; and, additional human resource functionality in
Europe. Planning for the rollout of this technology in Australia is now well
underway.
"In other areas, our investment in Wealth Management ($200 million over 3 - 4
years) is progressing well and will allow us to provide enhanced services and
business support to financial advisers.
Investments in compliance and quality
"During the last half, the Group moved to review compliance standards and make
associated quality improvements.
"In Australia, there has been a significant program to deal with regulatory
issues. These include the new licensing requirements under the Financial
Services Reform Act (FRSA), Privacy and the verification of identification for
cash management accounts.
"In relation to the FSRA, the National intends to apply for and obtain relevant
Australian financial services licences by 1 October 2003, which will be
approximately six months ahead of the compliance deadline.
"The process to compensate investors for unit price adjustments in some
National Australia Financial Management superannuation, pension and investment
bond products is progressing. We expect to begin processing compensation for
the bulk of the affected investors by June.
"A non material increase in costs associated with compensation and
administration of $8 million after tax has been provided for in the March half.
(A $45 million after tax compensation plan was expensed in the year ended 30
September 2002.)
"Along with investing to develop our Wealth Management business in the United
Kingdom, we have improved compliance procedures in our existing business as part
of our ongoing commitment to providing quality advice and customer service.
Balanced stakeholder approach
"I am pleased to report a number of initiatives being undertaken by the National
which are in line with a more balanced approach to stakeholders.
"The National has made a significant investment in its Australian rural network,
opening 15 new Integrated Financial Service Centres in regional towns at a cost
of approximately $10 million. In metropolitan areas, more than 180 branches
were fully or partially upgraded.
"Our banking arrangement with Australia Post, which is available at more than
2,900 locations, was extended to offer business transaction services at a
further 140 locations, 76 in rural areas.
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"In February, more than 1,000 Australian farmers participated in our Drought
Forum. Agribusiness experts were brought together to provide farmers with an
insight into the current climate cycle, including when the drought might break
in their region, to assist farmers with their decisions concerning cropping and
stock programs for 2003.
"In the same month, the National presented to the Joint Parliamentary Committee
on Corporations and Financial Services and outlined our strategy for rural and
regional bank services over the next three years.
"In March this year in Scotland, Clydesdale Bank launched "Art for All" in
association with The Glasgow School of Art. The program exposes students to a
range of workshops run by different artists. Its aim is to promote social
inclusion and give students an insight into the wide variety of creative skills
that can lead to career opportunities.
"Northern Bank won the Young Enterprise Special Award in the Northern Ireland
Business Education Awards for its pioneering work promoting entrepreneurial
skills in school children.
Strong active capital management
"The National continues to be the only AA rated bank in the Asia pacific region.
We have a strong capital position with a 7.47% risk adjusted Tier 1 capital
ratio and a total capital ratio of 9.16%.
"EVA (which measures the economic value added to the business) grew strongly,
increasing by 30% to $836 million.
"As part of maintaining our commitment to capital management, 32.4 million
shares were purchased during the March half at an average price of $31.59.
Outlook
"Our half year result reflects strong attention to continued growth in core
markets with a heightened focus on earnings quality. This is reflected in the
underlying profit result by our banking operations and the solid return to
shareholders this half year.
"We continue to expect cash earnings per share at the lower end of the 8%-11%
target range subject to interest rate, currency and market performance.
"We are confident that our ongoing investments and other business initiatives
will continue to allow the National to manage future challenges."
14 May 2003
For media enquiries, please
contact
Majella Allen Brandon Phillips
Group Corporate Affairs Group Corporate Affairs
0410 440 305 0419 369 058
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SECTION 2
RESULTS FOR THE HALF YEAR ENDED 31 MARCH 2003
FINANCIAL SUMMARY
5
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REPORTING FORMAT
Reporting Structure
To assist with the interpretation of the Group's results, earnings have been
reported under the following structure:
Ongoing operations
* Retail Banking, which comprises:
* Financial Services Australia ('FSA')
* Financial Services Europe ('FSE')
* Financial Services New Zealand ('FSNZ');
* Corporate & Institutional Banking ('CIB') (formerly Wholesale
Financial Services);
* Other (including Excess Capital, Group Funding & Corporate
Centre); and
* Wealth Management ('WM').
* Cash earnings by region from ongoing operations (Refer page 9 for
further details)
Disposed operations
* HomeSide - reflecting the Board's decision to sell SR Investment,
Inc., the parent company of HomeSide Lending, Inc. effective 1 October 2002 and
the sale of HomeSide US's operating platform and operating assets as at 1 March
2002; and
* Other non-core operations - the closure of the Vivid business in
Great Britain in April 2001.
Prior Period Comparatives
From 1 October 2002, there have been transfers of business units across all
Divisions. For comparability, the Divisions' prior period results have been
restated from the Profit Announcement released on 7 November 2002. The nature of
the restatements have been fully disclosed in the 2003 half year results
template released on 28 March 2003.
Please refer to the National's website at www.national.com.au for a copy of this
announcement.
Cash Earnings
Cash earnings is a key performance measure and financial target used by the
Group. It is also a key performance measure used by the broking community, as
well as by those Australian peers of the Group with a similar business
portfolio.
A reconciliation of cash earnings to net profit appears on page 7. Cash earnings
is also explained in detail in the Glossary of Terms.
6
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DIVISIONAL PERFORMANCE SUMMARY
Half year to Fav/(unfav)
change on
Note Mar 03 Sep 02 Mar 02 Sep 02 Mar 02
$m $m $m % %
Cash earnings
Retail Banking
Financial Services 1 904 887 870 1.9 3.9
Australia
Financial Services Europe 1 508 465 501 9.2 1.4
Financial Services New 1 159 140 117 13.6 35.9
Zealand
Retail Banking 1,571 1,492 1,488 5.3 5.6
Corporate & Institutional 1 416 441 377 (5.7 ) 10.3
Banking
Other (incl. Excess 1 (23 ) (54 ) (102 ) 57.4 77.5
Capital, Group Funding and
Corporate Centre)
Total Banking 1,964 1,879 1,763 4.5 11.4
Wealth Management operating 1 167 77 221 large (24.4 )
profit after tax (1)
Cash earnings from ongoing 2,131 1,956 1,984 8.9 7.4
operations before
significant items
Cash earnings from disposed 1 - (9 ) 107 large large
operations (2)
Net profit attributable to 10 (1 ) 7 large (42.9 )
outside equity interest
Distributions 94 92 95 (2.2 ) 1.1
Cash earnings before 2,027 1,856 1,989 9.2 1.9
significant items (3)
Weighted av no. of ordinary 16 1,524 1,544 1,555 1.3 2.0
shares (million)
Cash earnings per share 133.0 120.3 127.9 10.6 4.0
before significant items
(cents) (4)
Reconciliation to net
profit
Cash earnings before 2,027 1,856 1,989 9.2 1.9
significant items
Adjusted for:
Net profit attributable to 10 (1 ) 7 large (42.9 )
outside equity interest
Distributions 94 92 95 (2.2 ) 1.1
Wealth Management 1 (205 ) (389 ) 237 47.3 large
revaluation profit/(loss)
after tax
Goodwill amortisation (49 ) (53 ) (48 ) 7.5 (2.1 )
Net profit before 1,877 1,505 2,280 24.7 (17.7 )
significant items
Significant items after tax 13 - (389 ) (17 ) large large
Net profit 1,877 1,116 2,263 68.2 (17.1 )
Net profit attributable to 10 (1 ) 7 large (42.9 )
outside equity interest
Net profit attributable to 1,867 1,117 2,256 67.1 (17.2 )
members of the Company
Distributions 94 92 95 (2.2 ) 1.1
Earnings attributable to 1,773 1,025 2,161 73.0 (18.0 )
ordinary shareholders
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(1) Wealth Management operating profit after tax
refers to net profit generated through the Wealth Management operations. It
excludes revaluation profit/(loss) after tax.
(2) Includes an $89 million once-off taxation
benefit from HomeSide in the March 2002 half year.
(3) Cash earnings is a performance measure used by
the management of the Group. Refer to the Glossary of Terms for a complete
discussion of cash earnings.
(4) This calculation is prepared on a cash
earnings per ordinary share basis. Refer to note 16 for information on cash
earnings per diluted share.
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GROUP PERFORMANCE SUMMARY
Half year to Fav/(unfav)
change on
Note Mar 03 Sep 02 Mar 02 Sep 02 Mar 02
$m $m $m % %
Banking (1)
Net interest income 2 3,692 3,584 3,517 3.0 5.0
Other operating income (2) 7 2,066 1,972 1,877 4.8 10.1
Banking net operating income 5,758 5,556 5,394 3.6 6.7
(1)
Wealth Management
Net interest income 2 54 45 56 20.0 (3.6 )
Net life insurance income (3) 6 81 (250 ) 240 large (66.3 )
Other operating income (2) 7 366 411 388 (10.9 ) (5.7 )
Net operating income 6,259 5,762 6,078 8.6 3.0
Banking operating expenses 8 2,692 2,645 2,555 (1.8 ) (5.4 )
(1)
Wealth Management operating 8 394 482 331 18.3 (19.0 )
expenses (4)
Charge to provide for 10 322 260 387 (23.8 ) 16.8
doubtful debts
Cash earnings before tax 2,851 2,375 2,805 20.0 1.6
Banking income tax expense 12 781 771 689 (1.3 ) (13.4 )
(1)
Wealth Management income tax 12 (61 ) (352 ) 132 (82.7 ) large
(benefit)/expense
Cash earnings from ongoing 2,131 1,956 1,984 8.9 7.4
operations before significant
items
Wealth Management revaluation 1 (205 ) (389 ) 237 47.3 large
profit/(loss) after tax
Goodwill amortisation 49 53 48 7.5 (2.1 )
Net profit from ongoing 1,877 1,514 2,173 24.0 (13.6 )
operations
Net profit from disposed - (9 ) 107 large large
operations (HomeSide)
Net profit before significant 1,877 1,505 2,280 24.7 (17.7 )
items
Significant items after tax 13 - (389 ) (17 ) large large
Net profit 1,877 1,116 2,263 68.2 (17.1 )
Net profit attributable to 10 (1 ) 7 large (42.9 )
outside equity interest
Net profit attributable to 1,867 1,117 2,256 67.1 (17.2 )
members of the Company
Distributions 94 92 95 (2.2 ) 1.1
Earnings attributable to 1,773 1,025 2,161 73.0 (18.0 )
ordinary shareholders
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(1) Banking refers to Total Banking adjusted for
eliminations. Refer to note 1 for further details.
(2) Other operating income excludes net interest
income, net life insurance income and revaluation profit/(loss).
(3) Net life insurance income is the profit before
tax excluding net interest income of the statutory funds of the life insurance
companies of the Group.
(4) Other operating expenses excludes life
insurance expenses incorporated within net life insurance income.
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CASH EARNINGS BY REGION FROM ONGOING OPERATIONS
Half year to Fav/(unfav)
change on
Mar 03 Sep 02 Mar 02 Sep 02 Mar 02
$m $m $m % %
Australia
Retail Banking (1) 895 894 866 0.1 3.3
Corporate & Institutional Banking 202 250 164 (19.2 ) 23.2
Wealth Management 137 52 184 large (25.5 )
Other (incl. Excess Capital, Group (64 ) (66 ) (74 ) 3.0 13.5
Funding & Corporate Centre) (2)
Total Australia 1,170 1,130 1,140 3.5 2.6
Europe
Retail Banking (1) 509 456 504 11.6 1.0
Corporate & Institutional Banking 90 82 107 9.8 (15.9 )
Wealth Management 12 26 18 (53.8 ) (33.3 )
Other (incl. Group Funding & (46 ) (19 ) (27 ) large (70.4 )
Corporate Centre)
Total Europe 565 545 602 3.7 (6.1 )
New Zealand
Retail Banking (1) 167 142 118 17.6 41.5
Corporate & Institutional Banking 74 80 79 (7.5 ) (6.3 )
Wealth Management 6 3 4 large 50.0
Other (incl. Group Funding & (8 ) (4 ) (4 ) large large
Corporate Centre)
Total New Zealand 239 221 197 8.1 21.3
United States
Corporate & Institutional Banking 26 20 (19 ) 30.0 large
Other (incl. Group Funding & 89 34 (1 ) large large
Corporate Centre) (3)
Total United States 115 54 (20 ) large large
Asia
Corporate & Institutional Banking 24 9 46 large (47.8 )
Wealth Management 12 (4 ) 15 large (20.0 )
Other (incl. Group Funding & 6 1 4 large 50.0
Corporate Centre)
Total Asia 42 6 65 large (35.4 )
Cash earnings from ongoing operations 2,131 1,956 1,984 8.9 7.4
before significant items
--------------------
(1) Regional Retail Banking results differ from
Financial Services Australia, Europe and New Zealand primarily due to the
inclusion of the global fleet management business units within Financial
Services Australia
(2) Earnings on excess capital is wholly
attributed to Australia. The earnings rate on excess capital for the half years
ended March 2003, September 2002 and March 2002 were 4.99%, 5.72% and 5.26%
respectively
(3) The increased contribution is due to the
cessation of redeemable preference share dividend payments with the sale of SR
Investment, Inc. (HomeSide).
Refer to the Group Performance Summary on page 8 for a reconciliation of cash
earnings from
ongoing operations before significant items to net profit.
9
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SUMMARY OF FINANCIAL POSITION
--As at Change on
Note Mar 03 Sep 02 Mar 02 Sep 02 Mar 02
$m $m $m % %
Assets
Cash assets 6,060 6,294 8,423 (3.7 ) (28.1 )
Due from other financial 13,760 15,876 18,816 (13.3 ) (26.9 )
institutions
Due from customers on 20,677 19,474 20,317 6.2 1.8
acceptances
Trading securities 21,414 19,590 17,131 9.3 25.0
Trading derivatives (1) 25,228 12,128 12,838 large 96.5
Available for sale securities 5,005 6,192 6,213 (19.2 ) (19.4 )
Investment securities 10,925 13,541 10,556 (19.3 ) 3.5
Investments relating to life 30,278 31,012 32,865 (2.4 ) (7.9 )
ins. business
Loans and advances 242,612 231,300 207,636 4.9 16.8
Mortgage loans held for sale 12 85 101 (85.9 ) (88.1 )
Mortgage servicing rights - 1,794 6,044 large large
Shares in entities and other 1,186 1,199 1,114 (1.1 ) 6.5
securities
Regulatory deposits 180 129 334 39.5 (46.1 )
Property, plant and equipment 2,493 2,640 2,558 (5.6 ) (2.5 )
Income tax assets 1,213 1,292 1,194 (6.1 ) 1.6
Goodwill 787 775 828 1.5 (5.0 )
Other assets 12,366 14,066 14,669 (12.1 ) (15.7 )
Total assets 394,196 377,387 361,637 4.5 9.0
Liabilities
Due to other financial 49,722 43,279 41,194 14.9 20.7
institutions
Liability on acceptances 20,677 19,474 20,317 6.2 1.8
Life insurance policy 30,206 30,425 32,056 (0.7 ) (5.8 )
liabilities
Trading derivatives (1) 24,821 12,000 12,384 large large
Deposits and other borrowings 207,040 206,864 190,627 0.1 8.6
Income tax liabilities 1,255 1,609 2,045 (22.0 ) (38.6 )
Provisions 1,251 2,809 2,202 (55.5 ) (43.2 )
Bonds, notes and subordinated 18,933 22,192 22,499 (14.7 ) (15.8 )
debt
Other debt issues 1,808 1,866 1,926 (3.1 ) (6.1 )
Other liabilities 14,668 13,618 12,936 7.7 13.4
Net assets 23,815 23,251 23,451 2.4 1.6
Equity
Contributed equity 15 9,052 9,931 10,486 (8.9 ) (13.7 )
Reserves 15 1,254 2,105 1,480 (40.4 ) (15.3 )
Retained profits 15 13,224 11,148 11,416 18.6 15.8
Total parent entity interest 23,530 23,184 23,382 1.5 0.6
Outside equity interests in 15 285 67 69 large large
controlled entities
Total equity 23,815 23,251 23,451 2.4 1.6
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(1) The change in the fair value of trading derivatives asset and
liability balances from March 2002 to March 2003 primarily reflects the
revaluation impacts of movements in interest rates. The change in fair value
from September 2002 to March 2003 primarily results from a reclassification not
previously included, which equally impacts both trading derivative asset and
liability balances and is not material in the context of the Group's balance
sheet. The net trading derivative position at September 2002 is unchanged.
10
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GROUP KEY PERFORMANCE MEASURES
Half year to
Note Mar 03 Sep 02 Mar 02
Shareholder measures
EVA ($million) (1) 836 643 641
Per ordinary share (cents)
Cash earnings before significant items (2) 16 133.0 c 120.3 c 127.9 c
Cash earnings after significant items (2) 133.0 c 95.1 c 126.8 c
Earnings before significant items 116.3 c 91.6 c 140.1 c
Earnings after significant items 116.3 c 66.4 c 139.0 c
Per diluted share (cents) (3)
Cash earnings before significant items 16 130.1 c 117.5 c 125.4 c
Earnings after significant items 114.2 c 66.2 c 135.9 c
Weighted average ordinary shares (no. million) 1,524 1,544 1,555
Weighted average diluted shares (no. million) (3) 1,595 1,620 1,629
Dividends per share (cents) 80 c 75 c 72 c
Performance (after non-cash items) (4)
Return on average equity before significant items 17.1 % 14.5 % 20.3 %
Return on average equity after significant items 17.1 % 10.5 % 20.1 %
Return on average assets before significant items 0.94 % 0.77 % 1.24 %
Net interest income
Net interest spread 3 2.22 % 2.36 % 2.41 %
Net interest margin 3 2.56 % 2.63 % 2.71 %
Profitability
Total Banking cost to income ratio before significant 47.3 % 48.2 % 48.0 %
items (5)
Cash earnings per average FTE (before significant items) 95 85 85
($'000)
As at
Mar 03 Sep 02 Mar 02
Capital
Tier 1 ratio 15 7.47 % 7.76 % 7.91 %
Tier 2 ratio 15 3.02 % 3.76 % 4.03 %
Deductions 15 (1.33 )% (1.31 )% (1.34 )%
Total capital ratio 15 9.16 % 10.21 % 10.60 %
Adjusted common equity ratio (6) 15 5.09 % 5.37 % 5.44 %
Common equity to tangible assets (7) 4.59 % 5.02 % 5.38 %
Balance sheet assets ($bn)
Gross loans and acceptances 267 255 232
Risk-weighted assets 15 254 248 237
Off-balance sheet assets ($bn)
Funds under management and administration 65 66 71
Assets under custody and administration 343 365 359
Asset quality
Gross non-accrual loans to gross loans and acceptances 11 0.59 % 0.62 % 0.75 %
Net impaired assets to total equity 11 4.5 % 4.7 % 4.9 %
General provision to risk-weighted assets 11 0.75 % 0.82 % 0.88 %
Specific provision to gross impaired assets 11 36.1 % 34.6 % 37.0 %
General and specific provisions to gross impaired assets 11 155.7 % 161.0 % 155.7 %
Other information
Full-time equivalent employees (no.) 9 43,002 43,202 43,658
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(1) Economic Value Added (EVA) is a registered trademark of Stern
Stewart & Co. Refer pages 26 and 83 for further details.
(2) Cash earnings attributable to ordinary shareholders excludes
revaluation profits/(losses) after tax and goodwill amortisation.
(3) Refer to note 16 for the components.
(4) Includes non-cash items, ie. revaluation profits/(losses) after
tax and goodwill amortisation.
(5) Total Banking cost to income ratio is gross of eliminations,
refer to note 1. Costs include total expenses adjusted for significant
items,goodwill amortisation, the charge to provide for doubtful debts and
interest expense. Income includes total revenue adjusted forsignificant items
and net of interest expense. Refer to the Glossary of Terms for a complete
discussion of the cost to income ratio.
(6) Calculated as adjusted common equity to the risk-weighted assets.
(7) Calculated as adjusted shareholders funds to the adjusted
tangible assets.
11
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SECTION 3
RESULTS FOR THE HALF YEAR ENDED 31 MARCH 2003
MANAGEMENT DISCUSSION & ANALYSIS
12
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Management Discussion & Analysis - Overview
OVERVIEW (1)
Cash earnings of $2,027 million were a record half year result and were 1.9%
higher than the March 2002 half year. Cash earnings per share (EPS) increased
5.1 cents (4.0%) to 133.0 cents, reflecting both growth in the earnings of the
underlying core business and active capital management initiatives.
Cash earnings from ongoing operations have grown 7.4% on the March 2002 half
year and 8.9% on the September 2002 half year. Total Banking has maintained
earnings momentum with good volume growth and the benefit from restructuring
activities. This has resulted in underlying profit growth of 8.0% from the March
2002 half.
A key feature of the result has been strong underlying growth in both the
Australian and New Zealand retail banking operations. Strong housing growth and
sound asset quality were evident across the Group. Difficult trading conditions
in Europe and pressure on Wealth Management income due to weak investor
sentiment resulted in slower growth in these business divisions.
Cash earnings per share growth (in cents)
The March 2002 half included a $107 million contribution (including an $89
million once-off taxation benefit) from HomeSide. This impact has been partly
mitigated by the reduction in the Group's funding cost as a result of the sale.
The impact of the ongoing share buy back (net of funding costs) has added 1.6
cents or 1.3% to cash EPS growth compared to the March 2002 half.
The interim dividend has been increased 8 cents to 80 cents per share compared
with the prior corresponding period. The Group anticipates a 100% franking level
for the 2003 financial year.
Banking
Total Banking includes the Regional Retail Financial Services Divisions,
Corporate & Institutional Banking and Other (including Excess Capital, Group
Funding & Corporate Centre). It excludes Wealth Management.
Half year to Fav/(unfav)
change on
Mar 03 Sep 02 Mar 02 Sep 02 Mar 02
$m $m $m % %
Net interest income 3,692 3,584 3,517 3.0 5.0
Other operating income 2,124 2,041 1,940 4.1 9.5
Total income 5,816 5,625 5,457 3.4 6.6
Other operating expenses 2,750 2,714 2,618 (1.3 ) (5.0 )
Underlying profit 3,066 2,911 2,839 5.3 8.0
Charge to provide for doubtful debts 321 261 387 (23.0 ) 17.1
Cash earnings before tax 2,745 2,650 2,452 3.6 11.9
Income tax expense 781 771 689 (1.3 ) (13.4 )
Cash earnings before significant 1,964 1,879 1,763 4.5 11.4
items
--------------------
(1) The discussion on the following two pages
relates to results before significant items. For a reconciliation to net profit
refer page 7.
13
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Banking operations generated $1,964 million of total Group cash earnings, an
increase of 11.4% on prior corresponding period. The retail banking operations
produced $1,571 million, a growth rate of 5.6%, with the results underpinned by
strong volume growth, cost containment and an improved asset quality profile
across regions. Corporate & Institutional Banking had a 10.3% increase in cash
earnings in tough market conditions.
At an underlying profit level, Total Banking increased 8.0% from the March 2002
half year (5.3% from the September 2002 half). Retail Banking growth was 7.8%
and 5.0% respectively.
Half year to Fav/ (unfav) change on
Underlying profit Mar 03 Sep 02 Mar 02 Sep 02 Mar 02
$m $m $m % %
Financial Services Australia 1,446 1,365 1,272 5.9 13.7
Financial Services Europe 869 867 917 0.2 (5.2 )
Financial Services New Zealand 243 204 184 19.1 32.1
Retail Banking 2,558 2,436 2,373 5.0 7.8
Corporate & Institutional Banking 565 573 606 (1.4 ) (6.8 )
Other (57 ) (98 ) (140 ) 41.8 59.3
Total Banking 3,066 2,911 2,839 5.3 8.0
Sound progress was made towards 2004 efficiency targets established under
Positioning for Growth.
Half year to
Cost to income ratio by banking division 2004 Mar 03 Sep 02 Mar 02
Target
% % %
Financial Services Australia 46.0 45.6 47.4 48.9
Financial Services Europe 48.0 50.1 49.2 47.7
Financial Services New Zealand 48.0 50.8 53.4 53.2
Corporate & Institutional Banking 36.0 39.8 40.6 37.8
Total Banking 47.3 48.2 48.0
Wealth Management
Operating profit from Wealth Management more than doubled from the September
2002 half year but fell by 24.4% from the March 2002 half year. Market share
remained steady. The value of funds under management decreased 0.8% from 30
September 2002 as a result of weaker global equity markets, which have impacted
investor confidence. This has had a significant impact on the level of fees
earned, and has continued to unfavourably impact the investment earnings on
capital. Investors have generally lowered their risk profile during the half
year and this has been reflected in slower growth in investment products within
Wealth Management, but strong growth in deposit volumes within the Group's
banking businesses.
The share of net retail funds management inflows captured for the year to
December 2002 was 16.7%, which compares to a market share of funds under
management of 14.1%. The continuation of a substantial investment program in
both Australia and the United Kingdom will ensure the future growth in this
business.
Wealth Management efficiency targets 2004 Half year to
Target Mar 03 Sep 02 Mar 02
Cost to premium income ratio (%) 21.0 21.0 22.0 22.0
Cost to funds under management (basis points) 65 67 67 66
(1)
--------------------
(1) March 2003 and September 2002 half years exclude the NAFiM
investor compensation
Diversification of income streams
The Group has continued to deliver on its strategy of diversifying sources of
income, as well as the geographic mix of income. The Group has remained focused
on the development of sustainable relationship based sources of income and
reduced historical reliance on net interest income. In addition to the ongoing
growth in the Group's Wealth Management business, there has been an increase in
the share of Total Banking income derived from non-interest income from 35.6% in
the March 2002 half to 36.5% in the March 2003 half.
14
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Restructuring Progress
During 2002 the Group recognised restructuring costs of $580 million ($412
million after tax) resulting from its Positioning for Growth program and related
restructuring activities. The initiative comprised a fundamental reorganisation
of the structure of the Group as well as a series of revenue and cost
enhancement initiatives. Restructuring expenses primarily related to
redundancies of $327 million, surplus leased space of $68 million and other
restructuring costs of $185 million including technology write-downs of $132
million.
The restructuring expenses were incurred to deliver a significant portion of the
announced cost reduction target of $370 million per annum by September 2004. Of
these savings, 80% relate to personnel costs. Redundancy payments will have a
payback period of approximately one year.
Based primarily on redundancies made to date, annual cost savings of $195
million have been achieved against targeted annualised savings of $370 million
per annum by September 2004. The Group is on track to achieve the target.
Restructuring expenses
Redundancies Occupancy Other Total
$m $m $m $m
Total 2002 expenditure/provision 327 68 185 580
Expenditure in 2002 year (101 ) (20 ) (177 ) (298 )
Provision balance as at 30 September 2002 226 48 8 282
Foreign exchange impact (10 ) (2 ) - (12 )
Expenditure in March 2003 half year (64 ) (2 ) - (66 )
Provision balance as at 31 March 2003 152 44 8 204
Balance remaining of total restructuring 46 % 65 % 4 % 35 %
In the half year to March 2003 $66 million of the provision for restructuring
costs was utilised primarily in relation to 468 redundancies. Staff reductions
have resulted from changes to head office, back office, IT, operations and front
office areas and the re-engineering of the lending, distribution and transaction
processing functions.
Staffing levels - ongoing operations
Increase/(Decrease) Half year to Year to
Mar 03 Sep 02
FTEs FTEs
Opening balance 43,162 44,231
Acquisition - Hertz Fleetlease Limited 166 -
Adjustment to 2002 to exclude joint ventures - (184 )
Redundancies (468 ) (859 )
Net remaining movement 142 (26 )
Closing balance 43,002 43,162
Net full time equivalent employee (FTE) reductions of 326 have been achieved
over the half year to 31 March 2003 (excluding the impact of the Hertz
Fleetlease Limited acquisition). This increases the net reduction since
September 2001 to 1,211 (excluding the impact of the Hertz Fleetlease Limited
acquisition and the adjustment to exclude joint ventures). The Group is on track
to achieve its target of a net reduction in FTEs of 2,040 by 30 September 2003.
15
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Asset Quality
The Group's asset quality remains sound. Gross non-accrual loans were steady at
$1,583 million compared with $1,590 million at September 2002. Gross non-accrual
loans as a percentage of gross loans and acceptances fell to 0.59% from 0.62% in
September 2002.
During the past six months there has been a continued focus on positioning the
portfolio in terms of achieving a sound balance between asset growth, risk and
return, having regard to the economic cycle. This strategy has involved
effective early identification and management of problem loans including exit
lending strategies for exposures exhibiting signs of weakening credit quality.
These initiatives have resulted in an ongoing improvement in asset quality. This
improvement also reflects several other positioning outcomes including:
* shift in balance sheet asset composition towards housing loans and
lower risk corporate and small to medium enterprise lending;
* continuing improvement in the percentage of balances held which
are considered investment grade; and
* improving security position in the small and medium enterprise
sector.
Notwithstanding these favourable trends in asset quality, there are a wide range
of risks rising from a deteriorating credit environment. Key global risks
include low rates of economic growth, with banking sectors in some countries
exhibiting increasing risk. This difficult outlook is exacerbated by the
potential for world growth rates to experience sustained weakness reflecting
rising unemployment, deterioration of business and consumer sentiment and the
uncertain impact of SARS.
In Australia the drought has detracted from recent economic growth and if it
continues could weaken economic prospects. The retail banking markets in
Australia and Britain are currently characterised by household sectors that are
carrying debt levels much higher than is usual either at this stage of the
economic cycle or by historical standards. These sectors are vulnerable to
declines in employment or falls in disposable income.
In light of the above assessment of the current and prospective credit
environment the Group is appropriately positioned to manage these challenges.
This assessment is based on the following:
* the structure and composition of the Group's balance sheet;
* pro-active identification of risks and management of those risks;
and
* specific analysis of industries that are most likely to be
impacted by further deterioration in the global credit environment.
In terms of the asset composition of the book, most of the Group's lending is
either investment grade or secured.
16
--------------------------------------------------------------------------------
--------------------
(1) Business lending categories:
Category A - Bank security > 142% of the facility
Category B - Bank security between 100% to 142% of the facility
Category C - Bank security between 50% to 100% of the facility
Category D - Bank security of < 50% of the facility
For Corporate & Institutional Banking, asset quality remains strong from the
perspective of its rating and diversification. For the commercial portfolio,
investment grade lending represents 86% of the portfolio.
As part of the Group's pro-active risk management, there has been an increased
focus on credit reviews in the following areas:
* all sub-investment grade exposures;
* all companies with negative watch grading outlooks;
* the industries below; and
* the unsecured retail portfolio.
As at Mar 03
Exposures % of total Investment Non-accrual
Group Grade
exposures
$bn $bn $bn
Aviation & associated industries 2.63 0.64 1.48 0.03
Energy - Gas/Electricity 11.12 2.69 8.81 0.27
Hospitality 5.31 1.29 3.30 0.04
Insurance (excluding Government) 7.30 1.77 7.10 -
Technology 1.08 0.26 0.66 0.01
Telecommunications 3.01 0.73 2.45 0.07
In relation to the unsecured retail portfolio, as the following chart shows, the
90+ days delinquencies values are either stable or declining, underlying the
Group's sound asset quality.
17
--------------------------------------------------------------------------------
To ensure a degree of confidence on current and prospective trends in asset
quality, management has undertaken scenario testing of the Group's portfolio
based on an internally developed relationship between economic cycle and loan
loss rates.
Testing of the Australian home loan portfolio continues to show that an extreme
scenario of a 30% reduction in property prices in combination with a fivefold
increase in current default rates would be likely to result in losses of less
than $100 million. Underwiting standards in respect of mortgage lending have
continued to be actively managed and strategically tightened.
Against this background, the Group's provisioning coverage ratios remain sound.
An important driver of the Group's coverage ratio is its asset composition and
level of security.
Asset Composition
During the half year to March 2003, housing as a proportion of the total lending
portfolio has increased with a corresponding fall in business lending over the
same period.
As at
Mar 03 Sep 02
% %
Housing 43 41
Term Lending 29 31
Overdrafts 7 8
Leasing 6 7
Credit Cards 3 3
Other 12 10
Total 100 100
18
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Security Coverage
Within the Business lending portfolio the level of security coverage has
improved, with fully secured lending comprising 56.3% of the portfolio, up from
51.7% at 31 March 2002.
--------------------
(1) Excludes Housing/Flexi-plus Mortgages and
Personal Lending
(2) Business lending categories:
Category A - Bank security > 142% of the facility
Category B - Bank security between 100% to 142% of the facility
Category C - Bank security between 50% to 100% of the facility
Category D - Bank security of < 50% of the facility
As illustrated above, there has been a significant shift toward lower risk and
better secured lending that requires lower levels of statistical provisioning.
Recognition of impaired exposures and associated provisioning continues to be
treated conservatively. Management is satisfied that the level of current
provisions is adequate for known problem loans and trends.
19
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European Pension Schemes
The Group has five defined benefit pension funds in Europe. Disclosure of the
latest actuarial reviews on the position of these funds was contained in the
Annual Financial Report 2002. Further information was also provided at the
Investor Presentation on 11 April 2003 (refer to the National's website for a
copy of this presentation).
For the purpose of measuring the Group's defined benefit pension expense, US
accounting standard FAS 87 is applied to the Yorkshire Bank scheme and UK
accounting standard SSAP 24 is applied to the National Australia Bank UK,
Clydesdale Bank, Northern Bank and National Irish Bank schemes.
For the purpose of reporting the funded status of defined benefit pension
schemes in the Annual Financial Report, FAS 87 is used for all note disclosures
of asset values and pension obligations. This will be updated at 30 June 2003
and the net surplus or deficit for each fund will be disclosed in the Annual
Financial Report 2003.
Consulting actuaries Watson Wyatt LLP have advised that as at the end of January
2003 all of these funds would have met the minimum funding requirement (MFR)
test as defined in UK legislation. As at this date the FTSE 100 was
approximately 3,570. In addition, adopting best estimate assumptions for returns
from the current asset base, the overall longer term funding position of these
schemes is in excess of 100%.
The next full actuarial reviews are due 30 September 2004, except for National
Irish Bank, which is due 30 September 2005. In light of the fact that there has
been significant movement in equity markets since the last full actuarial
reviews, the Group has decided to commission partial interim actuarial reviews
of all European schemes as at 30 June 2003.
Share Based Payments - Employee Benefits
Shares
During the half year to March 2003, the National Group issued shares to
employees with a total fair value of $47 million. These share issues all related
to entitlements arising from the 2002 financial year and comprise:
* EVA share offer $34 million (equivalent to $1,000 to all eligible
employees); and
* Other contractual obligations $13 million.
Disclosure of the fair value of these shares will continue to be made in the
Annual Financial Report.
Under the proposed draft Australian and International Accounting Standard, the
fair value of shares issued to employees will be required to be expensed in the
period in which the shares are granted.
Options
On 21 March 2003, 5,978,750 options and 1,519,832 performance rights were
granted. The combined total fair value at the date of issue was approximately
$62 million, based on fair values of $4.95 and $21.22, respectively.
Disclosure of fair value of options will continue to be made in the Annual
Financial Report.
Under the proposed Australian and International Accounting Standard, the fair
value of options will be required to be expensed over the average vesting period
commencing from grant date, with annual adjustments for differences between the
expected and actual period of service for employees. This will apply to options
that were granted after November 2002 but not yet vested at the date of first
applying the standard, and all options granted after application of the
standard.
The National Group will adopt the proposed accounting standard once finalised
and promulgated by the Australian Accounting Standards Board.
20
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Software Capitalisation
The Group has capitalised the development and purchase of software in accordance
with US pronouncements. Total capitalised software as at 31 March 2003 was $920
million ($884 million at 30 September 2002).
The level of software capitalisation at 31 March 2003 equates to 0.2% of total
assets or 2.7% of total equity.
Software is amortised over a period of 3-10 years commencing from date of
implementation. The only assets amortised over a period of 10 years are the ISI
program and the Global Data Warehouse. The amortisation period aligns to the
expected useful life. The software amortisation charge for the half year to 31
March 2003 was $69 million (30 September 2002 half: $57 million, 31 March 2002
half: $49 million).
Integrated Systems Implementation (ISI) Program
The ISI program is a multi-stage project designed to provide the Group with a
common global enterprise resource planning system across all our lines of
operations.
The ISI program is a key enabler for the following:
* Provision of a strategic infrastructure platform for the future;
* Transformation of the finance and HR functions which will result
in staff savings, improved processes and more timely decision making based on
more accurate, comprehensive and consistent information;
* Significant procurement savings via improved information and
systems;
* Improved risk and balance sheet management; and
* Replacement of some legacy systems.
The Group has recognised an asset on the balance sheet for costs capitalised in
relation to the ISI program. The carrying value of this asset at 31 March 2003
is $329 million, (30 September 2002: $294 million), of which $314 million
related to capitalised software. This amount is being amortised over 10 years.
The ISI program continues to be on track. To date it has successfully delivered:
human resources and payroll functionality and core financial modules (general
ledger and procurement) in New Zealand; and, enhanced human resource
functionality in Europe.
21
--------------------------------------------------------------------------------
Management Discussion & Analysis - Profitability
PROFITABILITY
Net Interest Income
Group net interest income increased 4.0% from the prior comparative period (3.5%
from the September 2002 half). This primarily reflected growth from Retail
Banking of 5.2% and the benefit from the sales proceeds of HomeSide. It was
partly offset by Corporate & Institutional Banking decreasing 20.5% primarily
due to lower contribution from the Money Markets Division resulting from the
flatter interest rate yield curve environment.
Volumes by Division
Retail Banking volume growth has been driven by strong housing growth in
Australia and New Zealand and subdued business lending. Corporate &
Institutional Banking was impacted by an increase in core lending and increases
in securities under reverse repurchase agreements.
Half year to Change on
Average interest-earning assets (1) Mar 03 Sep 02 Mar 02 Sep 02
$bn $bn $bn %
Financial Services Australia 106 99 92 7
Financial Services Europe 53 52 52 2
Financial Services New Zealand 17 18 17 (1 )
Retail Banking 176 169 161 4
Corporate & Institutional Banking 107 100 97 7
Other 11 6 8 83
Group average interest-earning assets 294 275 266 7
--------------------
(1) Interest-earning assets exclude intercompany balances.
Net interest margin
--------------------
(2) Adjusted for impact of Money Markets division within CIB
Net interest margin declined 7 basis points during the March 2003 half. A
decline in margin contribution from the retail operations, primarily as a result
of the relatively strong growth in mortgage lending, was offset by the funding
benefit of the proceeds of HomeSide and the lower cost of debt.
The overall decline in Group margin can be attributed to the Money Markets
division within Corporate & Institutional Banking, which includes the impact of
lower trading income and an increase of $6.9 billion in a structured lending
product called "reverse repo" loans. These are low risk short-term loans to high
quality counterparties fully secured against government, semi-government or
prime corporate security. The loans attract the risk weighting of the security
and are priced to reflect their low risk nature. Adjusting for the Money Markets
division, the Group's net interest margin remained steady over the half year to
March 2003.
22
--------------------------------------------------------------------------------
The Retail Banking margin showed a 6 basis point decline in contribution to the
Group margin, due to a decline in margin for Financial Services Australia and
Financial Services Europe, partly offset by an increase in Financial Services
New Zealand.
The decline in Financial Services Australia's margin of 20 basis points is due
to the:
* Change in asset portfolio with strong growth in home loans and
subdued business lending;
* Focus on asset quality in the business loan book with a shift to
lower risk/lower margin lending; and
* Reduced contribution from free funds, due to lower longer term
interest rates.
Financial Services Australia has undertaken a comprehensive program to improve
credit quality and capital efficiency and reduce risk. This is illustrated
below, with the decrease in lower security category C and D lending and an
increase in more secured category A and B lending as a proportion of the total
portfolio.
--------------------
*Category as a percentage of the total loan portfolio as at March 2003:
Category A - Bank security > 142% of the facility
Category B - Bank security between 100% to 142% of the facility
Category C - Bank security between 50% to 100% of the facility
Category D - Bank security of < 50% of the facility
Financial Services New Zealand's margin improved 10 basis points resulting from
an increased contribution from retail deposits. Financial Services Europe's
margin decreased slightly on the prior half year.
The Corporate & Institutional Banking margin was depressed by lower Money Market
income, however the margin on core lending remained stable.
Other (including Group Funding) margin improved by 6 basis points. This
primarily reflects the funding benefit from the HomeSide sale proceeds and lower
cost of debt.
23
--------------------------------------------------------------------------------
Net Life Insurance Income
The Group reports its results in accordance with Australian Accounting Standard
AASB 1038 "Life Insurance Business" (AASB 1038). AASB 1038 requires that the
interests of policyholders in the statutory funds of the life insurance business
be reported in the consolidated results.
Net life insurance income is the profit before tax excluding net interest income
of the statutory funds of the life insurance companies of the Group. As the
policyholders receive the tax benefits, the movement in net life insurance
income should be viewed on an after tax basis. The statutory funds of the life
insurance companies conduct superannuation, investment and insurance-related
businesses (ie. Protection business including Term & Accident, Critical Illness
and Disability insurance and Traditional Whole of Life and Endowment).
Half year to Fav/ (unfav)
change on
Mar 03 Sep 02 Mar 02 Sep 02 Mar 02
$m $m $m % %
Net life insurance income/(loss) 81 (250 ) 240 large (66.3 )
Income tax expense/(benefit) (70 ) (354 ) 106 (80.2 ) large
Net life insurance income after tax 151 104 134 45.2 12.7
Net life insurance income after tax has improved 45.2% on the September 2002
half year. This is primarily due to increased investment revenue, partially
offset by a decrease in change in policy liabilities reflecting the performance
of global equity markets as compared to the September 2002 half.
For detailed discussion on the results of Wealth Management, including the
results of the life businesses (above), as well as the results from non-life
businesses, refer pages 38 - 41.
Other Operating Income
Refer to page 60 for Divisional details.
Total Banking other operating income increased by 9.5% from the prior
comparative period to $2,124 million (up 4.1% from September 2002 half).
Retail Banking contributed solidly to the result, with other operating income
increasing 6.4%. Other operating income in Financial Services Australia and New
Zealand grew strongly from higher lending fees from housing loans and higher
transaction volumes. Financial Services Europe declined slightly with reductions
in creditor insurance income as a result of limited growth in personal loan
volumes and lower account fee income.
The 18.0% growth within Corporate & Institutional Banking was largely from
improved customer-related activity.
Wealth Management other operating income decreased by 5.7% from the prior
comparative period, resulting from uncertain investor sentiment, with weaker
equity markets reducing fee income in the investments business and investment
returns on retained equity.
24
--------------------------------------------------------------------------------
Operating Expenses
Refer to page 62 for Divisional details.
Total Banking other operating expenses increased by 5.0% from the prior
comparative period to $2,750 million (up 1.3% from the September 2002 half).
Retail Banking other operating expenses of $2,339 million increased 3.3% from
the prior comparative period (1.4% from the September 2002 half). Excluding the
impact of the European pension fund expense, the rise was 2.4%, which was driven
by the following factors:
* Personnel expenses due to salary increases partly offset by a 718
net reduction in FTE staff (excluding the acquisition of Hertz Fleetlease with
166 additional staff members);
* Higher occupancy costs partly due to the sale and lease back of
properties in Australia and New Zealand; and
* Higher costs associated with continued significant investment, eg.
the National's Customer Relationship Management system capability in Australia.
Corporate & Institutional Banking expenses increased 1.6%, largely due to higher
software costs in the March 2003 half.
Other (including Corporate Centre) has been impacted by costs of $21 million
arising from an ongoing major review of compliance and associated quality
improvements.
The above increases were partially offset by reduced expenditure as a result of
productivity initiatives.
Wealth Management operating expenses increased 19.0% from the prior comparative
period to $394 million. This was primarily driven by the funding of strategic
investment platforms in building an external financial adviser distribution in
the UK and Australia.
Income Tax Expense
Total Banking income tax expense has increased 13.4% to $781 million on the
prior comparative period primarily reflecting profit growth over the period.
The Group's effective tax rate has increased to 30.3% from 26.1% on prior
comparative period. The March 2002 half year included an $89 million tax benefit
in relation to HomeSide, which reduced the effective tax rate. A reconciliation
of the total Group income tax expense is incorporated in note 12.
25
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Management Discussion & Analysis - Capital & Performance Measures
CAPITAL & PERFORMANCE MEASURES
Performance Measures
Economic Value Added (EVA)
Half year to
Mar 03 Sep 02 Mar 02
$m $m $m
EVA net operating profit after tax 2,260 2,054 2,104
Deduct: Capital charge 1,424 1,411 1,463
EVA 836 643 641
EVA is a shareholder value measure designed to recognise the requirement to
generate a satisfactory return on the economic capital invested in the business.
If the business produces profit in excess of its cost of capital then value is
being created for shareholders. To align management's interests with those of
shareholders, senior management is required to place a significant percentage of
their total remuneration at risk dependent upon performance against EVA growth
targets.
In order to encourage longer term decision making and sustained value creation,
the Group sets EVA targets for 3 year periods. The Group's target is 5% growth
per annum in EVA.
EVA's Net Operating Profit After Tax (NOPAT) is based on pre-tax profit, a
standard tax rate and inclusion of calculated benefit of imputation credits
earned by paying Australian tax. EVA's capital charge is based on an 11.5% cost
of capital, applied to a calculation of economic capital that is based on the
shareholders' equity.
EVA NOPAT grew by 7.4% and the charge for capital fell by 2.7% compared to the
March 2002 half. A committed focus on asset quality and the Group's policy of
active capital management, have restrained the growth in economic capital and
resulted in a stable charge for capital, in circumstances where the Group's
banking business has been growing strongly.
Capital Position
The Group's capital ratios remained strong throughout the half year.
The Group's Tier 1 capital represents 7.47% of risk-weighted assets (6.42%
excluding hybrid equity) and total capital represents 9.16% of risk-weighted
assets. This is a reduction from the Total Regulatory Capital ratio of 10.21% at
30 September 2002. These ratios are within the Group's target ranges of 7.0% to
7.5% for Tier 1 capital (revised from 30 September 2002 of 6.25% to 6.75%) and
9.0% to 9.5% for total capital. Capital targets have been re-set following a
recent review of the Group's capital requirements.
The National has moved to use the ratio of adjusted common equity to
risk-weighted assets (the ACE ratio) in addition to regulatory capital ratios.
The National has adopted this measure as a key capital target because it
measures the capital available to support the banking operations, after
deducting the Group's investment in wealth management operations. The ACE ratio
is becoming the industry standard capital measure amongst financial
institutions. The Group's target range for the ACE ratio is 4.75% to 5.25%. As
at 31 March 2003 the ACE ratio was 5.09%, a reduction from 5.37% as at September
2002. Refer to note 15 regarding the components of the ACE ratio.
The ACE ratio will replace the tangible common ratio, which the National has
used as an additional capital measure for the past two years.
The National adopts a conservative approach to its capital levels consistent
with maintaining a AA long-term rating with Standard and Poor's (Moody's Aa3).
The National's strong capital position supports the continuation of the strategy
of active capital management. This strategy incorporates the use of on-market
buy-backs to reduce surplus capital and the ongoing policy to buy-back all new
shares issued under the National's dividend re-investment plan and other share
plans.
26
--------------------------------------------------------------------------------
Share Buy-back Program
In November 2001, the Group adopted a policy of buying back shares equal to new
shares issued under the Group's various dividend plans and staff share and
option plans. The share buyback program was subsequently extended by a further
$1.0 billion to $1.75 billion for completion by September 2003. There are as at
31 March 2003, approximately 13 million shares (or $400 million) remaining to
complete the $1.75 billion buyback program. All buy-backs are subject to
appropriate pricing volume and other parameters and an assessment of the
circumstances facing the Group at the relevant time.
During the half year to March 2003, the Group bought back 32.4 million shares at
an average price of $31.59 thereby reducing ordinary equity by $1.0 billion. The
highest price paid was $33.70 and the lowest price paid was $28.40. The volume
weighted average price of shares purchased on the days in which National was
purchaser was $31.27. The National's purchases represented 9.9% of market
turnover on the days in which the National was purchaser, on average.
Half year to
Share buy-back activity Mar 03 Sep 02 Mar 02
Number of days traded 70 days 48 days 40 days
Number of shares bought (in millions) 32.4 19.4 16.8
Average price of buy-back $ 31.59 $ 34.83 $ 34.16
Percentage of market turnover on days traded 9.9 % 8.7 % 9.2 %
Percentage of market turnover on all days 5.6 % 3.2 % 6.0 %
Volume weighted average share price on days traded
- all shares traded $ 31.27 $ 34.94 $ 34.21
- shares traded excluding buy-back $ 31.24 $ 34.95 $ 34.22
A comparison of the Group's buy-back activities relative to total market in
National Australia Bank shares, highlights that the Group continues to execute
the buy-back program in modest volumes, avoiding any market disruptions.
27
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Management Discussion & Analysis - Total Banking
TOTAL BANKING
Total Banking includes the Regional Retail Financial Services Divisions,
Corporate & Institutional Banking and Other (including Excess Capital, Group
Funding & Corporate Centre). It excludes Wealth Management.
Performance Summary
Half year to Fav/(unfav)
change on
Mar 03 Sep 02 Mar 02 Sep 02 Mar 02
$m $m $m % %
Net interest income 3,692 3,584 3,517 3.0 5.0
Other operating income(1) 2,124 2,041 1,940 4.1 9.5
Total income 5,816 5,625 5,457 3.4 6.6
Other operating expenses(1) 2,750 2,714 2,618 (1.3 ) (5.0 )
Underlying profit 3,066 2,911 2,839 5.3 8.0
Charge to provide for doubtful 321 261 387 (23.0 ) 17.1
debts
Cash earnings before tax 2,745 2,650 2,452 3.6 11.9
Income tax expense 781 771 689 (1.3 ) (13.4 )
Cash earnings before significant 1,964 1,879 1,763 4.5 11.4
items
By Division
Retail Banking 1,571 1,492 1,488 5.3 5.6
Corporate & Institutional Banking 416 441 377 (5.7 ) 10.3
Other (incl. Excess Capital, Group (23 ) (54 ) (102 ) 57.4 77.5
Funding & Corporate Centre)
Total Banking 1,964 1,879 1,763 4.5 11.4
--------------------
(1) Total Banking is gross of inter-divisional eliminations.
Retail Banking
Refer to page 29 for further details.
Corporate & Institutional Banking
Refer to page 36 for a detailed discussion of financial performance.
Other (incl. Excess Capital, Group Funding & Corporate Centre)
Refer to page 42 for a detailed discussion of financial performance.
28
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Management Discussion & Analysis - Retail Banking
RETAIL BANKING
The Regional Retail Financial Services Divisions include the business,
agribusiness and consumer financial services retailers, as well as cards,
payments and leasing units together with supporting shared services. These
operate in Australia, Europe and New Zealand. They exclude Wealth Management,
Corporate & Institutional Banking and Other (including Excess Capital, Group
Funding & Corporate Centre). The regional financial services businesses aim to
develop long-term relationships with their customers by providing products and
services that consistently meet the full financial needs of customers.
Performance Summary
Half year to Fav/(unfav)
change on
Mar 03 Sep 02 Mar 02 Sep 02 Mar 02
$m $m $m % %
Net interest income 3,277 3,173 3,116 3.3 5.2
Other operating income(1) 1,620 1,569 1,522 3.3 6.4
Total income 4,897 4,742 4,638 3.3 5.6
Other operating expenses(1) 2,339 2,306 2,265 (1.4 ) (3.3 )
Underlying profit 2,558 2,436 2,373 5.0 7.8
Charge to provide for doubtful debts 298 277 242 (7.6 ) (23.1 )
Cash earnings before tax 2,260 2,159 2,131 4.7 6.1
Income tax expense 689 667 643 (3.3 ) (7.2 )
Cash earnings before significant 1,571 1,492 1,488 5.3 5.6
items
By Division
Financial Services Australia (2) 904 887 870 1.9 3.9
Financial Services Europe (2) 508 465 501 9.2 1.4
Financial Services New Zealand (2) 159 140 117 13.6 35.9
Retail Banking 1,571 1,492 1,488 5.3 5.6
--------------------
(1) Retail Banking is the sum of total Financial Services Australia,
Financial Services Europe and Financial Services New Zealand, gross of
inter-divisional eliminations.
(2) Refer to Note 1 for a reconciliation of the Divisional results to
Group net profit.
Financial Services Australia
Refer to page 30 for a detailed discussion of financial performance.
Financial Services Europe
Refer to page 32 for a detailed discussion of financial performance.
Financial Services New Zealand
Refer to page 34 for a detailed discussion of financial performance.
29
--------------------------------------------------------------------------------
Management Discussion & Analysis - Financial Services Australia
Performance Summary
Half year to Fav/(unfav)
change on
Mar 03 Sep 02 Mar 02 Sep 02 Mar 02
$m $m $m % %
Net interest income 1,710 1,677 1,630 2.0 4.9
Other operating income 950 920 860 3.3 10.5
Total income 2,660 2,597 2,490 2.4 6.8
Other operating expenses 1,214 1,232 1,218 1.5 0.3
Underlying profit 1,446 1,365 1,272 5.9 13.7
Charge to provide for doubtful debts 156 100 46 (56.0 ) large
Cash earnings before tax 1,290 1,265 1,226 2.0 5.2
Income tax expense 386 378 356 (2.1 ) (8.4 )
Cash earnings before significant 904 887 870 1.9 3.9
items(1)
--------------------
(1) Refer to Note 1 for a reconciliation of Financial Services Australia's
result to Group net profit.
Key Performance Measures
Performance & profitability
Return on average assets (annualised) 1.39 % 1.52 % 1.55 %
Cost to income ratio 45.6 % 47.4 % 48.9 %
Cash earnings per average FTE (annualised) ($'000) 100 97 94
Net interest income
Net interest margin 3.18 % 3.38 % 3.53 %
Net interest spread 2.73 % 2.86 % 3.05 %
Average balance sheet ($bn)
Gross loans and acceptances 127.7 118.7 110.9
Interest-earning assets 107.1 98.1 91.6
Retail deposits 59.7 55.6 53.9
As at
Mar 03 Sep 02 Mar 02
Asset quality
Gross non-accrual loans ($m) 685 634 636
Gross loans and acceptances ($bn) 131.3 122.9 113.2
Gross non-accrual loans to gross loans and 0.52 % 0.52 % 0.56 %
acceptances
Specific provision to gross impaired assets 31.3 % 25.5 % 29.2 %
Full-time equivalent employees (FTE)(2) 18,338 18,096 18,455
--------------------
(2) FTEs at 31 March 2003 reflect the impact of the graduate intake in
February 2003 (142), particularly in Business and Agribusiness.
30
--------------------------------------------------------------------------------
Financial performance
Cash earnings increased 3.9% ($34 million) over the prior corresponding period,
and 1.9% over the September 2002 half. Strong growth in housing lending, a focus
on productivity enhancement and sound asset quality were features of the result.
The cost to income ratio for the March half of 45.6% is down from 48.9% in March
2002, and is running below the target for 2004 of 46.0%.
Underlying profit increased 13.7% compared with the March 2002 half (5.9% over
the September 2002 half).
* Net interest income grew 4.9%, reflecting strong growth in housing
lending, subdued business lending growth and a reduction in net interest margin.
Housing lending grew 22% from March 2002.
* The reduction in net interest margin (refer to page 23) reflects a
continuation of the strategic focus on managing the relationship between credit
quality and pricing for risk. In addition there has been a shift in the
portfolio composition towards housing lending. The lower risk profile of assets
has resulted in a lower capital allocation and thus reduced earnings on free
funds. The lower interest rate environment has also reduced the return from
non-interest bearing deposits.
* Retail deposits grew 10.8% from March 2002 (7.4% from September
2002), with volatile global equity markets causing investors to seek safe, lower
risk investments. A significant proportion of the deposit growth was in cash
management deposit accounts.
* Other operating income increased 10.5% due to stronger growth in
housing lending and higher bill fee income resulting from 14% growth in bill
acceptances.
* Operating expenses have been contained over the past year.
* Implementation of productivity initiatives across the
business and a reduction in staff numbers has enabled the absorption of salary
increases from the Enterprise Bargaining Agreement. Staff numbers at 31 March
2003 decreased by 283 excluding the additional 166 resulting from the
integration of the Hertz Fleetlease business.
* Non-personnel expenses were in line with the March 2002 half
year. Following the successful implementation of the customer relationship
management system during 2002, software amortisation expense increased.
Communication, transport and non-lending loss expenses all reduced in the
current half year.
Asset quality has been impacted by one large well-publicised account for which a
receiver/manager was appointed in early April 2003. A provision of $46 million
has been taken at the half year, with a corresponding increase in gross
non-accrual loans of $132 million. Notwithstanding this account, the continued
comprehensive program to improve credit quality and capital efficiency has
resulted in gross non-accrual loans as a percentage of gross loans and
acceptances being 0.52%, which is in line with the previous two half years.
Key achievements
* Expansion and leverage of the National's customer relationship
capability which analyses customer activity, identifies needs and provides leads
to Bankers.
* Extensive deployment of Siebel-based sales and service desktop
including new consumer and business lending applications.
* Acquisition and successful integration of Hertz Fleetlease
business into the National's Custom Fleet operations.
* Significant investment within rural Australia, with 15 new
integrated financial service centres opened in larger regional towns at a cost
of approximately $10 million. In addition, in metropolitan Australia over 180
branches were fully or partially upgraded.
* Australia Post banking services were extended to offer business
transaction services at 140 locations, including 76 locations for rural
customers.
31
--------------------------------------------------------------------------------
Management Discussion & Analysis - Financial Services Europe
FINANCIAL SERVICES EUROPE
Performance Summary
Half year to Fav/(unfav)
change on
Australian dollars Mar 03 Sep 02 Mar 02 Sep 02 Mar 02
$m $m $m % %
Net interest income 1,239 1,204 1,229 2.9 0.8
Other operating income 503 503 525 - (4.2 )
Total income 1,742 1,707 1,754 2.1 (0.7 )
Pension fund expense 40 9 19 large large
Other operating expenses 833 831 818 (0.2 ) (1.8 )
Underlying profit 869 867 917 0.2 (5.2 )
Charge to provide for doubtful debts 135 190 188 28.9 28.2
Cash earnings before tax 734 677 729 8.4 0.7
Income tax expense 226 212 228 (6.6 ) 0.9
Cash earnings before significant 508 465 501 9.2 1.4
items(1)
--------------------
(1) Refer to Note 1 for a reconciliation of Financial Services Europe's
result to Group net profit.
Pounds sterling #m #m #m % %
Net interest income 449 439 441 2.3 1.8
Other operating income 182 183 188 (0.5 ) (3.2 )
Total income 631 622 629 1.4 0.3
Pension fund expense 15 3 7 large large
Other operating expenses 301 303 293 0.7 (2.7 )
Underlying profit 315 316 329 (0.3 ) (4.3 )
Charge to provide for doubtful debts 49 69 67 29.0 26.9
Cash earnings before tax 266 247 262 7.7 1.5
Income tax expense 82 77 82 (6.5 ) -
Cash earnings before significant 184 170 180 8.2 2.2
items
Key Performance Measures
Performance & profitability
Return on average assets 1.43 % 1.33 % 1.42 %
(annualised)
Cost to income ratio 50.1 % 49.2 % 47.7 %
Cost to income ratio (excl. pension 47.7 % 48.7 % 46.6 %
fund expense)
Cash earnings per average FTE 32 29 30
(annualised) (#'000)
Net interest income
Net interest margin 4.18 % 4.21 % 4.16 %
Net interest spread 3.82 % 3.82 % 3.64 %
Average balance sheet (#bn)
Gross loans and acceptances 19.7 19.3 19.2
Interest-earning assets 21.2 20.5 20.9
Retail deposits(2) 13.8 12.9 12.3
--------------------
(2) Retail deposits for March 2003 include #0.5bn, previously classified
within wholesale liabilities.
32
--------------------------------------------------------------------------------
As at
Mar 03 Sep 02 Mar 02
Asset quality
Gross non-accrual loans (#m) 162 187 213
Gross loans and acceptances (#bn) 20.2 19.6 19.5
Gross non-accrual loans to gross loans and acceptances 0.80 % 0.96 % 1.09 %
Specific provision to gross impaired assets 35.7 % 30.3 % 32.0 %
Full-time equivalent employees (FTE) 11,563 11,719 11,945
Financial performance (in local currency)
Cash earnings increased 2.2% on the prior corresponding period and increased
8.2% from the September 2002 half year. Excluding the impact of pension fund
expenses, cash earnings grew 5.2% on the March 2002 half and 13.0% on the
September 2002 half. The cost to income ratio excluding the pension fund expense
was 47.7%, an improvement from the September half year.
A difficult operating environment has constrained income growth in the half.
Underlying profit decreased 4.3% compared with the March 2002 half year and
decreased 0.3% over the September 2002 half.
* Net interest income growth reflected modest growth in mortgage
lending, business lending and an increase in the interest margin. Mortgage
lending has grown by 4% from September 2002, and 8% from March 2002.
* The net interest margin has increased and reflects the growth in
retail deposits that has subsequently reduced the requirement for wholesale
market funding. This is offset in part by a change in product mix resulting from
the growth in mortgage lending and the focus on selective business lending to
enhance the portfolio asset quality.
* Retail deposit volumes grew with higher levels of liquidity in the
banking system as a result of weakness in global equity markets.
* Other operating income declined slightly due to reductions in
creditor insurance income as a result of limited growth in personal loan volumes
and lower account fee income.
* Operating expenses (excluding the pension fund expense) decreased
marginally compared with the September 2002 half due to ongoing focus on
productivity improvement. Personnel costs increased by 1% on the March 2002 half
with the benefit from reductions in staffing levels due to efficiencies gained
in support functions being offset by annual salary reviews.
The charge to provide for doubtful debts decreased 26.9% on the prior
comparative period. During the half year the quality of the book improved
further, with higher security coverage and a lower risk profile. This was
complemented by the repayment of the book value of the largest non-accrual loan
and the recovery of a large previously written off debt.
Key achievements
* Clydesdale Bank was voted the "Most Improved Business Bank in
Britain" by the Forum of Private Business and Yorkshire Bank won the Your
Mortgage "Best Regional Lender" award.
* The Forum for Private Business Survey ranked Yorkshire Bank as
better than "the Big 4 UK banks" for customer service.
* Northern Bank won the Young Enterprise Special Award in the
Northern Ireland Business Education for its pioneering work promoting
entrepreneurial skills in school children.
* Total cash investment spend of #28 million, including the upgrade
of the teller, sales and service platform.
33
--------------------------------------------------------------------------------
Management Discussion & Analysis - Financial Services New Zealand
FINANCIAL SERVICES NEW ZEALAND
Performance Summary
Half year to Fav/(unfav)
change on
Australian dollars Mar 03 Sep 02 Mar 02 Sep 02 Mar 02
$m $m $m % %
Net interest income 328 292 257 12.3 27.6
Other operating income 167 146 137 14.4 21.9
Total income 495 438 394 13.0 25.6
Other operating expenses 252 234 210 (7.7 ) (20.0 )
Underlying profit 243 204 184 19.1 32.1
Charge to provide for doubtful debts 7 (13 ) 8 large 12.5
Cash earnings before tax 236 217 176 8.8 34.1
Income tax expense 77 77 59 - (30.5 )
Cash earnings before significant 159 140 117 13.6 35.9
items(1)
--------------------
(1) Refer to Note 1 for a reconciliation of Financial Services New
Zealand's result to Group net profit.
New Zealand dollars NZ$m NZ$m NZ$m % %
Net interest income 361 342 315 5.6 14.6
Other operating income 184 171 168 7.6 9.5
Total income 545 513 483 6.2 12.8
Other operating expenses 277 274 257 (1.1 ) (7.8 )
Underlying profit 268 239 226 12.1 18.6
Charge to provide for doubtful debts 8 (15 ) 10 large 20.0
Cash earnings before tax 260 254 216 2.4 20.4
Income tax expense 85 90 72 5.6 (18.1 )
Cash earnings before significant 175 164 144 6.7 21.5
items
Key Performance Measures
Performance & profitability
Return on average assets 1.29 % 1.29 % 1.11 %
(annualised)
Cost to income ratio 50.8 % 53.4 % 53.2 %
Cash earnings per average FTE 83 77 66
(annualised) (NZ$'000)
Net interest income
Net interest margin 2.78 % 2.68 % 2.54 %
Net interest spread 3.09 % 3.00 % 2.91 %
Average balance sheet (NZ$bn)
Gross loans and acceptances 22.5 21.3 20.9
Interest-earning assets 25.9 25.3 24.7
Retail deposits 15.6 15.1 14.2
34
--------------------------------------------------------------------------------
As at
Mar 03 Sep 02 Mar 02
Asset quality
Gross non-accrual loans (NZ$m) 38 31 43
Gross loans and acceptances (NZ$bn) 22.9 21.4 21.2
Gross non-accrual loans to gross loans and acceptances (NZ$bn) 0.17 % 0.14 % 0.21 %
Specific provision to gross impaired assets 28.8 % 37.2 % 29.5 %
Full-time equivalent employees (FTE) 4,221 4,277 4,274
Financial Performance (in local currency)
Cash earnings increased 21.5% over the prior corresponding period. It
demonstrates the strong market position in New Zealand, with market share
growing in housing and in middle market business. The strong result reflects the
focus on efficient capital use and sound asset quality.
Underlying profit increased 18.6% over the March 2002 half year (12.1% over the
September 2002 half year). The cost to income ratio at 50.8% reflects a
significant improvement on the prior corresponding half.
* Net interest income grew strongly reflecting growth in lending and
deposits volumes, as well as higher deposit margins.
* Retail deposit volumes grew solidly at 9.9%. Despite low market
interest rates, a strong focus on margin management enabled retail deposit
margins to be grown producing robust net interest income growth.
* Competition for loans and a change in the product mix resulted in
pressure on lending margins, with 11% housing lending growth from the prior
comparative period.
* Other operating income grew by 9.5% as a result of lending volume
growth and higher transaction levels.
* Personnel expenses grew by 3.5% reflecting renegotiated standard
terms of employment and staff on-costs, partly offset by the impact of a
reduction in staff levels resulting from the implementation of productivity
initiatives.
* Growth in other expenses was driven by software expenses,
marketing campaigns that support the recently re-launched Brand initiative, and
leasing costs following the sale and lease back of the BNZ Centre in Wellington
in 2002.
The charge to provide for doubtful debts reflects active credit risk management,
as the business continues to achieve improvements in capital efficiency and
reduce credit risk by focusing on continued overall quality in the loan
portfolio. The September 2002 result was impacted by a provisioning writeback
adjustment.
Key achievements
* Successful implementation of ISI modules within human resources,
finance and e-procurement functions (refer to page 21).
* Expansion and leverage of the National's customer relationship
capability which analyses customer activity, identifies needs and provide leads
to Bankers.
* FSNZ continues to excel in the business lending sector with
approximately 33% market share.
* Home loan loyalty products unique to Bank of New Zealand (Global
Plus and Flybuys home loans) continue to be extremely popular, enabling
continued growth of market share in the home loan market.
35
--------------------------------------------------------------------------------
Management Discussion & Analysis - Corporate & Institutional Banking
CORPORATE & INSTITUTIONAL BANKING
Corporate & Institutional Banking (CIB) is responsible for managing the Group's
relationships with large corporate clients and financial institutions worldwide.
CIB operates through an international network of offices in Australia, Europe,
New Zealand, North America and Asia.
CIB comprises Corporate Banking, Markets, Specialised Finance, Financial
Institutions Group, and a Support Services unit. The business also incorporates
Custodian Services, which provides custody and related services to institutions
within the Australian, NZ and UK markets.
Performance Summary
Half year to Fav/(unfav)
change on
Mar 03 Sep 02 Mar 02 Sep 02 Mar 02
$m $m $m % %
Net interest income 434 505 546 (14.1 ) (20.5 )
Other operating income 505 459 428 10.0 18.0
Total income 939 964 974 (2.6 ) (3.6 )
Other operating expenses 374 391 368 4.3 (1.6 )
Underlying profit 565 573 606 (1.4 ) (6.8 )
Charge to provide for doubtful debts 23 21 146 (9.5 ) 84.2
Cash earnings before tax 542 552 460 (1.8 ) 17.8
Income tax expense 126 111 83 (13.5 ) (51.8 )
Cash earnings before significant 416 441 377 (5.7 ) 10.3
items (1)
Net profit attributable to outside 4 - - large large
equity interest
Cash earnings before significant 412 441 377 (6.6 ) 9.3
items and after outside equity
interest
--------------------
(1) Refer to note 1 for a reconciliation of Corporate & Institutional
Banking's result to Group net profit.
Key Performance Measures
Performance & profitability
Total income to average risk-weighted 2.8 % 3.0 % 2.7 %
assets (annualised)
Cost to income ratio 39.8 % 40.6 % 37.8 %
Cash earnings per average FTE 330 343 288
(annualised) ($'000(2)
Net interest income
Net interest margin 0.58 % 0.73 % 0.81 %
Average balance sheet ($bn)
Core lending 37.5 35.6 36.7
Core lending and acceptances 43.3 42.3 44.5
Gross loans and acceptances 60.4 52.5 51.7
Interest-earning assets 148.7 137.9 134.7
Risk-weighted assets 66.2 65.1 71.4
--------------------
(2) Cash earnings before significant items and after outside equity
interest
As at
Mar 03 Sep 02 Mar 02
Asset quality
Gross non-accrual loans ($m) 427 370 491
Gross loans and acceptances ($bn) 60.7 53.9 50.4
Gross non-accrual loans to gross loans and acceptances 0.70 % 0.69 % 0.97 %
Specific provision to gross impaired assets 43.3 % 55.0 % 50.2 %
Full-time equivalent employees (FTE) 2,537 2,564 2,582
36
--------------------------------------------------------------------------------
Financial performance
Cash earnings of $412 million increased 9.3% on the March 2002 half year and are
6.6% lower than the September 2002 half. This was a sound result given the
difficult market environment, which was compounded by the uncertainty caused by
the conflict in Iraq.
* Total income for the half year was $939 million. The quality of
earnings has improved as a result of solid growth in underlying client-based
income due to the focus on growing core relationships in both the Corporate
Banking and Financial Institutions area. However, total income was marginally
lower than both March and September 2002, largely due to a less certain interest
rate environment and less volatile foreign exchange markets which resulted in
lower money market and foreign exchange income.
* Net interest income has decreased largely due to a reduction in
money markets income of $108 million. Other operating income continues to show
strong growth, reflecting improved activity in the Corporate Banking,
Specialised Finance and Markets divisions. The split of net interest income and
other operating income can vary considerably in the wholesale market depending
on activity and economic conditions.
* The underlying margin on the core lending business has remained
relatively stable. However, the overall margin has reduced primarily due to a
mix impact, with a reduction in contribution from money markets and growth in
securities under reverse repurchase agreements.
* Expenses have reduced compared to the September 2002 half, due to
lower personnel costs following the implementation of efficiency improvements.
Expenses increased slightly against March 2002 largely due to higher software
amortisation costs in the current half. The cost to income ratio at 39.8% has
improved from September 2002.
* Asset quality continues to be sound across all regions with
approximately 86% of exposures at investment grade equivalent or above. The
charge for doubtful debts has also fallen considerably from the March 2002 half
year, which included two large well-publicised exposures. The ratio of
non-accrual loans to gross loans and acceptances remains steady at 0.70%.
Key achievements
Several key initiatives and strategies have been undertaken over the half year
to March 2003, which have successfully strengthened client based income,
including:
* approximately a 10% increase in overall client-based income,
with a 19% increase in client income generated outside Australia over the half
year to March 2003 (compared with March 2002 half);
* Growth in client based income from the Markets division of
approximately 19%;
* 146 new clients, of which more than half have resulted from
operations outside of Australia; and
* leading product development in securitisation and commodity
derivatives resulting in revenue gains.
37
--------------------------------------------------------------------------------
Management Discussion & Analysis - Wealth Management
WEALTH MANAGEMENT
Wealth Management operates a diverse portfolio of financial services businesses.
It provides financial planning, insurance, private banking, superannuation and
investment solutions to both retail and corporate customers and portfolio
implementation systems and infrastructure services to financial advisers. The
businesses operate across four regions, Australia, Europe (Great Britain &
Ireland), New Zealand and Asia.
Sources of Operating Profit
Half year to Fav/(unfav)
change on
Mar 03 Sep 02 Mar 02 Sep 02 Mar 02
$m $m $m % %
Life company - planned profit margins 118 141 122 (16.3 ) (3.3 )
Life company - experience profit/ (4 ) (34 ) 1 88.2 large
(loss)
Capitalised losses 3 2 (6 ) 50.0 large
Life company operating margins(1) 117 109 117 7.3 -
Operating profits from non-life
businesses
- Operating profits(2) 49 70 69 (30.0 ) (29.0 )
- NAFiM investor compensation (8 ) (45 ) - (82.2 ) large
- Strategic investment expenditure (13 ) (19 ) (4 ) 31.6 large
Investment earnings on shareholders' 16 (37 ) 32 large (50.0 )
retained profits and capital from
life businesses
Operating profit after tax and 161 78 214 large (24.8 )
outside equity interest
Revaluation profit/(loss) after tax (205 ) (389 ) 237 47.3 large
Net profit before significant items (44 ) (311 ) 451 85.9 large
and after outside equity interest
--------------------
(1) Life Company operating margins are net of outside equity interest.
(2) Operating profits from non-life businesses includes Private Bank and
the shareholders' funds of life insurance companies and other businesses.
Wealth Management net loss (after outside equity interests) of $44 million
comprised $161 million of profit generated through operations and $205 million
of revaluation losses. The business continues to invest for future growth, with
$13 million after tax of investment expenditure included within the above result
to fund strategic investment programs in both Australia and the UK.
Life company operating margins
Life company operating margins of $117 million were in line with the March 2002
half and improved by $8 million on the September 2002 half.
Planned profit margins decreased on both half year periods, having been
adversely impacted by anticipated lower fee income as a result of lower funds
under management within the investments business, and the negative impact of
disability claims assumption changes which were made at September 2002 within
the insurance business. This has been partially offset by the anticipated growth
of inforce annual insurance premiums.
The experience loss of $4 million for the March 2003 half reflected reduced fee
revenue of $23 million resulting from unfavourable investment conditions, which
was offset by actively managed business expenditure, stabilising disability
claims experience and favourable lump sum insurance experience.
Operating profits from non-life businesses
The decline in operating profits from non-life businesses is largely
attributable to increased spend on regulatory and compliance related projects of
$11 million (after tax), a significant proportion of which relates to the
implementation of the new FSRA legislation. Further, there was a $3 million
write down of the market value of the Thailand joint venture business.
The result for the non-life businesses reflects continued growth from the
Private Bank and growth in the UK general insurance brokerage business, offset
by the impact of unfavourable investment market conditions on investment
earnings and discretionary inflows into the funds management businesses of both
Australia and the UK. Additional costs associated with the NAFiM investor
compensation announced in August 2002 of $8 million (after tax) have been
provided.
38
--------------------------------------------------------------------------------
Strategic investment spend in both the Australian and UK businesses has
continued. The profit impact of this spend will vary across periods due to the
profile of the expenditure and lifecycle of the projects. During the half year
the profit after tax impact of the investment expenditure in the Australian and
UK businesses were $8 million and $5 million respectively.
Investment earnings on shareholders' retained profits and capital from life
businesses
Investment earnings (after tax) generated on shareholders' invested capital in
the statutory funds of the life businesses were $16 million. Shareholders'
capital is invested in fixed interest and cash (75%) with the remaining balance
in equities, consistent with the investment profile of policyholder assets and
regional regulatory requirements. The variance on the March 2002 and September
2002 half year periods directly correlates to the movements in the major
stockmarket indices in those periods.
Key Performance Measures
Half year to
Mar 03 Sep 02 Mar 02
Sales ($ bn)(1) 5.3 9.3 7.1
As at
Mar 03 Sep 02 Mar 02
Total funds under management and administration ($ bn)(1) 65.1 65.6 71.1
Market share - Australia%
Platforms - master funds & wraps(2)(3) 24.3 26.7 n/a
Retail funds management(2) 14.1 14.5 14.4
Net annual retail inflows (2) 16.7 22.5 21.5
Wholesale funds management(2) 6.3 5.7 6.0
Net annual wholesale inflows(2) 29.0 5.8 6.2
Retail risk insurance(4) 14.1 13.7 13.3
New retail risk annual premiums(4) 16.8 14.9 13.7
Other (no.)
Financial advisers(5) 2,972 3,309 3,313
- Bank channels 643 783 838
- Aligned dealerships 2,329 2,526 2,475
Full-time equivalent employees (FTEs) 5,910 6,105 5,943
--------------------
(1) Sales and funds under management and administration have been restated
to exclude joint venture interests.
(2) Source: ASSIRT Market Share Reports as at December 2002, June 2002 and
December 2001.
(3) Reported by ASSIRT for the first time in June 2002.
(4) Source: DEXX&R Research Reports. Retail risk insurance includes term,
trauma and disability insurance at September 2002, March 2002, and September
2001.
(5) Significant business is also sourced from Independent Financial
Advisers (IFAs). There are currently active relationships with over 1,300 IFAs.
Financial advisers at March 2003 include 1,463 for the Australian business and
1,509 for the UK and Asian businesses, which compares with 1,501 and 1,808
respectively at September 2002 and 1,678 and 1,635 respectively at March 2002.
Funds under management / administration
Declining returns in global equity markets and the impact of investor
uncertainty has seen funds under management and administration decline by 8% on
the March 2002 half. The average balance of funds under management fell from
$69.5 billion for the March 2002 half to $66.4 billion for the March 2003 half.
The current market conditions have seen investors move towards bank fixed
interest and cash holdings at the expense of discretionary investment platforms.
The share of Australian net retail funds management inflows captured for the
year to December 2002 were 16.7%, which compares to a market share of funds
under management of 14.1%. Wholesale funds management market share increased to
6.3%.
In the UK, despite lower than anticipated sales in difficult market conditions,
investment funds under management has grown by 2% to $1.5 billion, at a time
when the market fell 23%. This reflects the continued growth in the financial
planning and investment service to customers of the UK banks. Customer feedback
continues to illustrate the strengths of the manager of managers investment
approach and the lifestyle financial advice proposition. Average investment size
has increased by 80% since launch of the investment service offering in November
2001.
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Insurance
The Australian retail risk insurance business continues to maintain its market
leading position increasing its market share of annual new business sales to
16.8% for the 12 months to September 2002, which compares to a market share of
premiums in force of 14.1%. The life companies improved their Standard and
Poor's rating to AA.
Efficiency measures
Continued growth of the insurance business and cost containment resulted in the
cost to premium income ratio of 21% for the half year to March 2003. This is in
line with the 2004 full year target of 21%, compared with 22% for both the March
2002 half and September 2002 full year.
The cost to funds under management ratio for the investment business was
maintained at 67 basis points for the half year to March 2003*. This compares
with 66 and 67 basis points for the March 2002 half and September full year*
respectively, and against a 2004 full year target of 65 basis points.
*Excluding NAFiM investor compensation
Valuation and Revaluation Profit/(Loss)
Valuation of businesses held in the mark to market environment decreased by $48
million from $6,475 million at 30 September 2002 to $6,427 million at 31 March
2003. Values shown are directors' market valuations. The valuations are based on
Discounted Cash Flow (DCF) valuations prepared by Tillinghast - Towers Perrin
(Tillinghast), using, for the Australian and New Zealand entities, risk discount
rates specified by the directors.
The components comprising the change in value are summarised below:
NAFiM subsidiaries
Market value summary ($m)
Net Value of Embedded Value of Market
assets(1) inforce value future value
business new
business(2)
Market value at 30 September 2002 1,301 2,252 3,553 2,922 6,475
Operating profits after tax of NAFiM 123 - 123 - 123
subsidiaries(3)
Capital and other movements(4) 68 - 68 - 68
Increase in shareholders net assets 191 - 191 - 191
Revaluation profit /(loss)
components before tax:
- Business assumptions & roll
forward
Roll forward of DCF(5) - 211 211 - 211
Change in assumptions & experience - 3 3 (453 ) (450 )
Revaluation profit/(loss) before tax - 214 214 (453 ) (239 )
(6)
Foreign exchange excess movements(7) 29 (29 ) - - -
Market value at 31 March 2003 1,521 2,437 3,958 2,469 6,427
--------------------
(1) Net assets represent the shareholder capital reserves and retained
profits. A portion of these net assets is non-distributable, as it is required
to support regulatory capital requirements. The cost of this capital support is
reflected in the value of inforce business.
(2) For some smaller entities the projection of future new business and
inforce business is combined for the purposes of valuation. For these entities
the value of future new business is reflected in the embedded value.
(3) Operating profit after income tax is before revaluations and excludes
operating profits of entities outside the market value accounting environment;
ie. the operating profits after tax from NAFiM's own business, and other
entities not owned by NAFiM.
(4) Capital and other movements represent movements in value such as the
payment of dividends, capital injections and reductions, acquisitions of
subsidiaries and foreign exchange movements on intragroup debt related to
international subsidiaries.
(5) The roll forward represents the growth over the period at the
valuation discount rate over and above operating profit.
(6) The revaluation profit/(loss) before tax does not include revaluation
uplift in respect of NAFiM's own business. AASB 1038 requires assets of a life
company to be valued at net market value; since NAFiM is the parent life entity,
the change in market value of its own life business is not brought to account.
(7) Foreign exchange excess movements represent foreign exchange impacts
on the net assets of international subsidiaries and market value of intragroup
debt.
40
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Revaluation Profit/(Loss)
The components that contributed to the $239 million revaluation loss before tax
comprised the effect of assumption changes and experience, offset by the
anticipated growth in the business above current levels of operating profit (ie.
the roll forward of the DCF).
The assumption changes primarily comprised lower retail sales volumes than
anticipated at September 2002, which has impacted the value of future new
business reducing it from 45% to 38% of total market value, and the overall
impact of lower investment earnings. Further, weaker operating environments have
reduced the values of the international businesses. The impact of these factors
has been mitigated to some extent by the active management of expenses.
Included within 'capital and other movements' is a net capital injection of $135
million, which includes a $140 million injection into the insurance business to
support the growth in the risk insurance business. A favourable foreign exchange
movement on the intra-group debt related to the international subsidiaries is
also included in this category. The growth of the risk insurance business is
reflected in the increased market value attributed to the insurance business
segment.
Entities held within the mark to market environment include operations in
Australia, Europe, New Zealand and Asia. Distribution of value by both region
and business segment are summarised below:
NAFiM subsidiaries
Market value summary ($m)
Net Value of Embedded Value of Market
assets inforce value future value
business new
business
By region
Australia 1,131 2,002 3,133 2,358 5,491
Europe 236 287 523 12 535
New Zealand 25 41 66 23 89
Asia 129 107 236 76 312
Market value at 31 March 2003 1,521 2,437 3,958 2,469 6,427
By business segment
Investments 765 1,101 1,866 1,701 3,567
Insurance 695 1,228 1,923 768 2,691
Other 61 108 169 - 169
Market value at 31 March 2003 1,521 2,437 3,958 2,469 6,427
Actuarial assumptions applied in the determination of market value
Actuarial assumptions applied in the determination of market values for
significant Wealth Management businesses held within the mark to market
environment are summarised as follows:
March 2003 September 2002
Assumptions applied in New Risk Franking New Risk Franking
the business discount credit business discount credit
determination of multiplier rate(3)(%) assumptn multiplier rate(3)(%) assumptn
market (2) (%)(4) (2) (%)(4)
value (1)
Insurance 8.8 11.0 70 10.1 11.0 70
Investments 8.4 11.0 - 12.0 70 8.7 11.0 - 12.0 70
New Zealand 6.8 11.50 - 70 8.1 11.75 - 70
12.75 12.75
Hong Kong 9.0 12.5 - 9.0 12.5 -
--------------------
(1) The bulk of the European valuation was performed on an aggregate
basis. Where the European business valuations identified separate values of
inforce business and future new business, approximate methods were used to
derive the value of future business that did not involve new business
multipliers. The risk discount rate used in European valuations at 31 March 2003
was 10%.
(2) New business multipliers represent the multiple of value arising from
the 12 months to 30 September 2002 & the 12 months to 31 March 2003 new business
experience respectively that equates to the value of future new business. It
reflects the risk discount rate, anticipated new business growth and expected
industry growth rates thereafter, together with an allowance for the expected
pressure to reduce profit margins in the future.
(3) Risk discount rates are gross of tax and have been derived using the
Capital Asset Pricing Model. For the Australian and New Zealand businesses, the
rates applied in the directors' market valuations, as shown in the table above,
are 0.5% higher than Tillinghast's standard rates for DCF valuations of such
businesses.
(4) the valuations of Australian and New Zealand entities comprise the
present value of estimated future distributable profits after corporate tax,
together with the present value of 70% of the attaching imputation credits. The
valuations of international entities other than New Zealand comprise the present
values of estimated future distributable profits after corporate tax.
41
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Management Discussion & Analysis - Other (incl. Excess Capital, Group Funding &
Corp. Centre)
OTHER (INCLUDING EXCESS CAPITAL, GROUP FUNDING & CORPORATE CENTRE)
Performance Summary
Half year to Fav/(unfav)
change on
Mar 03 Sep 02 Mar 02 Sep 02 Mar 02
$m $m $m % %
Net interest income (19 ) (94 ) (145 ) 79.8 86.9
Other operating income(1) (1 ) 13 (10 ) large 90.0
Total income (20 ) (81 ) (155 ) 75.3 87.1
Other operating expenses(1) 37 17 (15 ) large large
Underlying loss (57 ) (98 ) (140 ) 41.8 59.3
Charge to provide for doubtful debts - (37 ) (1 ) large large
(2)
Net cash earnings before tax (57 ) (61 ) (139 ) 6.6 59.0
Income tax benefit (34 ) (7 ) (37 ) large (8.1 )
Cash earnings before significant (23 ) (54 ) (102 ) 57.4 77.5
items(3)
By Division
Excess Capital(4) 38 68 69 (44.1 ) (44.9 )
Group Funding (32 ) (107 ) (158 ) 70.1 79.7
Corporate Centre (29 ) (15 ) (13 ) (93.3 ) large
Other (23 ) (54 ) (102 ) 57.4 77.5
--------------------
(1) Includes Group eliminations between the
Banking Divisions.
(2) The September 2002 half year included a
re-allocation from the Group statistical provision reserve to the operating
divisions of $37 million.
(3) Refer to Note 1 for a reconciliation of Other
(including Excess Capital, Group Funding & Corporate Centre) to Group net
profit.
(4) Net interest income from excess capital (after
tax). The earnings rate on excess capital for the half years ended March 2003,
September 2002 and March 2002 was 4.99%, 5.72% and 5.26% respectively.
Excess Capital
The Group's earnings on excess capital for the March 2003 half year were $38
million compared with $69 million in the prior comparative period reflecting the
lower volume of excess capital due to the impact of the share buy-back and a
lower average earning rate.
Earnings on excess capital is calculated by applying the average three-year bank
bill swap rate of 4.99% (5.26% prior corresponding period) to the estimated
excess. For balance sheet management purposes, the banking operations use a
three-year benchmark for the investment term of capital. Holdings of excess
capital reduce the amount of debt required by the banking operations to fund
asset growth. Any reduction in excess capital would therefore need to be
replaced with debt of the same term in order to maintain the interest rate risk
profile of the banking operations.
When estimating excess capital, benchmarks are chosen having regard to
Australian and international peers and the risk profile and asset base of the
Group's banking operations. Excess capital does not represent the total amount
of surplus capital held by the Group.
42
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Group Funding
Group Funding acts as the central vehicle for movements of capital and
structural funding to support the Group's operations. This minimises the
earnings distortion to the operating divisions and enhances the comparability of
divisional performance over time.
For the half year to March 2003, Group Funding experienced a loss of $32 million
compared to a loss of $158 million for the prior corresponding period. The main
factors contributing to the movement include:
* the funding benefit on the proceeds from the sale of SR Investment
Inc. (HomeSide);
* lower inter-company funding costs with the falling interest rate
environment; and
* a one-off unfavourable interest accrual adjustment in the March
2002 half.
Corporate Centre
Corporate Centre comprises the following non-operating units - Group and
Corporate Finance, Corporate Development, People & Culture, Risk Management,
Nautilus Insurance, National Technology, ISI program, Office of the CEO, and
Group eliminations.
The Corporate Centre result for the March 2003 half year has been impacted by
costs of $15 million after tax arising from an ongoing major review of
compliance and associated quality improvements within Europe.
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This information is provided by RNS
The company news service from the London Stock Exchange
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