RNS Number:9616R
National Australia Bank Ld
11 November 2003
National Australia Bank Limited
Full Year Results 2003
12 Months Ended 30 September 2003
(NATIONAL LOGO)
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TABLE OF CONTENTS
Media Release 1
Section 2 - Financial Summary 5
Reporting Format 6
Divisional Performance Summary 8
Group Performance Summary 9
Regional Performance Summary 10
Summary of Financial Position 11
Group Key Performance Measures 12
Section 3 - Management Discussion & Analysis 13
Overview 14
Restructuring Progress 16
Asset Quality 18
European Pension Schemes 21
Software Capitalisation 21
Profitability 22
Net Operating Income 22
Net Interest Income 22
Net Life Insurance Income 24
Other Operating Income 25
Operating Expenses 25
Income Tax Expense 26
Capital and Performance Measures 27
Performance Measures 27
Capital Position 28
Share Buy-back Program 28
Total Banking 29
Retail Banking 30
Financial Services Australia 31
Financial Services Europe 33
Financial Services New Zealand 36
Corporate & Institutional Banking 38
Wealth Management 40
Other (incl. Excess Capital, Group Funding & Corporate Centre) 45
Section 4 - Detailed Financial Information 46
1. Performance Summary by Division 47
2. Net Interest Income 51
3. Net Interest Margins & Spreads 52
4. Average Balance Sheet & Related Interest 54
5. Gross Loans & Advances 59
6. Net Life Insurance Income 62
7. Revenue 63
8. Expenses 65
9. Full Time Equivalent Employees 67
10. Doubtful Debts 68
11. Asset Quality 70
12. Income Tax Reconciliation 72
13. Significant Items 74
14. Exchange Rates 75
15. Capital Adequacy 77
16. Cash Earnings per Share 79
17. Risk Management 80
Non-GAAP financial measures 82
Alphabetical Index 84
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Media Release
11 November 2003
RECORD RESULT LIFTS NATIONAL'S DIVIDEND 11%
FINANCIAL HIGHLIGHTS
* Achieved full year forecast:
* cash earnings per share up 8.2%
* cash earnings of $4.07 billion - a record full year result
* Net profit after significant items up 16.8% to $3.95 billion
* Final dividend of 83 cents cents (fully franked). Full year dividend up
10.9% to 163 cents (fully franked).
* Retail banking cash earnings:
* Australia - up 6.5%
* New Zealand - up 21.0% (up 12.7% in local currency)
* Europe - down 3.9% (up 0.9% in local currency)
* Corporate & Institutional Banking cash earnings up 3.4% to $846 million
(up 6.2% excluding currency impacts)
* Wealth Management operating profit after tax up 28.1% to $374 million
* Asset quality sound: gross non-accrual loans to total loans improved
from 0.62% to 0.51%
* Return on equity up from 17.0% to 18.3%.
* Economic Value Added (EVA (R)) up 29.9% to $1,668 million*.
* Strong capital position - Total capital at 9.70%, Tier 1 at 7.82% and
Adjusted Common Equity ratio of 4.95% after the buy back of 48.9 million
shares.
*EVA(R) is a registered trademark of Stern Stewart & Co. It measures the
economic profit earned in excess of the Group's cost of capital.
1
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MANAGING DIRECTOR'S REVIEW
The Managing Director and Chief Executive Officer, Frank Cicutto, said record
cash earnings of $4.07 billion, a higher fully franked dividend and continued
EVA(R) growth was a good result for shareholders.
"The National generated cash earnings per share growth of 8.2 per cent in line
with its full year forecast after absorbing significantly higher European
pension costs and adverse exchange rate movements," Mr Cicutto said.
Mr Cicutto said this solid result enabled the National to pay shareholders a
higher fully franked dividend of 163 cents per share - continuing 11 consecutive
years of dividend growth.
The National's return on equity increased from 17.0 to 18.3 per cent.
"Building and managing our portfolio of businesses for strong and sustainable
total shareholder return is a key objective of our strategy," he said.
DIVISIONAL PERFORMANCE
"Financial Services Australia produced another solid result with 12.5 per cent
underlying profit growth. Cash earnings were up 6.5 per cent.
"Our market position remains strong. Deposits were up 11 per cent, business
loans were up 9 per cent and housing loans were up 20 per cent.
"We also improved credit quality across the lending portfolio, with gross
non-accrual loans as a percentage of total loans falling from 0.52 to 0.35 per
cent.
"The cost to income ratio was 45.7 per cent - down from 48.2 per cent last
year."
"Financial Services Europe increased cash earnings by 6 per cent in local
currency before the impact of higher pension charges.
"Mortgage lending was up 9 per cent year on year and business lending increased
5 per cent. Asset quality improved with non-accrual loans falling 35 per cent.
"We will complete the legal entity merger of Clydesdale and Yorkshire Banks.
This is an important milestone in the transformation of our European
businesses."
"Financial Services New Zealand had a good year. Cash earnings in local currency
increased 12.7 per cent after strong growth in lending to an expanding housing
market as well as healthy deposit growth. Housing market share increased from
15.1 per cent to 15.6 per cent."
"Other highlights of the New Zealand performance included a substantial cost to
income ratio improvement from 53.3 per cent to 50.3 per cent and stable interest
margins and credit quality.
2
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"Corporate & Institutional Banking increased cash earnings by 3.4 per cent (6.2
per cent excluding currency impacts). A renewed focus on enhancing the quality
of Corporate & Institutional Banking revenue saw customer related income
increase by 10.7 per cent. Asset quality remains sound.
"Wealth Management operating profit after tax increased by 28.1 per cent
reflecting continued strong growth in the insurance business and a recovery in
investment earnings.
"Total funds under management and administration increased from $65.6 billion to
$73.1 billion and the Group maintained its leading share of the master fund and
wrap market in Australia.
BALANCED STAKEHOLDER APPROACH
"The National's new purpose statement 'Growth through Excellent Relationships'
represents a more focused approach to corporate social responsibility. This has
resulted in the inclusion of the National in the Dow Jones Sustainability Index
that tracks the sustainability performance of global companies.
"The National also participates in the FTSE4Good Index, which measures the
performance of global companies in the areas of environmental sustainability,
stakeholder relations and support for human rights.
"As part of our commitment to greater transparency and accountability, this year
the National will commence reporting on social and environmental impacts, in
addition to traditional financial measures.
"Using global key performance indicators for the finance sector, our 2003
concise annual report will give a snap shot of our commitment to building
trusted relationships with our stakeholders, ranging from customers, employees,
shareholders and the communities in which we operate.
"For example, in Australia we have installed over 60 audio-enabled ATMs for the
visually impaired and plan to enable 50 per cent of ATMs by the middle of next
year.
"We also upgraded 44 branches, opened 20 new integrated financial services
centres and two new branches in metropolitan and regional areas in the last 12
months.
"The National is a signatory to the United National Environment Program
Financial Initiative (UNEP Fi) and is committed to working with other global
financial institutions on environmental initiatives."
The National's Stakeholder Scorecard will be incorporated in the 2003 concise
annual report, which will be issued in late November. A full copy of the
Stakeholder Scorecard will subsequently be published on the Group's web site
www.nabgroup.com.
3
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OUTLOOK
"The outlook for the Australian and New Zealand economies remains healthy and
there are signs of improving global economic activity.
"In Australia, our business surveys show continued strength in housing,
transport and business and financial services sectors. Manufacturing,
agribusiness and tourism are also improving. In New Zealand, domestic activity
remains comparatively strong.
"UK activity has gathered pace in 2003, Ireland is recovering modestly, and in
the near term, very strong US economic growth looks set to continue.
"The combination of strong domestic activity and better global economic news
mean that interest rates are likely to rise in all of the major economies in
which we operate.
"The global recovery and increased commodity prices are also likely to mean a
higher Australian dollar against both the US dollar and Sterling.
"In this economic and business environment, our growth strategies will continue
to generate solid shareholder returns."
"We remain confident in the underlying resilience of our banking and wealth
management businesses.
"We expect all of our businesses, except Financial Services Europe, to produce
solid cash earnings growth in the next 12 months.
"We expect Financial Services Europe earnings to be flat in local currency terms
before absorbing increased pension costs.
"Given the impact of UK earnings on the Group result this financial year, we
expect to temporarily increase the dividend payout ratio to maintain our track
record of strong and sustainable franked dividend growth for shareholders."
For media enquiries, please contact:
Brandon Phillips
0419 369 058
For investor enquiries, please contact:
Hany Messieh
0414 446 876
Or visit www.nabgroup.com
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SECTION 2
RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 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');
* Other (including Excess Capital, Group Funding & Corporate Centre); and
* Wealth Management ('WM').
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 Lending, Inc.'s operating platform and operating assets as
at 1 March 2002.
Cash Earnings
Cash earnings is a key performance measure and financial target used by the
Group. Dividends paid by the Group are based on after-tax cash earnings
(adjusted for significant items). Cash earnings is a key performance measure
used by the investment 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 8. Cash earnings
is also explained in detail in the 'Non-GAAP financial measures' section. Refer
page 82 for further details.
Wealth Management Registered Schemes
During the September 2003 half, National Australia Financial Management (NAFiM),
MLC and MLC Lifetime statutory funds reorganised their business operational
model such that the funds increased the level of investments held through units
in registered schemes, rather than directly held investments in debt and equity
securities. The registered schemes are operated by several related entities
within the Wealth Management (WM) Group of companies. NAFiM, MLC and MLC
Lifetime invest in these units to support policy liabilities.
As the statutory funds are considered to have the 'capacity to control' certain
of these registered schemes, they have been consolidated by the Group as at 30
September 2003 (as required under Australian Accounting Standard 'AASB 1024 -
Consolidated Accounts'). The 'capacity to control' means that registered schemes
must be consolidated where the Group holds more than 75% of the units on issue
in the scheme. Where the companies hold between 50% and 75%, the consolidation
of these schemes is considered on a case by case basis.
This is the first time these registered schemes have been consolidated. Where
investments had previously been directly held by the funds, there was no
capacity to control the entities who had issued the securities.
This is a change in the form of investment holdings rather than a change in the
underlying substance of the investments.
All divisional results are shown after outside equity interests on the
Divisional Performance Summary. This change will have no impact on Group cash
earnings or net profit attributable to members.
Controlled registered schemes have been brought onto the balance sheet of the
Group through the consolidation (grossing up) of the investment assets of the
trusts, with a corresponding increase in outside equity interest in total
equity.
At 30 September 2003, this has had the impact of increasing Group total assets
and total equity by $2.5 billion. It has not impacted the parent entity interest
in equity but only increased the outside equity interest in total equity.
6
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From a Divisional Performance Summary perspective, this has resulted in grossing
up the WM operating profit after tax (and before outside equity interest), with
a corresponding increase in net profit attributable to outside equity interest.
In relation to the 30 September 2003 year, because the investment earnings of
these trusts were actually a loss, this has had the impact of reducing WM
operating profit after tax before outside equity interest, by $28 million, all
of which impacts the September 2003 half.
7
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DIVISIONAL PERFORMANCE SUMMARY
Fav/ Fav/
(unfav) (unfav)
Half Year to change on Year to change on
Note Sep 03 Mar 03 Mar 03 Sep 03 Sep 02 Sep 02
$m $m % $m $m %
Cash earnings (1)
Retail Banking
Financial Services Australia 1 967 904 7.0 1,871 1,757 6.5
Financial Services Europe 1 420 508 (17.3 ) 928 966 (3.9 )
Financial Services New Zealand 1 152 159 (4.4 ) 311 257 21.0
Retail Banking 1,539 1,571 (2.0 ) 3,110 2,980 4.4
Corporate & Institutional 1 434 412 5.3 846 818 3.4
Banking (2)
Other (incl. Excess Capital, 1 (54 ) (23 ) large (77 ) (156 ) 50.6
Group Funding and Corporate
Centre) (2)
Total Banking 1,919 1,960 (2.1 ) 3,879 3,642 6.5
Wealth Management operating 1 213 161 32.3 374 292 28.1
profit (2) (3)
Cash earnings from ongoing 2,132 2,121 0.5 4,253 3,934 8.1
operations before significant
items
Cash earnings from disposed 1 - - - - 98 large
operations (4)
Distributions (89 ) (94 ) 5.3 (183 ) (187 ) 2.1
Cash earnings before 2,043 2,027 0.8 4,070 3,845 5.9
significant items
Weighted av no. of ordinary 16 1,508 1,524 1.0 1,516 1,549 2.1
shares (million)
Cash earnings per share before 135.5 133.0 1.9 268.5 248.2 8.2
significant items (cents) (5)
Reconciliation to net profit
Cash earnings before 2,043 2,027 0.8 4,070 3,845 5.9
significant items
Adjusted for:
Net profit/(loss) attributable (18 ) 10 large (8 ) 6 large
to outside
equity interest
Distributions 89 94 5.3 183 187 2.1
Wealth Management revaluation 1 5 (205 ) large (200 ) (152 ) (31.6 )
profit/(loss)
Goodwill amortisation (49 ) (49 ) - (98 ) (101 ) 3.0
Net profit before significant 2,070 1,877 10.3 3,947 3,785 4.3
items
Significant items 13 - - - - (406 ) large
Net profit 2,070 1,877 10.3 3,947 3,379 16.8
Net (profit)/loss attributable 18 (10 ) large 8 (6 ) large
to outside equity interest
Net profit attributable to 2,088 1,867 11.8 3,955 3,373 17.3
members of the Company
Distributions (89 ) (94 ) 5.3 (183 ) (187 ) 2.1
Earnings attributable to 1,999 1,773 12.7 3,772 3,186 18.4
ordinary shareholders
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(1) Cash earnings is a performance measure used by the management of the Group.
Refer to 'Non-GAAP financial measures' on page 82 for a complete discussion
of cash earnings.
(2) Cash earnings after outside equity interest. Corporate & Institutional
Banking and Wealth Management cash earnings were disclosed before outside
equity interest in the March 2003 and September 2002 Results Announcements.
(3) Refers to net profit generated through the Wealth Management operations. It
excludes revaluation profit/(loss) after tax.
(4) Includes an $89 million once-off taxation benefit from HomeSide in the
September 2002 year.
(5) This is calculated on a cash earnings per ordinary share basis. Refer to
note 16 for information on cash earnings per diluted share.
8
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GROUP PERFORMANCE SUMMARY
Fav/ Fav/
(unfav) (unfav)
Half Year to change on Year to change on
Note Sep 03 Mar 03 Mar 03 Sep 03 Sep 02 Sep 02
$m $m % $m $m %
Banking (1)
Net interest income 2 3,610 3,692 (2.2 ) 7,302 7,101 2.8
Other operating income (1) (2) 7 2,211 2,066 7.0 4,277 3,849 11.1
Banking net operating income (1) 5,821 5,758 1.1 11,579 10,950 5.7
Wealth Management
Net interest income 2 63 54 16.7 117 101 15.8
Net life insurance income (3) 6 363 81 large 444 (10 ) large
Other operating income (2) 7 367 366 0.3 733 799 (8.3 )
Net operating income 6,614 6,259 5.7 12,873 11,840 8.7
Banking operating expenses (1) 8 (2,856 ) (2,692 ) (6.1 ) (5,548 ) (5,200 ) (6.7 )
Wealth Management operating 8 (412 ) (394 ) (4.6 ) (806 ) (813 ) 0.9
expenses (4)
Charge to provide for doubtful 10 (311 ) (322 ) 3.4 (633 ) (647 ) 2.2
debts
Cash earnings before tax 3,035 2,851 6.5 5,886 5,180 13.6
Banking income tax expense (1) 12 (731 ) (781 ) 6.4 (1,512 ) (1,460 ) (3.6 )
Wealth Management income tax 12 (190 ) 61 large (129 ) 220 large
benefit/ (expense)
Cash earnings from ongoing 2,114 2,131 (0.8 ) 4,245 3,940 7.7
operations before significant
item, distributions and
outside equity interest
Wealth Management revaluation 1 5 (205 ) large (200 ) (152 ) (31.6 )
profit/(loss) after tax
Goodwill amortisation (49 ) (49 ) - (98 ) (101 ) 3.0
Net profit from ongoing 2,070 1,877 10.3 3,947 3,687 7.1
operations
Net profit from disposed - - - - 98 large
operations
Net profit before significant 2,070 1,877 10.3 3,947 3,785 4.3
items
Significant items after tax 13 - - - - (406 ) large
Net profit 2,070 1,877 10.3 3,947 3,379 16.8
Net (profit)/loss attributable
to outside equity interest
Wealth Management (5) 22 (6 ) large 16 (6 ) large
Corporate & Institutional (5 ) (4 ) (25.0 ) (9 ) - large
Banking
Other 1 - large 1 - large
Net profit attributable to 2,088 1,867 11.8 3,955 3,373 17.3
members of the Company
Distributions (89 ) (94 ) 5.3 (183 ) (187 ) 2.1
Earnings attributable to 1,999 1,773 12.7 3,772 3,186 18.4
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.
(5) The net (profit)/loss attributable to outside equity interest represents
the Wealth Management registered schemes consolidated for the first time at
30 September 2003 ($28 million loss) and Wealth Management Asia
($12 million profit).
9
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REGIONAL PERFORMANCE SUMMARY
Fav/ Fav/
(unfav) (unfav)
Half Year to change on Year to change on
Sep 03 Mar 03 Mar 03 Sep 03 Sep 02 Sep 02
$m $m % $m $m %
Cash earnings
Australia
Retail Banking (1) 959 895 7.2 1,854 1,760 5.3
Corporate & Institutional 188 202 (6.9 ) 390 414 (5.8 )
Banking
Wealth Management 190 137 38.7 327 236 38.6
Other (incl. Excess Capital, (82 ) (64 ) (28.1 ) (146 ) (124 ) (17.7 )
Group Funding & Corporate
Centre) (2) (3)
Total Australia 1,255 1,170 7.3 2,425 2,286 6.1
Europe
Retail Banking (1) 421 509 (17.3 ) 930 960 (3.1 )
Corporate & Institutional 136 86 58.1 222 189 17.5
Banking
Wealth Management 14 12 16.7 26 44 (40.9 )
Other (incl. Group Funding & (58 ) (46 ) (26.1 ) (104 ) (59 ) (76.3 )
Corporate Centre) (2)
Total Europe 513 561 (8.6 ) 1,074 1,134 (5.3 )
New Zealand
Retail Banking (1) 159 167 (4.8 ) 326 260 25.4
Corporate & Institutional 68 74 (8.1 ) 142 159 (10.7 )
Banking
Wealth Management (4 ) 6 large 2 7 (71.4 )
Other (incl. Group Funding & (3 ) (8 ) 62.5 (11 ) (11 ) -
Corporate Centre) (2)
Total New Zealand 220 239 (7.9 ) 459 415 10.6
United States
Corporate & Institutional 22 26 (15.4 ) 48 1 large
Banking
Other (incl. Group Funding & 76 89 (14.6 ) 165 33 large
Corporate Centre) (4)
Total United States 98 115 (14.8 ) 213 34 large
Asia
Corporate & Institutional 20 24 (16.7 ) 44 55 (20.0 )
Banking
Wealth Management 13 6 large 19 5 large
Other (incl. Group Funding & 13 6 large 19 5 large
Corporate Centre)
Total Asia 46 36 27.8 82 65 26.2
Cash earnings from ongoing 2,132 2,121 0.5 4,253 3,934 8.1
operations 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) 'Other' has been restated in the 2002 year to reflect the reclassification
of funding costs from Australia to Europe and New Zealand.
(3) Earnings on excess capital is wholly attributed to Australia.
(4) The increased contribution in the September 2003 year is due to the
cessation of redeemable preference share dividend payments following the
sale of SR Investment, Inc.
Refer to the Group Performance Summary on page 9 for a reconciliation of cash
earnings from ongoing operations before significant items to net profit.
10
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SUMMARY OF FINANCIAL POSITION
As at Change on
Note Sep 03 Mar 03 Sep 02 Mar 03 Sep 02
$m $m $m % %
Assets
Cash assets 5,032 6,060 6,294 (17.0 ) (20.1 )
Due from other financial 10,383 13,760 15,876 (24.5 ) (34.6 )
institutions
Due from customers on 19,562 20,677 19,474 (5.4 ) 0.5
acceptances
Trading securities 23,724 21,414 19,590 10.8 21.1
Trading derivatives (1) 23,644 25,228 12,128 (6.3 ) 95.0
Available for sale securities 6,513 5,005 6,192 30.1 5.2
Investment securities 8,647 10,925 13,541 (20.9 ) (36.1 )
Investments relating to life 35,846 30,278 31,012 18.4 15.6
ins. business
Loans and advances 247,959 242,612 231,300 2.2 7.2
Mortgage servicing rights - - 1,794 - large
Shares in entities and other 1,445 1,186 1,199 21.8 20.5
securities
Regulatory deposits 225 180 129 25.0 74.4
Property, plant and equipment 2,498 2,493 2,640 0.2 (5.4 )
Income tax assets 1,203 1,213 1,292 (0.8 ) (6.9 )
Goodwill 740 787 775 (6.0 ) (4.5 )
Other assets 10,050 12,378 14,151 (18.8 ) (29.0 )
Total assets 397,471 394,196 377,387 0.8 5.3
Liabilities
Due to other financial 45,128 49,722 43,279 (9.2 ) 4.3
institutions
Liability on acceptances 19,562 20,677 19,474 (5.4 ) 0.5
Life insurance policy 32,457 30,206 30,425 7.5 6.7
liabilities
Trading derivatives (1) 21,479 24,821 12,000 (13.5 ) 79.0
Deposits and other borrowings 210,146 207,040 206,864 1.5 1.6
Income tax liabilities 1,537 1,255 1,609 22.5 (4.5 )
Provisions 1,262 1,251 2,809 0.9 (55.1 )
Bonds, notes and subordinated 22,707 18,933 22,192 19.9 2.3
debt
Other debt issues 1,743 1,808 1,866 (3.6 ) (6.6 )
Other liabilities 14,239 14,668 13,618 (2.9 ) 4.6
Net assets 27,211 23,815 23,251 14.3 17.0
Equity
Contributed equity 15 9,728 9,052 9,931 7.5 (2.0 )
Reserves 15 893 1,254 2,105 (28.8 ) (57.6 )
Retained profits 15 13,786 13,224 11,148 4.2 23.7
Total parent entity interest 24,407 23,530 23,184 3.7 5.3
Outside equity interest in 15
controlled entities
Wealth Management (2) 2,614 70 67 large large
Corporate & Institutional 190 215 - (11.6 ) large
Banking
Total equity 27,211 23,815 23,251 14.3 17.0
--------------------
(1) The change in the fair value of trading derivatives asset and liability
balances from September 2002 to March 2003 primarily reflects a
reclassification omission which equally understated 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.
(2) Increase primarily relates to consolidation of Wealth Management
registered schemes. Refer page 6 for further details.
11
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Group Key Performance Measures
GROUP KEY PERFORMANCE MEASURES
Half Year to Year to
Note Sep 03 Mar 03 Sep 03 Sep 02
Shareholder measures
EVA(R) ($million) (1) 832 836 1,668 1,284
Per ordinary share (cents)
Cash earnings before significant 16 135.5 133.0 268.5 248.2
items (2)
Cash earnings after significant items (2) 135.5 133.0 268.5 222.0
Earnings before significant items 132.6 116.3 248.8 231.9
Earnings after significant items 132.6 116.3 248.8 205.7
Per diluted share (cents) (3)
Cash earnings before significant 16 132.2 130.1 262.3 243.0
items
Earnings after significant items 129.4 114.2 243.6 202.5
Weighted average ordinary shares (no. 1,508 1,524 1,516 1,549
million)
Weighted average diluted shares (no. 1,577 1,595 1,586 1,624
million) (3)
Dividends per share (cents) 83 80 163 147
Performance (after non-cash items) (4)
Return on average equity (parent 19.8 % 16.8 % 18.3 % 17.0 %
entity interest) before sig. item (5)
Return on average equity (parent 19.8 % 16.8 % 18.3 % 15.1 %
entity interest) after sig. item (5)
Return on average assets before 1.03 % 0.94 % 0.98 % 1.00 %
significant items
Net interest income
Net interest spread 3 2.16 % 2.22 % 2.18 % 2.39 %
Net interest margin 3 2.50 % 2.56 % 2.53 % 2.67 %
Profitability (before significant
items)
Banking cost to income ratio (6) 49.6 % 47.3 % 48.4 % 48.1 %
Banking cost to income ratio 48.7 % 46.6 % 47.6 % 47.9 %
excluding FSE pensions
Cash earnings per average FTE 95 95 95 85
($'000)
As at
Sep 03 Mar 03 Sep 02
Capital
Tier 1 ratio 15 7.82 % 7.47 % 7.76 %
Tier 2 ratio 15 3.30 % 3.02 % 3.76 %
Deductions 15 (1.42 )% (1.33 )% (1.31 )%
Total capital ratio 15 9.70 % 9.16 % 10.21 %
Adjusted common equity ratio 15 4.95 % 5.09 % 5.37 %
Balance sheet assets ($ bn)
Gross loans and acceptances 272 267 255
Risk-weighted assets 15 252 254 248
Off-balance sheet assets ($ bn)
Funds under management and 73 65 66
administration
Assets under custody and 311 343 365
administration
Asset quality
Gross non-accrual loans to gross loans 11 0.51 % 0.59 % 0.62 %
and acceptances
Net impaired assets to total equity 11 3.9 % 4.5 % 4.7 %
(parent entity interest)
General provision to risk-weighted 11 0.71 % 0.75 % 0.82 %
assets
Specific provision to gross impaired 11 33.5 % 36.1 % 34.6 %
assets
General and specific provisions to 11 163.4 % 155.7 % 161.0 %
gross impaired assets
Other information
Full-time equivalent employees (no.) 9 42,540 43,002 43,202
--------------------
(1) Economic Value Added (EVA(R)) is a registered trademark of Stern Stewart &
Co. Refer pages 27 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) For the half year to 31 March 2003 previously shown as 17.1%, but adjusted
to reflect the adoption of AASB 1044 "Provisions, Contingent Liabilities
and Contingent Assets" effective 1 October 2002.
(6) Total Banking cost to income ratio is gross of eliminations 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 for significant items and
net of interest expense. Refer to 'Non-GAAP financial measures' for a
complete discussion of the cost to income ratio.
12
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SECTION 3
RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2003
MANAGEMENT DISCUSSION & ANALYSIS
13
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Management Discussion & Analysis - Overview
OVERVIEW (1)
Cash earnings of $4,070 million for the year is a record result and was 5.9%
higher than the 2002 year. This is a strong result given that it includes the
impact of an appreciating Australian dollar and the absorption of additional
pension costs in Europe.
Cash earnings per share (EPS) increased 20.3 cents (8.2%) to 268.5 cents,
reflecting both growth in the earnings of the underlying core business and
active capital management initiatives.
Cash earnings from ongoing operations increased 8.1%. A key feature of the
result was the strong underlying growth in both the Australian and New Zealand
retail banking operations, while difficult conditions have been experienced in
Europe. Strong housing growth and sound asset quality continued across the
Group.
Cash earnings from ongoing operations increased 0.5% from the March 2003 half
year. This result largely reflects the impact of a strengthening Australian
dollar and additional costs in relation to European defined pension schemes.
Prior to the impact of these items, cash earnings from ongoing operations
increased 4.7% in the second half.
Cash earnings per share growth (in cents)
The September 2002 year included a $98 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 final dividend has increased by 8 cents to 83 cents per share compared with
the prior corresponding period and will be 100% franked. This brings the full
year dividend to 163.0 cents 100% franked, which represents an increase of 10.9%
compared with the prior year dividend of 147 cents, which was 95% franked. The
Group anticipates a 100% franking level for the 2004 financial year.
--------------------
(1) The discussion on the following two pages relates to results before
significant items. For a reconciliation to net profit refer page 8.
14
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Management Discussion & Analysis - Overview
Banking
Total Banking includes Retail Banking, Corporate & Institutional Banking and
Other (including Excess Capital, Group Funding & Corporate Centre). It excludes
Wealth Management.
Fav/(unfav)
Year to change on
Sep 03 Sep 02 Sep 02 Ex FX(1)
$m $m % %
Net interest income 7,302 7,101 2.8 4.5
Other operating income 4,394 3,981 10.4 11.7
Total income 11,696 11,082 5.5 7.1
FSE pension fund expense (93 ) (28 ) large large
Other operating expenses (5,572 ) (5,304 ) (5.1 ) (6.5 )
Underlying profit 6,031 5,750 4.9 6.4
Charge to provide for doubtful debts (632 ) (648 ) 2.5 (0.2 )
Cash earnings before tax 5,399 5,102 5.8 7.2
Income tax expense (1,512 ) (1,460 ) (3.6 ) (4.2 )
Cash earnings before significant items 3,887 3,642 6.7 8.4
Net profit attributable to outside equity (8 ) - large large
interest
Cash earnings before significant items after 3,879 3,642 6.5 8.2
outside equity interest
Banking operations generated $3,879 million of total Group cash earnings, an
increase of 6.5% on the prior year. The retail banking operations produced
$3,110 million, a growth rate of 4.4%, with the results underpinned by strong
volume growth, cost containment and a sound asset quality profile across all
regions. Corporate & Institutional Banking had a 3.4% increase in cash earnings
built on growth in client-related income.
At an underlying profit level, Total Banking increased 4.9% and Retail Banking
increased 5.1% from the 2002 year. Excluding movements in foreign exchange the
increase in Total Banking was 6.4% and Retail Banking 5.9%.
Fav/ (unfav)
Year to change on Sep 02
Underlying profit Sep 03 Sep 02 Ex FX(1)
$m $m % %
Financial Services Australia 2,967 2,637 12.5 12.5
Financial Services Europe 1,598 1,784 (10.4 ) (6.0 )
Financial Services New Zealand 487 388 25.5 16.7
Retail Banking 5,052 4,809 5.1 5.9
Corporate & Institutional Banking 1,143 1,179 (3.1 ) (0.3 )
Other (164 ) (238 ) 31.1 45.8
Total Banking 6,031 5,750 4.9 6.4
--------------------
(1) Change expressed at constant foreign exchange rates.
Sound progress was made towards 2004 efficiency targets established under
Positioning for Growth. However, Financial Services Europe has been negatively
impacted by additional pension costs and the investment in core infrastructure.
2004 Half year to
Cost to income ratio by banking division Target Sep 03 Mar 03 Sep 02
% % %
Financial Services Australia 46.0 45.8 45.6 47.4
Financial Services Europe (excluding pension 48.0 50.5 47.7 48.7
costs)
Financial Services New Zealand 48.0 49.7 50.8 53.4
Corporate & Institutional Banking 36.0 39.7 39.8 40.6
Total Banking (excluding FSE pension costs) 48.7 46.6 48.1
15
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Management Discussion & Analysis - Overview
Wealth Management
Wealth Management operating profit of $374 million grew 28.1% from the prior
year. Funds under management and administration (FUMA) grew $7.5 billion over
the year reflecting improved investment returns in the second half. In addition,
the improved equity market performance contributed to higher earnings on
shareholders retained profits and capital.
The Group continues to invest for future growth, with $28 million after tax of
strategic investment expenditure included within the Wealth Management result.
2004 Year to
Wealth Management efficiency targets Target Sep 03 Sep 02
% % %
Cost to premium income ratio (%) 21.0 20.0 22.0
Cost to funds under management (basis points) (1) 65 60 67
--------------------
(1) Excludes the NAFiM Investor compensation and associated costs.
Restructuring Progress
During 2002 the Group recognised restructuring costs of $580 million ($412
million after tax) resulting from its Positioning for Growth (PfG) program and
related restructuring activities. The initiative comprised a fundamental
reorganisation of the structure of the Group as well as a series of revenue
enhancement and cost containment 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 $315
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
Foreign exchange impact (6 ) (1 ) (1 ) (8 )
Expenditure in September 2003 half year (67 ) (16 ) (3 ) (86 )
Provision balance as at 30 September 2003 79 27 4 110
Balance remaining of total restructuring 24 % 40 % 2 % 19 %
In the year to September 2003 $152 million of the provision for restructuring
costs was utilised primarily in relation to 1,317 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.
16
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Management Discussion & Analysis - Overview
Staffing levels - ongoing operations
Increase/(Decrease) Total Year to Year to
FTEs Sep 03 Sep 02
FTEs FTEs
Opening balance 43,162 44,231
Acquisitions (1) 357 -
Global projects (2) 169 -
Adjustment to 2002 to exclude joint ventures - (184 )
Net PfG reductions (Target: 2,040) (2,033 ) (1,148 ) (885 )
Closing balance 42,540 43,162
--------------------
(1) Custom Service Leasing (New Zealand) Limited, formerly Hertz Fleetlease
Limited (166), Commonwealth Custodial Services Limited (19), Plum Financial
Services Limited (152) and an increased interest in Advance MLC Assurance
Co. Limited (Thailand) (20).
(2) Staff increases relating to ISI, Basel II & IFRS global projects.
The Group has achieved its PfG target of a net reduction in full time equivalent
employees (FTEs) of 2,040. During the year to September 2003 FTE reductions of
1,148 were achieved (excluding the impact of acquisitions and global projects).
This increases the net reduction over the two years since September 2001 to
2,033.
17
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Management Discussion & Analysis - Overview
Asset Quality
Asset quality remained strong. Influencing factors over the year were:
* falling non-accrual loans (NALs);
* ongoing changes in asset composition - as evidenced by an increase in
housing's share of the portfolio;
* favourable movement in credit ratings across the business portfolio; and
* improving collateral / security coverage across the business portfolio.
Gross non-accrual loans fell to $1,379 million at September 2003 compared with
$1,590 million at September 2002. As a percentage of gross loans and
acceptances, NALs fell significantly over the year from 0.62% to 0.51%. This
falling trend is also evident for the non-housing portfolio.
The Group is proactive in terms of credit risk management and aims to stay ahead
of the credit cycle. Policies and processes at both the transactional and
portfolio levels include:
* single large exposure policy - ensures that the Group is not
excessively exposed to any single borrower (or group of borrowers);
* effective early identification and management of problem loans for
exposures exhibiting signs of weakening credit quality; and
* undertaking targeted credit reviews at both industry and account level.
Specific reviews undertaken during the year include:
* housing - including inner city apartments. Over 9,000 files were
individually reviewed;
* unsecured portfolio - including personal loans;
* business lending - particularly large exposures over $10 million
in Australia; and
* industry exposures (eg. automotive, utilities, airlines and
tourism)
At the portfolio level, the alignment of risk and return objectives together
with EVA(R) performance measures have resulted in an ongoing improvement in
credit ratings and security levels. Further, portfolio based limits (industry
and country) along with selective stress testing have contributed to those
favourable trends.
18
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Management Discussion & Analysis - Overview
Asset Composition
Business Portfolio
There have been favourable movements in the credit rating for the Business
lending portfolio over the past year.
In addition, the security coverage across the Group's business portfolio
improved with fully secured lending comprising 62% of the portfolio, up from 55%
at September 2002.
Level of Security - Business Customers (1)
--------------------
(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
19
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Management Discussion & Analysis - Overview
Select Industry Exposures
As at September 03
% of total
Group
Exposures exposures Investment Grade Non-accrual
$bn $bn $bn
Airlines 3.06 0.74 1.83 0.03
Energy 11.36 2.75 9.09 0.18
Technology 0.90 0.22 0.69 0.01
Telecommunications 2.78 0.67 2.21 0.07
Retail Portfolio
Asset quality within the personal lending portfolio is satisfactory. Write-offs
expressed as a percentage of outstandings fell during the year. Ninety-plus days
delinquency also improved.
Provisioning Coverage
Against the above broad trends in asset quality, the level of provisions for the
Group is considered appropriate. The specific provision coverage ratio fell
slightly from 34.6% to 33.5% over the year.
The total coverage ratio of gross impaired assets improved from 161% to 164% in
September 2003. Excluding housing, it improved from 171% to 173%.
20
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Management Discussion & Analysis - Overview
European Defined Benefit Pension Schemes
As advised earlier this year, the Group commissioned an unscheduled interim
actuarial review of its European defined benefit schemes as at 30 June 2003 in
response to worldwide equity market falls and reductions in interest rates to
historically low levels.
Based on this partial interim review, the actuaries have confirmed that each
fund exceeds the minimum funding requirements test set by legislation in the
United Kingdom. In addition, the actuaries have advised that based on their best
estimate assumptions in relation to investment earnings and discount rates, the
funds have an aggregate surplus position of approximately #0.3 billion. This
provides comfort that in the long-term the funds are expected to meet their
obligations.
Under the relevant accounting standards certain actuarial assumptions are
prescribed. The principal difference relates to the use of the yield on high
quality corporate bonds as the discount factor for the future liabilities of the
fund (notwithstanding that a majority of the funds are invested in equities).
Using these conservative assumptions shows an accounting deficit position of
approximately #0.5 billion for the funds at 30 June 2003.
From a profit and loss perspective, actuarial gains and losses are taken into
account over the average remaining employment period of fund members, generally
between 10 and 15 years. A full year pension charge (pre-tax) of #42 million was
incurred in 2003 (prior year #16 million), of which #36 million relates to
Financial Services Europe and the balance to other businesses. This includes an
increase in pension expense in the final quarter of the 2003 financial year
reflecting the 30 June review.
As part of the review of pension arrangements these defined benefit pension
funds have been closed to new members and new defined contribution schemes have
been opened.
Software Capitalisation
The Group has capitalised the development and purchase of software in accordance
with US pronouncements. Total capitalised software as at 30 September 2003 was
$955 million ($920 million at 31 March 2003; $884 million at 30 September 2002).
The level of software capitalisation at 30 September 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
Integrated Systems Implementation (ISI) program and the Global Data Warehouse.
The amortisation period aligns to the expected useful life. The software
amortisation charge for the year to 30 September 2003 was $152 million (30
September 2002: $106 million).
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 30 September
2003 is $315 million (30 September 2002: $294 million), of which $301 million
relates to capitalised software.
21
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Management Discussion & Analysis - Profitability
PROFITABILITY (1)
Net Operating Income
Year to Fav/ (unfav)
change on Sep 02
Sep 03 Sep 02 Ex FX
$m $m % %
Financial Services Australia 5,469 5,087 7.5 7.5
Financial Services Europe 3,318 3,461 (4.1 ) 0.6
Financial Services New Zealand 980 832 17.8 9.6
Retail Banking 9,767 9,380 4.1 5.1
Corporate & Institutional Banking 1,897 1,938 (2.1 ) 1.0
Other 32 (236 ) large large
Total Banking 11,696 11,082 5.5 7.1
Wealth Management 1,294 890 45.4 46.9
Eliminations (117 ) (132 ) 11.4 11.4
Total Group (ongoing operations) 12,873 11,840 8.7 10.3
Group net operating income increased 8.7% from the prior year, with a 5.7%
increase in the September 2003 half compared to the March 2003 half. Banking
other operating income (primarily fee income) growth of 10.4% (6.9% in the
second half) was strong, benefiting from housing lending growth and the pick up
in investment markets.
Fee income growth offset subdued growth in Banking net interest income. The
latter rose 2.8% from the prior year reflecting loan growth, a 34% fall in
Corporate & Institutional Banking's Markets division net interest income and 1.7
% points adverse currency effect from offshore operations.
Net interest income grew strongly within the Australian and New Zealand retail
banking operations, with net interest income growth of 6.4% (5.8% in the second
half) in Australia and 10.4% (0.8% in the second half) in New Zealand in local
currency terms.
Net Interest Income
Fav/ (unfav)
Year to change on Sep 02
Sep 03 Sep 02 Ex FX
$m $m % %
Financial Services Australia 3,519 3,307 6.4 6.4
Financial Services Europe 2,368 2,433 (2.7 ) 2.0
Financial Services New Zealand 651 549 18.6 10.4
Retail Banking 6,538 6,289 4.0 5.0
Corporate & Institutional Banking 807 1,051 (23.2 ) (20.3 )
Other (43 ) (239 ) 82.0 91.6
Total Banking 7,302 7,101 2.8 4.5
Wealth Management 117 101 15.8 15.8
Total Group (ongoing operations) 7,419 7,202 3.0 4.7
--------------------
(1) References in this section to the Group only refer to the ongoing
operations of the Group.
22
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Management Discussion & Analysis - Profitability
Volumes by Division
Fav/(unfav)
Year to change on Sep 02
Average interest-earning assets (1) Sep 03 Sep 02 Ex FX
$ bn $ bn % %
Financial Services Australia 110.9 95.6 16.0 16.0
Financial Services Europe 51.4 51.7 (0.6 ) 4.0
Financial Services New Zealand 20.7 17.5 18.3 9.8
Retail Banking 183.0 164.8 11.0 11.6
Corporate & Institutional Banking 104.6 98.7 6.0 9.8
Other 5.7 7.0 (18.6 ) (5.7 )
Group average interest-earning assets 293.3 270.5 8.4 10.5
--------------------
(1) Interest-earning assets exclude intercompany balances.
Net interest margin
Group net interest margin declined 14 basis points during the year from 2.67% to
2.53%, with 11 basis points of the reduction occuring in the first half.
Margin decline in:
* Retail Banking is primarily due to the mix effect of strong growth in
mortgages; and
* Corporate & Institutional Banking is primarily due to the impact of lower
trading income and an increase 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. These loans attract the risk weighting of the security
and are priced to reflect their low risk nature. Margin on core lending
remained stable over the period.
At the Group level, the funding benefit from the proceeds of the sale of
HomeSide and the lower cost of debt added 5 basis points.
Within Retail Banking the 8 basis point decline in contribution to the Group
margin is due to a decline in margin for Australia and Europe, partly offset by
an increase in New Zealand.
The decline in Financial Services Australia's margin of 31 basis points is due
to the:
* Change in asset portfolio with strong growth in home loans and subdued
business lending;
* Better asset quality in the business loan book; and
* Reduced contribution from free funds, due to lower longer term interest
rates.
23
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Management Discussion & Analysis - Profitability
The impact of high growth in housing lending relative to higher margin
non-housing lending is illustrated in the chart below.
Financial Services Australia - Net interest margin impacted by
changing portfolio
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 year.
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 tax
expense/benefit is attributable primarily to the policyholders, 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).
Fav/ Fav/
(unfav) (unfav)
Half year to change on Year to change on
Sep 03 Mar 03 Mar 03 Sep 03 Sep 02 Sep 02
$m $m % $m $m %
Net life insurance income/(loss) 363 81 large 444 (10 ) large
Income tax (expense)/ benefit (196 ) 70 large (126 ) 248 large
Net life insurance income after tax 167 151 10.6 318 238 33.6
Net life insurance income after tax has improved 33.6% on the September 2002
year. This is primarily due to increased investment revenue, partially offset by
an increase in change in policy liabilities reflecting the performance of global
equity markets as compared to the September 2002 year.
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 40 - 44.
24
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Management Discussion & Analysis - Profitability
Other Operating Income
Year to Fav/ (unfav)
change on Sep 02
Sep 03 Sep 02 Ex FX
$m $m % %
Financial Services Australia 1,950 1,780 9.6 9.6
Financial Services Europe 950 1,028 (7.6 ) (2.7 )
Financial Services New Zealand 329 283 16.3 8.1
Retail Banking 3,229 3,091 4.5 5.2
Corporate & Institutional Banking 1,090 887 22.9 26.3
Other 75 3 large large
Total Banking 4,394 3,981 10.4 11.7
Wealth Management 733 799 (8.3 ) (6.6 )
Eliminations (117 ) (132 ) 11.4 11.4
Total Group (ongoing operations) 5,010 4,648 7.8 9.2
Total Banking other operating income increased by 10.4% from the prior year to
$4,394 million.
Retail Banking contributed solidly to the result, with other operating income
increasing 4.5% driven by growth in housing loans and higher transaction volumes
in Australia and New Zealand, offset by lower income in Europe due to reductions
in creditor insurance income as a result of limited growth in personal loans,
lower account fee income and an appreciation of the Australian dollar.
Growth of 22.9% within Corporate & Institutional Banking was largely from
improved customer-related activity, including strong deal flows in structured
transactions.
Other includes a one-off benefit on the restructure of the hedging swaps on the
TrUEPrS(SM) preference shares.
Wealth Management other operating income decreased by 8.3% from the prior year,
resulting from uncertain investor sentiment, with weaker equity markets reducing
fee income in the investments business.
TrUEPrS(SM) is a service mark of Merrill Lynch & Co., Inc.
Operating Expenses
Year to Fav/ (unfav)
change on Sep 02
Sep 03 Sep 02 Ex FX
$m $m % %
Financial Services Australia 2,502 2,450 (2.1 ) (2.1 )
Financial Services Europe (excluding FSE pension 1,627 1,649 1.3 (3.5 )
fund)
Financial Services New Zealand 493 444 (11.0 ) (3.4 )
Retail Banking 4,622 4,543 (1.7 ) (2.7 )
Corporate & Institutional Banking 754 759 0.7 (3.0 )
Other 196 2 large large
Total Banking (excluding FSE pension fund) 5,572 5,304 (5.1 ) (6.5 )
FSE pension fund expense 93 28 large large
Total Banking 5,665 5,332 (6.2 ) (7.8 )
Wealth Management 806 813 0.9 (0.3 )
Eliminations (117 ) (132 ) (11.4 ) (11.4 )
Total Group (ongoing operations) 6,354 6,013 (5.7 ) (7.2 )
Total Banking expenses (excluding the FSE pension fund expense) increased 5.1%
from the prior year to $5,572 million.
Retail Banking expenses (excluding the FSE pension fund expense) rose 1.7%, due
to:
* Personnel expenses due to salary increases, offset by a 1,177
reduction in staff (net of acquisitions);
* 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. Customer Relationship Management system capability in Australia.
25
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Management Discussion & Analysis - Profitability
Corporate & Institutional Banking expenses are in line with the prior year.
Other (including Corporate Centre) includes expenses associated with four key
areas:
* an ongoing major review of regulatory compliance and
associated quality improvements;
* operating costs (including amortisation) of the Integrated
Systems Implementation (ISI) program, which is the Group's strategic
infrastructure program;
* impact of Basel II and IFRS on the ISI program; and
* expenses associated with corporate structure, funding and
acquisition-related strategic initiatives.
Wealth Management operating expenses decreased 0.9% from the prior year to $806
million, after absorbing increased investment costs.
Major global regulatory and compliance projects
The Group's strategy around integrated financial services, customer service and
distribution leads to a strong focus on compliance and quality.
Regulatory issues include:
* Basel II Capital Accord;
* Financial Services Reform Act;
* International Financial Reporting Standards;
* Sarbanes-Oxley Act;
* Code of Banking Practice; and
* Mortgage selling regulations in the United Kingdom.
Income Tax Expense
Total Banking's effective tax rate has decreased from 28.6% in prior year to
28.0%. This is impacted by structured finance transactions, to which a wide
range of tax rates are applied.
The September 2002 year included an $89 million tax benefit in relation to
HomeSide.
A reconciliation of the total Group income tax expense is incorporated in note
12.
26
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Management Discussion & Analysis - Capital & Performance Measures
CAPITAL & PERFORMANCE MEASURES
Performance Measures
Economic Value Added (EVA(R))
Half year to Fav/ Year to Fav/
(unfav) (unfav)
change on change on
Mar 03 Sep 02
Sep 03 Mar 03 Sep 03 Sep 02
$m $m % $m $m %
EVA(R) net operating profit after 2,264 2,260 0.2 4,524 4,157 8.8
tax
Capital charge (1,432 ) (1,424 ) (0.6 ) (2,856 ) (2,873 ) (0.6 )
EVA(R) 832 836 (0.5 ) 1,668 1,284 29.9
EVA(R)growth over prior year 384 155
EVA(R) is a measure designed to recognise the shareholder 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(R)
annual growth targets.
In order to encourage longer term management decision making and sustained value
creation, the Group sets EVA(R) growth targets for 3 year periods. The Group's
EVA(R) target of 5% compound growth per annum was set in 2000, for the 3 years
ending September 2003.
EVA(R)'s Net Operating Profit After Tax (NOPAT) is based on pre-tax profit, and
includes the calculated benefit of imputation credits earned by paying
Australian tax. EVA(R)'s capital charge is based on an 11.5% cost of capital,
applied to a calculation of economic capital that is based on shareholders
equity.
EVA(R)'s NOPAT grew by 8.8% and the capital charge was flat compared to the
2002 year. The growth in EVA(R) over the year was $384 million or 30%.
The first 3 year EVA(R) cycle concluded in September 2003. Following a review
by Stern Stewart it is proposed to simplify the EVA(R) framework effective 1
October 2003, with adjustments to both NOPAT and capital calculations.
Applying the revised EVA(R) methodology, the relevant comparatives that will be
used for future reporting are as follows:
Half year to Fav/ Year to Fav/
(unfav) (unfav)
change on change on
Mar 03 Sep 02
Sep 03 Mar 03 Sep 03 Sep 02
$m $m % $m $m %
EVA(R) net operating profit 2,407 2,389 0.7 4,796 4,401 9.0
after tax
Capital charge (1,315 ) (1,298 ) (1.3 ) (2,613 ) (2,607 ) (0.3 )
EVA(R) 1,092 1,091 0.1 2,183 1,794 21.7
EVA(R) growth over prior 389 178
year
--------------------
EVA(R) is a registered trademark of Stern Stewart & Co.
27
--------------------------------------------------------------------------------
Management Discussion & Analysis - Capital & Performance Measures
Capital Position
The Group's capital ratios are strong. Regulatory capital ratios are set out
below.
Target As at
ratio Sep 03 Sep 02
% % %
Core Tier 1 (excluding hybrid equity) 6.0 - 6.5 6.38 6.68
Tier 1 7.0 - 7.5 7.82 7.76
Total Capital 9.0 - 9.5 9.70 10.21
In addition to regulatory capital ratios, the National uses the ratio of
adjusted common equity to risk-weighted assets (the ACE ratio) as a key capital
target. It measures the capital available to support the banking operations,
after deducting the Group's investment in wealth management operations. The
Group's target range for the ACE ratio is 4.75% to 5.25%. As at 30 September
2003 the ACE ratio was 4.95%, a reduction from 5.37% as at September 2002. Refer
to note 15 regarding the components of the ACE ratio.
Capital has been managed within a framework of:
* maintaining a AA rating with external rating agencies;
* actively managing capital through share buy-backs; and
* opportune issuing of subordinated debt and hybrid securities.
Trust Preferred Securities
On September 29, 2003, the Group raised GBP400 million (A$975 million net of
issue costs) through the issue of 400,000 Trust Preferred Securities at GBP1,000
each. Each Trust Preferred Security pays a semi-annual non-cumulative
distribution, in arrears equal to 5.62% per annum until 17 December 2018. Each
five year period after that date, a non-cumulative distribution will be payable
semi-annually in arrears at a rate equal to the five-year benchmark gilt rate at
the start of that period plus 1.93%.
Share Buy-back Program
Since November 2001, the National has adopted an ongoing policy of buying back
all new shares issued under the National's dividend package plans and staff
share and option plans. Additionally for the period up to 30 September 2003, the
National announced an intention to purchase a further number of shares to the
value of $1.75 billion. 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 year, the National bought back 48.9 million shares at an average
price of $31.98, thereby reducing ordinary equity by $1,565 million. The highest
price paid was $34.35 and the lowest price paid was $28.40.
Half year to Year to
Share buy-back activity Sep 03 Mar 03 Sep 03 Sep 02
Number of days traded 65 days 70 days 135 days 88 days
Number of shares bought (in millions) 16.5 32.4 48.9 36.2
Average price of buy-back $ 32.75 $ 31.59 $ 31.98 $ 34.52
Percentage of market turnover on days traded 5.5 % 9.9 % 7.8 % 8.9 %
Percentage of market turnover on all days 3.2 % 5.6 % 4.5 % 3.9 %
Volume weighted average share price on days traded
* all shares traded $ 32.34 $ 31.27 $ 31.78 $ 34.61
* shares traded excluding buy-back $ 32.31 $ 31.24 $ 31.77 $ 34.62
A comparison of the National's buy-back activities relative to the total market
in the National's shares, highlights that the National continues to execute the
buy-back program in modest volumes, avoiding any market disruptions.
In October 2003 the Group announced its intention to repurchase approximately
25.5 million shares over the year to 30 September 2004. This includes 6.5
million shares carried over from the previous buy-back and an estimate of 19
million shares to be issued under the Group's dividend package plans and staff
and option plans.
28
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Management Discussion & Analysis - Banking
TOTAL BANKING
Total Banking includes Retail Banking, Corporate & Institutional Banking and
Other (including Excess Capital, Group Funding & Corporate Centre). It excludes
Wealth Management.
Performance Summary
Year to Fav/ (unfav)
change on Sep 02
Sep 03 Sep 02 Ex FX (1)
$m $m % %
Net interest income 7,302 7,101 2.8 4.5
Other operating income (2) 4,394 3,981 10.4 11.7
Total income 11,696 11,082 5.5 7.1
FSE pension fund expense (93 ) (28 ) large large
Other operating expenses (2) (5,572 ) (5,304 ) (5.1 ) (6.5 )
Underlying profit 6,031 5,750 4.9 6.4
Charge to provide for doubtful debts (632 ) (648 ) 2.5 (0.2 )
Cash earnings before tax 5,399 5,102 5.8 7.2
Income tax expense (1,512 ) (1,460 ) (3.6 ) (4.2 )
Cash earnings before significant items 3,887 3,642 6.7 8.4
Net profit attributable to outside equity interest (8 ) - large large
Cash earnings before significant items after outside 3,879 3,642 6.5 8.2
equity interest
Half year to Fav/ (unfav)
change on Mar 03
Sep 03 Mar 03 Ex FX (1)
$m $m % %
Net interest income 3,610 3,692 (2.2 ) 1.9
Other operating income (2) 2,270 2,124 6.9 10.6
Total income 5,880 5,816 1.1 5.1
FSE pension fund expense (53 ) (40 ) (32.5 ) (45.0 )
Other operating expenses (2) (2,862 ) (2,710 ) (5.6 ) (10.0 )
Underlying profit 2,965 3,066 (3.3 ) 0.3
Charge to provide for doubtful debts (311 ) (321 ) 3.1 (2.2 )
Cash earnings before tax 2,654 2,745 (3.3 ) -
Income tax expense (731 ) (781 ) 6.4 3.7
Cash earnings before significant items 1,923 1,964 (2.1 ) 1.5
Net profit attributable to outside equity interest (4 ) (4 ) - -
Cash earnings before significant items after outside 1,919 1,960 (2.1 ) 1.5
equity interest
Half year to Year to
Sep 03 Mar 03 Sep 03 Sep 02
$m $m $m $m
Performance & profitability
Cost to income ratio 49.6 % 47.3 % 48.4 % 48.1 %
Cost to income ratio (excl. FSE pension expense) 48.7 % 46.6 % 47.6 % 47.9 %
--------------------
(1) Change expressed at constant foreign exchange rates.
(2) Total Banking is gross of inter-divisional eliminations.
29
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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 Customer Service and
Operations. 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
Year to Fav/(unfav)
change on Sep 02
Sep 03 Sep 02 Ex FX (1)
$m $m % %
Net interest income 6,538 6,289 4.0 5.0
Other operating income (2) 3,229 3,091 4.5 5.2
Total income 9,767 9,380 4.1 5.1
FSE pension fund expense (93 ) (28 ) large large
Other operating expenses (2) (4,622 ) (4,543 ) (1.7 ) (2.7 )
Underlying profit 5,052 4,809 5.1 5.9
Charge to provide for doubtful debts (573 ) (519 ) (10.4 ) (12.9 )
Cash earnings before tax 4,479 4,290 4.4 5.1
Income tax expense (1,369 ) (1,310 ) (4.5 ) (5.3 )
Cash earnings before significant items 3,110 2,980 4.4 5.0
Half year to Fav/(unfav)
change on Mar 03
Sep 03 Mar 03 Ex FX (1)
$m $m % %
Net interest income 3,261 3,277 (0.5 ) 3.4
Other operating income (2) 1,609 1,620 (0.7 ) 2.7
Total income 4,870 4,897 (0.6 ) 3.1
FSE pension fund expense (53 ) (40 ) (32.5 ) (45.0 )
Other operating expenses (2) (2,323 ) (2,299 ) (1.0 ) (4.8 )
Underlying profit 2,494 2,558 (2.5 ) 0.9
Charge to provide for doubtful debts (275 ) (298 ) 7.7 3.7
Cash earnings before tax 2,219 2,260 (1.8 ) 1.6
Income tax expense (680 ) (689 ) 1.3 (1.9 )
Cash earnings before significant items 1,539 1,571 (2.0 ) 1.4
--------------------
(1) Change expressed at constant foreign exchange rates.
(2) Retail Banking is the sum of total Financial Services Australia,
Financial Services Europe and Financial Services New Zealand, gross of
inter-divisional eliminations.
30
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Management Discussion & Analysis - Financial Services Australia
FINANCIAL SERVICES AUSTRALIA
Performance Summary
Half year to Fav/ Year to Fav/
(unfav) (unfav)
change on change on
Mar 03 Sep 02
Sep 03 Mar 03 Sep 03 Sep 02
$m $m % $m $m %
Net interest income 1,809 1,710 5.8 3,519 3,307 6.4
Other operating income 1,000 950 5.3 1,950 1,780 9.6
Total income 2,809 2,660 5.6 5,469 5,087 7.5
Other operating expenses (1,288 ) (1,214 ) (6.1 ) (2,502 ) (2,450 ) (2.1 )
Underlying profit 1,521 1,446 5.2 2,967 2,637 12.5
Charge to provide for (142 ) (156 ) 9.0 (298 ) (146 ) large
doubtful debts
Cash earnings before tax 1,379 1,290 6.9 2,669 2,491 7.1
Income tax expense (412 ) (386 ) (6.7 ) (798 ) (734 ) (8.7 )
Cash earnings before 967 904 7.0 1,871 1,757 6.5
significant items (1)
--------------------
(1) Refer to Note 1 for a reconciliation of Financial Services
Australia's result to Group net profit.
Key Performance Measures
Performance & profitability
Return on average assets 1.39 % 1.39 % 1.39 % 1.51 %
(annualised)
Cost to income ratio 45.8 % 45.6 % 45.7 % 48.2 %
Cash earnings per average FTE 108 100 104 96
(annualised) ($'000)
Net interest income
Net interest margin 3.11 % 3.18 % 3.14 % 3.45 %
Net interest spread 2.64 % 2.73 % 2.68 % 2.95 %
Average balance sheet ($bn)
Gross loans and acceptances 137.1 127.7 7.4 % 132.4 114.8 15.3 %
Interest-earning assets 115.3 107.1 7.7 % 111.2 94.8 17.3 %
Retail deposits 61.5 59.7 3.0 % 60.6 54.7 10.8 %
As at
Sep 03 Mar 03 Sep 02
Asset quality
Gross non-accrual loans ($m) 494 685 634
Gross loans and acceptances ($bn) 140.5 131.3 122.9
Gross non-accrual loans to 0.35 % 0.52 % 0.52 %
gross loans and acceptances
Specific provision to gross 27.6 % 31.3 % 25.5 %
impaired assets
Full-time equivalent 17,233 18,149 17,928
employees (FTE)(2)
--------------------
(2) Comparative information in relation to FTEs has been
restated to reflect the transfer of technology FTEs in relation to Group-wide
projects from Financial Services Australia to Corporate Centre.
31
--------------------------------------------------------------------------------
Management Discussion & Analysis - Financial Services Australia
Financial performance
Cash earnings increased 6.5% over the prior year, reflecting strong underlying
profit growth and a higher charge for doubtful debts largely related to a single
exposure.
Underlying profit increased 12.5%, with the September 2003 half increasing 5.2%
compared with the March 2003 half. The cost to income ratio for the year was
45.7% compared to the previous year of 48.2% and is favourable to the target for
2004 of 46.0%.
* Net interest income reflected strong growth in lending and
deposits.
* Net interest margin reduced by 7 basis points in the
September 2003 half to 3.11%, after a fall of 20 basis points in the first half.
This fall is attributable to the continued low interest rate environment
impacting return from capital and interest rate insensitive deposits, the higher
weighting of housing in the portfolio, and a continued focus on asset quality.
* Other operating income increased as a result of the growth in
housing lending, strong growth in bill acceptances (up 11.7% since September
2002) and higher transaction revenue.
* Operating expenses were contained, growing 2.1% over the
year. Increase in second half costs represents expenses associated with
investment in the Technology platform (network infrastructure costs associated
with the roll out of technology and firewall/security costs) and the timing of
performance-related bonus and annual leave provisions. The trend of higher costs
in the second half is consistent with prior years.
Asset quality has been impacted by one large well-publicised account for which a
receiver/manager was appointed in early April 2003. A charge of $104 million has
been recognised in the results during the year in relation to this account ($46
million booked in the March 2003 half). The focus on credit quality and capital
efficiency continues resulting in gross non-accrual loans as a percentage of
gross loans and acceptances of 0.35%, an improvement of 17 basis points on March
2003.
Key achievements
* Strong growth in lending and deposits. Housing lending grew
20.3%. Business lending grew 8.9%. Deposits grew 10.6%.
* Leveraged customer relationship management capability to
generate over one million customer contacts
* Invested in 20 new integrated financial service centres to
provide convenient customer access and meet all financial needs in one location
* Productivity improvement of 25% in lending processes
supported by the roll out of electronic consumer and business lending
* Committed two days per person to volunteer leave and as at 30
September 2003, 1,933 days contributed to local community activities. Included
in $7.3 million of community donations/sponsorships, $1,000 was provided to each
branch to allocate at the discretion of local staff to an appropriate community
charity or activity.
32
--------------------------------------------------------------------------------
Management Discussion & Analysis - Financial Services Europe
FINANCIAL SERVICES EUROPE
Performance Summary
Australian dollars Fav/ Year to Fav/
(unfav) (unfav)
Half year to change on change on
Mar 03 Sep 02
Sep 03 Mar 03 Sep 03 Sep 02
$m $m % $m $m %
Net interest income 1,129 1,239 (8.9 ) 2,368 2,433 (2.7 )
Other operating income 447 503 (11.1 ) 950 1,028 (7.6 )
Total income 1,576 1,742 (9.5 ) 3,318 3,461 (4.1 )
Pension fund expense (53 ) (40 ) (32.5 ) (93 ) (28 ) large
Other operating expenses (794 ) (833 ) 4.7 (1,627 ) (1,649 ) 1.3
Underlying profit 729 869 (16.1 ) 1,598 1,784 (10.4 )
Charge to provide for (119 ) (135 ) 11.9 (254 ) (378 ) 32.8
doubtful debts
Cash earnings before tax 610 734 (16.9 ) 1,344 1,406 (4.4 )
Income tax expense (190 ) (226 ) 15.9 (416 ) (440 ) 5.5
Cash earnings before 420 508 (17.3 ) 928 966 (3.9 )
significant items (1)
Add: Pension fund expense 37 28 (32.5 ) 65 20 large
(after tax)
Cash earnings before pension 457 536 (14.7 ) 993 986 0.7
fund expense & significant
items
--------------------
(1) Refer to Note 1 for a reconciliation of Financial Services
Europe's result to Group net profit.
Pounds sterling
#m #m % #m #m %
Net interest income 454 449 1.1 903 880 2.6
Other operating income 180 182 (1.1 ) 362 371 (2.4 )
Total income 634 631 0.5 1,265 1,251 1.1
Pension fund expense (21 ) (15 ) (40.0 ) (36 ) (10 ) large
Other operating expenses (320 ) (301 ) (6.3 ) (621 ) (596 ) (4.2 )
Underlying profit 293 315 (7.0 ) 608 645 (5.7 )
Charge to provide for (48 ) (49 ) 2.0 (97 ) (136 ) 28.7
doubtful debts
Cash earnings before tax 245 266 (7.9 ) 511 509 0.4
Income tax expense (76 ) (82 ) 7.3 (158 ) (159 ) 0.6
Cash earnings before 169 184 (8.2 ) 353 350 0.9
significant items
Add: Pension fund expense 14 11 (40.0 ) 25 7 large
(after tax)
Cash earnings before pension 183 195 (6.2 ) 378 357 5.9
fund expense & significant
items
Underlying profit before 314 330 (4.8 ) 644 655 (1.7 )
pension
33
--------------------------------------------------------------------------------
Management Discussion & Analysis - Financial Services Europe
Key Performance Measures Fav/ Year to Fav/
(unfav) (unfav)
Half year to change on change on
Mar 03 Sep 02
Sep 03 Mar 03 Sep 03 Sep 02
#m #m % #m #m %
Performance & profitability
Return on average assets 1.27 % 1.43 % 1.36 % 1.39 %
(annualised)
Cost to income ratio 53.8 % 50.1 % 51.9 % 48.4 %
Cost to income ratio (excl. 50.5 % 47.7 % 49.1 % 47.6 %
pension fund expense)
Cash earnings per average FTE 29 32 30 29
(annualised)(#'000)
Net interest income
Net interest margin 4.13 % 4.18 % 4.16 % 4.18 %
Net interest spread 3.83 % 3.82 % 3.82 % 3.73 %
Average balance sheet (#bn)
Gross loans and acceptances 20.1 19.7 2.0 % 19.9 19.3 3.1 %
Interest-earning assets 21.6 21.2 1.9 % 21.4 20.7 3.4 %
Retail deposits (2) 14.2 13.8 2.9 % 14.0 13.1 6.9 %
--------------------
(2) Retail deposits for September 2002 have been restated for
#0.5bn previously classified within wholesale liabilities.
As at
Sep 03 Mar 03 Sep 02
Asset quality
Gross non-accrual loans (#m) 122 162 187
Gross loans and acceptances (#bn) 20.5 20.2 19.6
Gross non-accrual loans to 0.59 % 0.80 % 0.96 %
gross loans and acceptances
Specific provision to gross 39.9 % 35.7 % 30.3 %
impaired assets
Full-time equivalent 11,423 11,563 11,719
employees (FTE)
Financial performance (in local currency)
Cash earnings increased 0.9% on the prior year and decreased 8.2% from the March
half. The result has been negatively impacted by higher pension fund expenses.
Excluding the impact of pension fund expenses, cash earnings increased 5.9% on
the prior year and decreased 6.2% on the March 2003 half.
Excluding pension fund expenses, underlying profit decreased 1.7% on the prior
year.
* Net interest income reflects growth in mortgage and business
lending, and a fall in the net interest margin. Mortgage lending increased 9% on
the prior year, (predominantly in the north of England (18%) and Ireland (10%))
and business lending grew 5% on the prior year (predominantly in Ireland (9%)
and the north of England (8%)).
* The decrease in net interest margin reflects the impact of
falling interest rates on retail deposits, together with a change in product mix
resulting from housing growth and the focus on selective business lending to
enhance the portfolio asset quality. This was mitigated in part by the reduced
requirement for wholesale market funding as a result of retail deposit growth of
6.9%.
* Other operating income was lower due to a reduction in income
from sales of creditor insurance, lower account fee income and the outsourcing
of the merchant acquiring business, more than offsetting the impact of lending
growth.
* Operating expenses, excluding pension expense, increased 4.2%
compared with the prior year due to:
* Increases in personnel costs as a result of annual salary
reviews, mitigated by a reduction in staff numbers, particularly in back office
functions;
* An increase in customer-facing staff, including additional
staff supporting the growth in the south of England.
* Increased investment including integration and the front-end
teller system;
34
--------------------------------------------------------------------------------
Management Discussion & Analysis - Financial Services Europe
* Higher costs associated with compliance activities including
FSA mortgage regulation and the EMU write-off;
* Most of the investment occurred in the September half,
resulting in a growth rate for expenses of 6.3% on the first half.
The charge to provide for doubtful debts decreased 28.7% on the prior year.
During the 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 recovery of a large previously
written off debt in the March 2003 half.
Key achievements
* Strengthened senior executive leadership, including the
appointment of John Stewart as CEO.
* Proceeding to move to the next phase in completing the legal
entity merger of Clydesdale and Yorkshire Banks during 2004.
* Program to establish new integrated Financial Services
Centres commenced with the first four in Liverpool, Bristol, Reading &
Southampton and the next four in Oxford, Milton Keynes, Kent and Hertford.
* Investment in new information technology systems to improve
customer service in the branches and integrate back office support functions.
35
--------------------------------------------------------------------------------
Management Discussion & Analysis - Financial Services New Zealand
FINANCIAL SERVICES NEW ZEALAND
Performance Summary
Australian dollars Fav/ Year to Fav/
(unfav) (unfav)
Half year to change on change on
Mar 03 Sep 02
Sep 03 Mar 03 Sep 03 Sep 02
$m $m % $m $m %
Net interest income 323 328 (1.5 ) 651 549 18.6
Other operating income 162 167 (3.0 ) 329 283 16.3
Total income 485 495 (2.0 ) 980 832 17.8
Other operating expenses (241 ) (252 ) 4.4 (493 ) (444 ) (11.0 )
Underlying profit 244 243 0.4 487 388 25.5
Charge to provide for (14 ) (7 ) large (21 ) 5 large
doubtful debts
Cash earnings before tax 230 236 (2.5 ) 466 393 18.6
Income tax expense (78 ) (77 ) (1.3 ) (155 ) (136 ) (14.0 )
Cash earnings before 152 159 (4.4 ) 311 257 21.0
significant items (1)
--------------------
(1) Refer to Note 1 for a reconciliation of Financial Services
New Zealand's result to Group net profit.
New Zealand dollars
NZ$m NZ$m % NZ$m NZ$m %
Net interest income 364 361 0.8 725 657 10.4
Other operating income 183 184 (0.5 ) 367 339 8.3
Total income 547 545 0.4 1,092 996 9.6
Other operating expenses (272 ) (277 ) 1.8 (549 ) (531 ) (3.4 )
Underlying profit 275 268 2.6 543 465 16.8
Charge to provide for (15 ) (8 ) (87.5 ) (23 ) 5 large
doubtful debts
Cash earnings before tax 260 260 - 520 470 10.6
Income tax expense (88 ) (85 ) (3.5 ) (173 ) (162 ) (6.8 )
Cash earnings before 172 175 (1.7 ) 347 308 12.7
significant items
Key Performance Measures
Performance & profitability
Return on average assets 1.21 % 1.29 % 1.25 % 1.18 %
(annualised)
Cost to income ratio 49.7 % 50.8 % 50.3 % 53.3 %
Cash earnings per average FTE 80 83 81 71
(annualised) (NZ$'000)
Net interest income
Net interest margin 2.65 % 2.78 % 2.71 % 2.61 %
Net interest spread 2.89 % 3.09 % 3.00 % 2.96 %
Average balance sheet (NZ$bn)
Gross loans and acceptances 24.5 22.5 8.9 % 23.5 21.1 11.4 %
Interest-earning assets 27.3 25.9 5.4 % 26.6 25.0 6.4 %
Retail deposits 16.1 15.6 3.2 % 15.9 14.7 8.2 %
36
--------------------------------------------------------------------------------
Management Discussion & Analysis - Financial Services New Zealand
As at
Sep 03 Mar 03 Sep 02
Asset quality
Gross non-accrual loans (NZ$m) 30 38 31
Gross loans and acceptances (NZ$bn) 24.6 22.9 21.4
Gross non-accrual loans to gross 0.12 % 0.17 % 0.14 %
loans and acceptances
Specific provision to gross 34.5 % 28.8 % 37.2 %
impaired assets
Full-time equivalent employees (FTE) 4,257 4,221 4,277
Financial Performance (in local currency)
Cash earnings increased 12.7% over the prior year reflecting stronger lending
and deposit growth and improving housing market share.
Underlying profit increased 16.8% over the prior year.
* Higher net interest income reflects housing and deposit
volume growth.
* Housing grew 17.9%, reflecting a stronger focus backed by a
number of innovative products. BNZ is the only major New Zealand bank that does
not lend through mortgage brokers.
* The current low interest rate environment combined with
heightened competition, especially for housing, put increased pressure on the
net interest margin. Downward pressure on retail deposit margins as a result of
decreases in the official cash rate impacted margins in the second half of the
year.
* Other operating income grew as a result of higher volumes and
transaction levels. It was flat in the second half reflecting the impact of
lower tourism and related businesses, and a trend by customers to use more
cost-effective channels.
* Other operating expenses have increased from the prior year
by 3.4%. However, the cost to income ratio improved from 53.3% to 50.3%.
* Personnel expenses grew by 3.5% reflecting annual salary
increases.
* Non-personal expenses growth remained flat. This is attributable
to productivity improvements, offset by increased marketing campaigns supporting
the re-launched Brand initiative and increased leasing costs following the sale
and lease back of the BNZ Centre.
The charge to provide for doubtful debts has increased by NZ$28 million on the
prior year. Whilst the overall asset quality is stable with gross non-accrual
loans as a percentage of gross loans and acceptances at 0.12%, increased
statistical provisioning, particularly in Agribusiness, has led to higher
charges in the second half.
Key achievements
* Over the year Bank of New Zealand achieved growth in the
number of personal transaction and youth accounts. It captured over 19.0% of
home loans systems growth to August 2003 (improvement in market share from 15.1%
in September 2002 to 15.6% in September 2003).
* Launch of All Blacks Mastercard and BNZ Amex card in May.
* Improvement in customer satisfaction as measured by the
University of Auckland Customer Satisfaction Survey for 2003, with a 14%
increase in the percentage of satisfied / very satisfied residential customers.
This has taken the Bank from 5th place (57%) to 2nd at 71%.
* Expansion and leverage of customer relationship capability
(TOPS) that analyses customer activity, identifies needs and provides leads to
Bankers for proactive customer contact. Over a million leads have been
generated since implementation in November 2001.
37
--------------------------------------------------------------------------------
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
Fav/ Fav/(unfav)
(unfav) change on
Half year to change on Year to Sep 02
Sep 03 Mar 03 Mar 03 Sep 03 Sep 02 Sep 02 Ex FX
$m $m % $m $m % %
Net interest income 373 434 (14.1 ) 807 1,051 (23.2 ) (20.3 )
Other operating income 585 505 15.8 1,090 887 22.9 26.3
Total income 958 939 2.0 1,897 1,938 (2.1 ) 1.0
Other operating expenses (380 ) (374 ) (1.6 ) (754 ) (759 ) 0.7 (3.0 )
Underlying profit 578 565 2.3 1,143 1,179 (3.1 ) (0.3 )
Charge to provide for doubtful (40 ) (23 ) (73.9 ) (63 ) (167 ) 62.3 59.3
debts
Cash earnings before tax 538 542 (0.7 ) 1,080 1,012 6.7 9.5
Income tax expense (99 ) (126 ) 21.4 (225 ) (194 ) (16.0 ) (18.7 )
Cash earnings before 439 416 5.5 855 818 4.5 7.3
significant items(1)
Net profit attributable to (5 ) (4 ) (25.0 ) (9 ) - large large
outside equity interest
Cash earnings before 434 412 5.3 846 818 3.4 6.2
significant items and after
outside equity interest
--------------------
(1) Refer to Note 1 for a reconciliation of Corporate &
Institutional Banking's result to Group net profit.
Key Performance Measures
Performance & profitability
Return on average risk-weighted 2.8 % 2.8 % 2.8 % 2.8 %
assets (annualised) (%)
Cost to income ratio 39.7 % 39.8 % 39.7 % 39.2 %
Cash earnings per average FTE 338 330 333 315
(annualised) ($'000) (2)
Net interest income
Net interest margin 0.53 % 0.58 % 0.56 % 0.77 %
Average balance sheet ($bn)
Core lending 35.7 37.5 (4.8 )% 36.6 36.2 1.1 %
Core lending and acceptances 41.4 43.3 (4.4 )% 42.3 43.4 (2.5 )%
Gross loans and acceptances 59.2 60.4 (2.0 )% 59.8 52.1 14.8 %
Interest-earning assets 141.0 148.7 (5.2 )% 144.8 136.3 6.2 %
Risk-weighted assets 68.4 66.2 3.3 % 67.3 68.3 (1.5 )%
--------------------
(2) Cash earnings before significant items and after outside
equity interest
38
--------------------------------------------------------------------------------
Management Discussion & Analysis - Corporate & Institutional Banking
As at
Sep 03 Mar 03 Sep 02
Asset quality
Gross non-accrual loans ($m) 539 427 370
Gross loans and acceptances ($bn) 58.3 60.7 53.9
Gross non-accrual loans to gross 0.92 % 0.70 % 0.69 %
loans and acceptances
Specific provision to gross impaired 36.1 % 43.3 % 55.0 %
assets
Full-time equivalent employees (FTE) 2,612 2,537 2,564
Financial performance
Cash earnings of $846 million increased 3.4% for the year with September 2003
half growth of 5.3% on the March 2003 half year.
* Approximately 50% of Corporate & Institutional Banking's cash
earnings are generated from offshore markets. Year on year performance has been
adversely affected by the strong appreciation in the Australian dollar. At
constant exchange rates cash earnings increased by 6.2%.
* Total income was marginally lower than 2002, but up 1% at
constant exchange rates. However, the focus of building strong relationships
with clients over the past 12 months has improved the quality of earnings.
* Growth in customer-related banking income of 10.7%, or 14.4%
at constant exchange rates, helped mitigate the impact of lower Markets risk and
trading income arising from a flat yield curve environment and reduced
volatility in foreign exchange markets. The increase in other operating income
in the second half was influenced by strong deal flows, particularly in
structured finance.
* Net interest income decreased 23.2% for the year largely due
to a reduction in money markets income. Other operating income continues to
show strong growth reflecting improved client fee income streams from a larger
customer base. The split of net interest income and other operating income can
vary considerably depending on market activity and economic conditions.
* The underlying margin on core lending business has stayed
relatively stable over the year. However, the overall margin reduced primarily
due to product mix, with a reduction in contribution from money markets and
growth in securities under reverse repurchase agreements.
* Expenses rose marginally at constant exchange rates,
reflecting investment in strategies to support the ongoing growth in client
revenue. The cost to income ratio remained relatively stable.
* Asset quality improved with the level of exposures rated
investment grade equivalent or above increasing from 87.6% at September 2002 to
91.4% at September 2003. The charge for doubtful debts reduced considerably from
2002, which included two large provisions. The level of non-accrual loans is
distorted by a NZ facility for which restructuring has been finalised since
September 2003 and on which settlement is imminent. Excluding this facility, the
level of gross non-accrual loans to gross loans and acceptances reduced to 0.58%
and the level of provision coverage on impaired assets improved to 51.4%.
Key achievements
* Strong growth in customer-related banking income of 10.7%, or
14.4% at constant exchange rates, with 325 new clients joining during the year.
* Debt market sales increased 18.4%. Product offerings,
particularly in securitisation and commodity derivatives, have been a key
enabler of the growth.
* Acquisition of custody client contracts from CBA will
significantly increase market share in Australia.
* Maintained No. 1 status for Corporate Bonds and significantly
improved the position in the Securitisation Markets.
39
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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
Fav/ Year to Fav/
(unfav) (unfav)
Half year to change on change on
Mar 03 Sep 02
Sep 03 Mar 03 Sep 03 Sep 02
$m $m % $m $m %
Life company - planned profit 123 118 4.2 241 263 (8.4 )
margins
Life company - experience 9 (4 ) large 5 (33 ) large
profit/(loss)
Capitalised losses 7 3 large 10 (4 ) large
Life company operating 139 117 18.8 256 226 13.3
margins (1)
Operating profits from
non-life businesses
* Operating profits (2) 58 49 18.4 107 139 (23.0 )
* NAFiM investor compensation (11 ) (8 ) (37.5 ) (19 ) (45 ) 57.7
and associated costs
* Strategic investment (15 ) (13 ) (15.4 ) (28 ) (23 ) (21.7 )
expenditure
Investment earnings on 42 16 large 58 (5 ) large
shareholders' retained
profits and capital from life
businesses
Operating profit after tax 213 161 32.3 374 292 28.1
and outside equity interest
Revaluation profit/ (loss) 5 (205 ) large (200 ) (152 ) (31.6 )
after tax
Net profit before significant 218 (44 ) large 174 140 24.3
items 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 produced operating profit after tax and outside equity
interests for the year of $374 million, an increase of 28.1% on September 2002.
The result accommodates a significant increase in compliance and regulatory
expenditure as the industry went through some of its most significant changes
this decade. During the year the business continued to invest for future growth,
with $28 million after tax of investment expenditure included within the above
result to fund strategic investment programs in both Australia and the UK.
Revaluation profit for the September half was $5 million reflecting an
improvement in the business outlook.
Life company operating margins
Life company operating margins increased by $30 million, an increase of 13.3% on
September 2002.
Planned profit margins decreased by $22 million, reflecting the impact of large
withdrawals in the traditional business due to the decline of the secondary
market and the incorporation of negative disability experience outcomes from
2002 into 2003 assumptions. Lower sales and funds under management, impacting
fee income within the investments business, were offset by anticipated growth in
inforce annual insurance premiums.
Experience profits were positively impacted by actively managed business
expenditure and favourable investment conditions in the September 2003 half
resulting in higher fee income. Within the insurance business, disability claims
experience has stabilised and lump sum experience remains favourable.
Capitalised losses of $10 million were reversed during the year, reflecting
favourable experience and latest available data.
40
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Management Discussion & Analysis - Wealth Management
Operating profits from non-life businesses
Operating profit from non-life businesses decreased $32 million. Whilst the
Private Bank continued to record strong growth with a 17% increase in earnings,
and the Australian investments businesses recorded stable earnings in difficult
operating conditions, the UK non-life businesses were adversely impacted by
negative investor sentiment.
The result also includes $32 million of compliance costs and expenditure on
regulatory projects such as FSRA and superannuation legislation changes.
Additional compensation and associated costs of $19 million have been provided
in relation to NAFiM investor compensation announced in August 2002.
Strategic investment spend in both the Australian and UK businesses has
continued with a number of key initiatives delivered during the course of the
year. The profit impact of this expenditure was $19 million and $9 million
respectively.
Investment earnings on shareholders' retained profits and capital from life
businesses
Investment earnings generated on shareholders' invested capital in the statutory
funds of the life businesses were $58 million. The improved performance
correlates to the movements in the major stockmarket indices in those periods.
The result reflects the significant volatility experienced in the half year to
March 2003 and steady improvement in equity market returns in the September 2003
half year. Shareholders' capital is invested in fixed interest and cash (73%)
with the remaining balance in equities, consistent with the investment profile
of policyholder assets and regional regulatory requirements.
Operating profit by business segment (1)
Fav/
(unfav)
Year to change on
Sep 03 Sep 02 Sep 02
$m $m %
Investments (2) 142 184 (22.8 )
Insurance (3) 204 137 48.9
Other (4) 17 44 (61.4 )
Profit from operations (after tax) (5) 363 365 (0.5 )
--------------------
(1) Reflects operating profit by business type irrespective of the legal
entity through which the business is written. This differs from the sources of
operating profit disclosure, where all business written through life company
statutory funds, irrespective of the business type (investments or life
insurance) is included in life company operating margins.
(2) Investments includes funds management, funds administration, asset
management and on-line investing.
(3) Insurance includes retail insurance (covering life insurance, income
insurance and general insurance agency) and group insurance for members of a
corporate, business or club.
(4) Other includes the shareholders branches of the life companies,
private bank, advice solutions and other businesses.
(5) Profit from operations by business segment includes life company
operating margins and operating profits from non-life businesses. It excludes
NAFiM investor compensation and associated costs, strategic investment
expenditure and investment earnings on shareholders' retained profits and
capital from life businesses.
The Investments result was impacted by unfavourable market conditions
particularly in the first half on the UK and Australian investments business.
The Insurance business was positively impacted by growth in in-force annual
insurance premiums, stabilising claims experience and favourable lump sum
business experience, while Other profits decreased primarily due to increased
regulatory and compliance spend.
41
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Management Discussion & Analysis - Wealth Management
Key Performance Measures
Half year to Year to
Sep 03 Mar 03 Sep 03 Sep 02
Sales ($bn) (1) 7.1 5.3 12.4 16.4
As at
Sep 03 Mar 03 Sep 02
Total funds under management and administration ($ bn) (1) 73.1 65.1 65.6
Market share - Australia%
Platforms - master funds & wraps (2) (3) 19.2 N/a N/a
Retail funds management (2) 13.7 14.1 14.5
Net annual retail inflows (2) 11.3 16.7 22.5
Wholesale funds management (2) 6.7 6.3 5.7
Net annual wholesale inflows (2) 30.7 29.0 5.8
Retail risk insurance (4) 14.7 14.1 13.7
New retail risk annual premiums (4) 16.5 16.8 14.9
Other (no.)
Financial advisers (5) 3,215 2,972 3,309
* Bank channels 643 643 783
* Aligned dealerships 2,572 2,329 2,526
Full-time equivalent employees (FTEs) (6) 6,174 5,910 6,105
--------------------
(1) Sales and funds under management and administration have been restated
to exclude joint venture interests.
(2) Source: ASSIRT Market Share Reports as at June 2003, December 2002 and
June 2002.
(3) At 30 June 2003, National/MLC changed the methodology used to report
Platform data to only include assets on the MLC platform. As a result prior
period market share data is not comparable. (Market share based on the old
methodology: March 2003: 24.3%, September 2002: 26.7%).
(4) Source: DEXX&R Research Reports. Retail risk insurance includes term,
trauma and disability insurance at June 2003, September 2002 and March 2002.
(5) Significant business is also sourced from Independent Financial
Advisers (IFAs). There are currently active relationships with over 1,600 IFAs.
Financial advisers at September 2003 include 1,403 for the Australian business
and 1,812 for the UK and Asian businesses, which compares with 1,463 and 1,509
respectively at March 2003 and 1,501 and 1,808 respectively at September 2002.
(6) FTEs at 30 September 2003 include the impact of acquisitions (Plum
Financial Services Limited (152) and an increased interest in Advance MLC
Assurance Co. Limited (Thailand) (20)). It also reflects the increased number of
FTEs engaged in regulatory, compliance and strategic reinvestment projects.
Funds under management / administration
Strong investment returns and the acquisition of the remaining 50% of Plum
Financial Services Limited in the September 2003 half has led to funds under
management and administration increasing by 11% on September 2002.
Investments
With a market share of 19.2% at 30 June 2003, Wealth Management continues to be
the number one provider of retail investment platforms, (masterfunds and wraps)
in Australia. Market share in retail funds under management is 13.7%, with
second position retained. The decrease in net annual retail inflows reflects the
impact of lower inflows during the first half of the year. Wholesale funds
management market share increased to 6.7%.
Insurance
Wealth Management held the largest share of the Australian retail life insurance
market as at 30 June 2003, with a 16.5% share of annual new business sales and a
14.7% share of premiums in force.
Efficiency measures
Robust cost containment together with growth in the insurance business has
resulted in a cost to premium income ratio for the year of 20% compared with 22%
for the 2002 year, exceeding the 2004 full year target of 21%.
42
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Management Discussion & Analysis - Wealth Management
The cost to funds under management ratio for the investments business achieved
60 basis points* as a result of cost containment and higher closing funds under
management. This compares with 67 basis points for the year ended 30 September
2002*, and against a 2004 target of 65 basis points.
--------------------
*Excluding NAFiM investor compensation and associated costs.
Valuation and revaluation profit/(loss)
Valuation of businesses held in the mark to market environment increased by $158
million from $6,475 million at September 2002 to $6,633 million at 30 September
2003. Values shown are directors' market valuations. The valuations are based
on Discounted Cash Flow (DCF) valuations prepared by Tillinghast - Towers Perrin
(Tillinghast), using, for the Australian and New Zealand entities, risk discount
rates specified by the directors.
The components comprising the change in value are summarised below:
NAFiM subsidiaries
Market value summary ($m)
Net Value of Embedd Value of Market
assets (1) inforce -ed future value
business value 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 293 - 293 - 293
subsidiaries (3)
Capital and other movements (4) 25 - 25 - 25
Increase in shareholders net assets 318 - 318 - 318
Revaluation profit /(loss) components
before tax:
Business assumptions & roll forward
Roll forward of DCF (5) - 399 399 - 399
Change in business assumptions & - (235 ) (235 ) (324 ) (559 )
experience
Revaluation profit/(loss) before tax (6) - 164 164 (324 ) (160 )
Excess movements (7) (47 ) 47 - - -
Market value at 30 September 2003 1,572 2,463 4,035 2,598 6,633
--------------------
(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) Excess movements represent excess on the transfer from
associate to subsidiary of Plum Financial Services Limited, increased interest
in Advance MLC Assurance Co. Limited (Thailand), foreign exchange impacts on the
net assets of international subsidiaries and market value of intragroup debt.
Revaluation profit/(loss)
The full year revaluation loss of $160 million before tax comprises second half
revaluation profit of $79 million and first half revaluation loss of $239
million. The components that contributed to the full year revaluation loss
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, resulting in a reduction from 51% to 43% in the
ratio of the Australian value of future new business to total Australian market
value. Further, weaker operating environments have reduced the values of the
international businesses, as has the overall strengthening in the Australian
dollar. The impact of these factors has been mitigated to some extent by the
active management of expenses.
43
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Management Discussion & Analysis - Wealth Management
The adverse impact on value of poor investment returns in the March half has
largely been offset by improved investment returns experienced in the second
half.
Included within 'capital and other movements' is a net capital injection of $135
million, which includes a $140 million injection into the insurance business to
support the growth in the risk insurance business. A favourable foreign exchange
movement on the intra-group debt related to the international subsidiaries is
also included in this category.
Entities held within the mark to market environment include operations in
Australia, Europe, New Zealand and Asia. Value by both region and business
segment are summarised below:
NAFiM subsidiaries
Market value summary ($m)
At 30 Sep 2003
Net Value of Embedd Value of Market At
assets inforce -ed future value 30 Sep 02
business value new Market
business value
By region
Australia 1,221 2,062 3,283 2,492 5,775 5,430
Europe 209 261 470 34 504 616
New Zealand 20 47 67 10 77 97
Asia 122 93 215 62 277 332
Market value at 30 September 1,572 2,463 4,035 2,598 6,633 6,475
By business segment
Investments 768 1,189 1,957 1,750 3,707 3,847
Insurance 695 1,242 1,937 848 2,785 2,444
Other 109 32 141 - 141 184
Market value at 30 September 1,572 2,463 4,035 2,598 6,633 6,475
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:
September 2003 September 2002
New Risk discount Franking New Risk discount Franking
business rate (3) (%) credit business rate (3) (%) credit
multiplier assumptn multiplier assumptn
(2) (%) (4) (2) (%) (4)
Assumptions applied in
the determination of
market value (1)
Insurance - Australia 9.1 11.0 70 10.1 11.0 70
Investments - Australia 9.1 11.0 - 12.0 70 8.7 11.0 - 12.0 70
New Zealand 6.8 11.25 - 12.50 70 8.3 11.75 - 12.75 70
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 30 September 2003 was 10%.
(2) Australian new business multipliers represent
the multiple of value arising from the 12 months to 30 September 2002 and the 12
months to 30 September 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. For New Zealand, the new business multiplier applying to the WM
valuation of the retail investments business has been disclosed. Whilst this
multiplier does not recognise other parts of the Wealth Management New Zealand
product range (eg. wholesale investment and life insurance business), the
disclosure of this multiplier is considered appropriate to demonstrate the
impact of changes in assumptions over the 12 months to 30 September 2003.
(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.
44
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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
Fav/ Year to Fav/
(unfav) (unfav)
Half year to change on change on
Mar 03 Sep 02
By Division Sep 03 Mar 03 Sep 03 Sep 02
$m $m % $m $m %
Excess Capital (1) 16 38 (57.9 ) 54 137 (60.6 )
Group Funding (34 ) (32 ) (6.3 ) (66 ) (265 ) 75.1
Corporate Centre (36 ) (29 ) (24.1 ) (65 ) (28 ) large
Other (2) (54 ) (23 ) large (77 ) (156 ) 50.6
--------------------
(1) Net interest income from excess capital (after tax).
(2) Refer to Note 1 for a reconciliation of Other (including
Excess Capital, Group Funding & Corporate Centre) to Group net profit.
Excess Capital
The Group's earnings on excess capital for the 2003 year were $54 million
compared with $137 million in the prior year reflecting a 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 4.96% (5.49% prior year) to the estimated excess.
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.
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.
Group Funding experienced a loss of $66 million compared to a loss of $265
million for the prior year. The main factors contributing to the movement
include:
* the funding benefit on the proceeds from the sale of SR
Investment Inc. (HomeSide);
* a one-off benefit on the restructure of the hedging swaps on
the TrUEPrS(SM) preference shares;
* 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, Technology, Office of the CEO, and Group eliminations.
The Corporate Centre result for the year has primarily been impacted by four key
areas:
* an ongoing major review of regulatory compliance and
associated quality improvements;
* operating costs (including amortisation) of the Integrated
Systems Implementation (ISI) program, which is the Group's strategic
infrastructure program;
* impact of Basel II and IFRS on the ISI program; and
* expenses associated with corporate structure, funding and
acquisition-related strategic initiatives.
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FR UASARONRAAUA