RNS Number:5001S
National Australia Bank Ld
26 November 2003
Net profit by segment
Contribution to Group net profit/(loss) attributable to members of the Company
by operating segment
2003 2002 (1) 2001
$m $m $m
Financial Services Australia 1,868 1,572 1,377
Financial Services Europe 866 787 749
Financial Services New Zealand 310 242 223
Corporate & Institutional Banking 846 787 739
Wealth Management 174 120 720
Other (2) (109 ) (135 ) (1,725 )
Net profit attributable to members of the Company 3,955 3,373 2,083
--------------------
(1) Net profit attributable to members of the Company by operating segment
has been restated as described in note 3 in the financial report.
(2) Incorporates the net profit on sale of Michigan National Corporation
and its controlled entities of $1,681 million in 2001, as well as Michigan
National Corporation's contribution to profit of $132 million prior to
its sale on April 1, 2001. Also incorporates the results of SR Investment, Inc.
(the parent entity of HomeSide US) prior to its sale on October 1, 2002.
(Refer to note 3 in the financial report for detailed information by operating
segment.)
Financial Services Australia
Financial Services Australia increased net profit 18.8% to $1,868 million in
2003, from $1,572 million in 2002. Excluding the impact of the significant
expenses incurred during 2002 of $185 million (after tax), net profit increased
6.3%. Details of the increase in net profit are as follows.
Total revenue increased 7.5% to $5,469 million. Net interest income increased
6.4% to $3,519 million, reflecting growth in lending volumes, particularly
housing lending, and growth in retail deposits. This was partially offset by a
31 basis point reduction in net interest margin to 3.14%, caused by the
increased proportion of housing lending in the loan portfolio, and the impact of
lower market rates on deposit margins and capital.
Non-interest income increased 9.6% to $1,950 million, driven by strong housing
loan growth, and strong bill acceptances growth.
Total expenses decreased 1.9% to $2,803 million. During 2002 significant
expenses of $261 million were incurred relating to Positioning for Growth
restructuring and efficiency initiatives. Total expenses in 2003, include $3
million of goodwill amortisation and a $298 million charge to provide for
doubtful debts. Excluding these items, total expenses increased 2.1%. This was
due to higher personnel expenses with the impact of enterprise bargaining
agreements partly offset by lower staff numbers reflecting the implementation of
productivity initiatives. Expenses were further impacted by higher software
amortisation and costs associated with the continued roll out of customer
relationship and loan processing technology. The cost to income ratio improved
from 48.2% to 45.7%.
Asset quality management remained a key focus during the year. The charge to
provide for doubtful debts increased from $146 million in 2002 to $298 million
in 2003, which was impacted by a large corporate exposure. The year saw a
continued focus on credit quality and capital efficiency.
Financial Services Europe
Financial Services Europe increased net profit 10.0% to $866 million in 2003,
from $787 million in 2002. Excluding the impact of the significant expenses
incurred during 2002 of $117 million (after tax), net profit decreased 4.2%.
Details of the movement in net profit are as follows.
Total revenue decreased 4.3% to $3,318 million. Net interest income decreased
2.9%, or increased 2.3% in local currency terms, to $2,368 million, due to
growth in lending, particularly mortgage and business lending. Net interest
margin declined 2 basis points in 2003 to 4.16%, resulting from falling interest
rates on retail deposits, together with a change in product mix resulting from
the growth in mortgage lending and the focus on selective business lending to
enhance the portfolio asset quality.
Non-interest income decreased 7.6%, or 2.4% in local currency terms, to $950
million, driven by lower income from sales of creditor insurance, lower account
fee income and the outsourcing of the merchant acquiring business, partly offset
by increased lending fee income.
Total expenses decreased 11.1% to $2,036 million. During 2002 significant
expenses of $166 million were incurred relating to Positioning for Growth
restructuring and efficiency initiatives. Total expenses in 2003 includes $62
million of goodwill amortisation and a $254 million charge to provide for
doubtful debts. Excluding these items, total expenses increased 2.4% or 5.8% in
local currency terms. This was largely a result of higher pension expenses,
higher personnel costs due to annual salary reviews offset by reductions in
staff numbers, higher investment in core infrastructure such as the teller
system and higher costs associated with compliance activities including
Financial Services Authority mortgage regulation and the write-off European
monetary union development costs. The cost to income ratio increased from 48.5%
to 51.9%.
30
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The charge to provide for doubtful debts decreased from $378 million in 2002 to
$254 million in 2003. Asset quality management remained a key priority during
the year and has improved, with higher security coverage and a lower risk
profile. In addition, during 2003 the book value of the largest non-accrual
loan was repaid and a large previously written-off debt was recovered.
Financial Services New Zealand
Financial Services New Zealand increased net profit 28.1% to $310 million in
2003, from $242 million in 2002. Excluding the impact of the significant
expenses incurred during 2002 of $13 million (after tax), net profit increased
21.6%. Details of the increase in net profit are as follows.
Total revenue increased 17.8% to $980 million. Net interest income increased
18.6%, or 10.4% in local currency terms, to $651 million, reflecting strong
growth in lending volumes, particularly in fixed rate housing mortgages and term
lending, growth in retail deposit volumes and 10 basis point increase in the net
interest margin to 2.71%.
Non-interest income increased 16.3% to $329 million, or 8.3% in local currency
terms, with increased lending fees resulting from strong volumes and transaction
levels, partly offset by lower income from the transition of customers to lower
cost channels.
Total expenses increased 11.7% to $515 million. During 2002 significant
expenses of $20 million were incurred relating to Positioning for Growth
restructuring and efficiency initiatives. Total expenses in 2003 year include
$1 million of goodwill amortisation and a $21 million charge to provide for
doubtful debts. Excluding these items, total expenses increased 11.0%, or 3.4%
in local currency terms. This was due to higher personnel expenses from the
renegotiation of standard terms of employment, whilst all other expenses
remained flat. The cost to income ratio improved from 53.3% to 50.3%.
The charge to provide for doubtful debts increased from $5 million credit in
2002 to a charge of $21 million in 2003. The higher charge is a result of
higher commodity prices and export conditions adversely impacting Agribusiness
lending. Further, the 2002 charge was impacted by a statistical provisioning
write-back adjustment.
Corporate & Institutional Banking
Corporate & Institutional Banking increased its contribution to net profit
attributable to members of the Company by 7.5% to $846 million in 2003, from
$787 million in 2002. Excluding the impact of the significant expenses incurred
during 2002 of $31 million (after tax), it increased 3.4%. Details of the
increase in net profit attributable to members of the Company are as follows.
Total revenue decreased marginally by 2.1% to $1,897 million, as a result of a
more challenging environment and the focus on building strong relationships with
customers. The split of income between net interest income and non-interest
income can vary considerably in the wholesale market, depending on market
activity and environmental conditions. This was particularly evident in this
year's results.
Net interest income decreased 23.2% to $807 million, mainly due to flat yield
curves and the stabilisation of interest rates which has reduced the Markets
unit's net interest income from funding and liquidity management
activities, slightly offset by the growth in securities under reverse repurchase
agreements. Net interest margin decreased by 21 basis points to 0.56%,
primarily due to the factors that impacted net interest income.
Non-interest income increased 22.9% to $1,090 million, reflecting growth from
specialised finance, debt markets, trading income and corporate banking.
Total expenses decreased 15.6% to $817 million. During 2002 significant
expenses of $42 million were incurred relating to Positioning for Growth
restructuring and efficiency initiatives. Total expenses in 2003 include a $63
million charge to provide for doubtful debts. Excluding these items, total
expenses increased 0.7%. This primarily reflected the impact of cost
containment initiatives. The cost to income ratio increased from 39.2% to
39.7%.
The quality of the loan portfolio across all regions remains high, with
approximately 91.4% of credit exposures equivalent to investment grade or above.
The charge to provide for doubtful debts decreased from $167 million in 2002
to $63 million in 2003. This was due to 2002 including a number of large
corporate exposures.
Wealth Management
Wealth Management increased its contribution to net profit attributable to
members of the Company by 45.0% to $174 million in 2003, from $120 million in
2002. Excluding the impact of the significant expenses incurred during 2002 of
$20 million (after tax), it increased 24.3%.
The result comprised of $374 million of profit generated through operations
(2002: $272 million) and a $200 million decrease in the excess of the net market
value over the net assets of life insurance controlled entities, after tax
(2002: negative $152 million).
31
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The main factors impacting the profit generated through operations are:
* growth in insurance business volumes;
* reversal of capitalised losses due to favourable
expense experience;
* growth in the contribution of the Private Bank as a
result of strong lending and deposit volumes;
* significant improvement in global equity market
conditions particularly in the six months to September 30, 2003, which has
increased earnings generated on shareholders' invested capital and
retained earnings;
* stable disability claims experience;
* lower investor compensation costs of $27 million compared with $64
million in 2002;
* strategic investment expenditure of $28 million
(after tax), up $5 million on 2002, including operational and amortised
capitalised expenditure in Australia and Europe; and
* increased compliance costs and spend on regulatory projects.
The valuation of businesses held in the mark-to-market environment increased by
$158 million from $6,475 million at September 30, 2002 to $6,633 million at
September 30, 2003. This increase in value comprised $318 million from growth
in shareholders' net assets less $160 million ($200 million after tax)
from other components over and above the increase in net assets, which are
reported as the movement in the excess of net market value over net assets of
life insurance controlled entities.
The components that contributed to the $160 million ($200 million after tax)
negative movement in the net market value of the life insurance controlled
entities comprised:
* the effect of assumption and experience changes
primarily comprising lower retail sales volumes than anticipated at September
30, 2002, the effect of weaker operating environments reducing the values of the
international businesses, and the overall strengthening in the Australian
dollar. The impact of these factors has been partially mitigated by the active
management of expenses; and
* the anticipated growth in the business above current
levels of operating profit (ie. the roll-forward of the discounted cash flow).
32
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Contribution to Group net profit by major geographic area
2003 2002 2001 2000 1999
$m $m $m $m $m
Australia
Australia (excluding Wealth Management)(1) 2,099 1,798 3,264 1,406 1,308
Wealth Management 127 73 666 241 97
Deduct: Amortisation of goodwill (3 ) (8 ) (1 ) (1 ) (11 )
2,223 1,863 3,929 1,646 1,394
Europe
Clydesdale and Yorkshire Banks 745 733 819 708 605
Northern and National Irish Banks 224 191 200 174 202
Other (2) 105 89 4 (16 ) 16
Deduct: Amortisation of goodwill (62 ) (62 ) (62 ) (62 ) (62 )
1,012 951 961 804 761
New Zealand
Bank of New Zealand 494 433 348 311 298
Other (3) (36 ) (29 ) (35 ) (30 ) (27 )
Deduct: Amortisation of goodwill (33 ) (31 ) (31 ) (31 ) (31 )
425 373 282 250 240
United States
Michigan National Corporation - - 156 291 254
SR Investment, Inc. - 98 (3,438 ) 141 153
Other (4) 213 31 191 161 78
Deduct: Amortisation of goodwill - - (73 ) (103 ) (102 )
213 129 (3,164 ) 490 383
Asia
Asian branches 36 44 71 39 33
Other (5) 46 13 4 10 10
82 57 75 49 43
Net profit attributable to members of the 3,955 3,373 2,083 3,239 2,821
Company
--------------------
(1) Australia (excluding Wealth Management) included the net profit on
sale of Michigan National Corporation and its controlled entities of $1,681
million in 2001.
(2) Europe Other includes National Wealth Management Europe Holdings
Limited, National Australia Group Europe Limited, the London branch of the
Company, NAB Investments Limited and NAB Finance (Ireland) Limited.
(3) New Zealand Other includes National Australia Group (NZ) Limited and
National Wealth Management New Zealand Holdings Limited.
(4) United States Other includes the New York branch of the Company,
National Australia Funding (Delaware), Inc. and National America Investment,
Inc.
(5) Asia Other includes Nautilus Insurance Pte Limited, National Australia
Capital Markets (Japan) Co., Ltd, National Australia Finance (Asia) Limited,
Hong Kong MLC Holdings Limited, PT MLC Life Indonesia and Advance MLC Assurance
Co. Ltd.
Australia
Australia's net profit attributable to members of the Company increased
by 19.3% to $2,223 million from $1,863 million in 2002 and $3,929 million in
2001. The 2002 result includes $256 million (after tax) of significant expenses
relating to Positioning for Growth restructuring and efficiency initiatives.
Excluding these items, net profit attributable to members of the Company
increased 4.9% due to the solid performances of the retail banking operations,
and an improved Wealth Management result.
Australia (excluding Wealth Management)
The net profit of Australia (excluding Wealth Management and before goodwill
amortisation) increased 16.7% in the year to $2,099 million from $1,798 million
in 2002 and $3,264 million in 2001. Excluding prior year significant expenses
of $256 million (after tax), net profit of $2,099 million increased 2.2% from
the prior year.
Net interest income increased $179 million or 5.0%, despite a 28 basis point
decline in net interest margin to 2.51% (for Australia including Wealth
Management) over the same period.
The increase was driven by strong deposit and lending growth, with housing loans
performing particularly well in a continuing low interest rate environment.
Non-interest income increased $117 million or 4.7%, due largely to housing
lending growth and bill acceptances fee income, and higher treasury-related
income from Corporate & Institutional Banking.
33
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Total expenses (before the charge to provide for doubtful debts and during 2002
significant expenses) were flat reflecting cost containment through the
implementation of efficiency improvements. Expense reductions were offset by
higher costs associated with the continued roll-out of the customer relationship
management and loan processing technology. The cost to income ratio improved to
46.6%, compared to 49.0% in the prior year.
The charge to provide for doubtful debts increased by $210 million or 191.4%,
impacted by number of large corporate exposures. During the 2002 year, a review
of the risk profile within Corporate & Institutional Banking and Financial
Services Australia (Business) loan portfolios resulted in a reduced charge.
Wealth Management
Net profit attributable to members of the Company for Wealth Management
Australia increased 74.0% to $127 million in 2003, from $73 million in 2002.
The result comprised $327 million of profit generated through operations (2002:
$225 million) and $200 million negative net movement in the excess of net market
value over the net assets of life insurance controlled entities, after tax
(2002: negative $152 million).
Profit generated through operations was impacted by the improvement in global
equity market conditions particularly in the six months to September 2003, which
has increased earnings generated on shareholders' invested capital and
retained earnings. Compensation and associated costs of $27 million have been
provided in the current year in relation to the investor compensation announced
in August 2002, down from $64 million in 2002. The result also includes the
impact of strategic investment expenditure including both operational and
amortised capitalised expenditure.
Further financial highlights supporting the net operating profit result include:
* growth in insurance business volumes;
* stable disability claims experience; and
* contained business expenditure.
For a discussion of the $200 million decrease in the excess of net market value
over net assets of life insurance controlled entities (after tax), refer to page
25.
Europe
Europe's net profit increased 6.4% in the year to $1,012 million from
$951 million in 2002 and $961 million in 2001. The 2002 result included $130
million (after tax) of significant expenses relating to Positioning for Growth
restructuring and efficiency initiatives. Excluding these items, net profit
decreased 6.4%.
Clydesdale and Yorkshire Banks
Clydesdale and Yorkshire Banks contributed a net profit (before goodwill
amortisation) of $745 million, an increase of 1.6% from the prior year.
Excluding significant expenses of $90 million (after tax) in 2002, net profit
decreased by 9.5%.
Net interest income decreased by $74 million or 3.8%. However, excluding
exchange rate movements net interest income increased, with asset growth in
lending (mortgages and cards), slightly offset by the decline in personal loan
volumes and a small contraction in the net interest margin. Non-interest income
decreased by 10.7%. Excluding exchange rate movements non-interest income also
decreased, due to reduced credit line origination fees and lower money transfer
fees. In addition, merchant servicing fees were lower with the outsourcing of
this operation.
Total expenses (before the charge to provide for doubtful debts and during 2002
significant expenses) decreased $46.8 million or 3.8%. However, excluding the
impact of exchange rate movements expenses increased, reflecting higher pension
fund expenses, slightly offset by a reduction in employee numbers lowering
personnel expenses. The cost to income ratio increased from 44.4% to 48.9%.
The charge to provide for doubtful debts decreased $112 million or 30.9%, with
exchange rate movements favourably impacting this result. The underlying
decrease reflected the recovery of a large corporate exposure.
Northern and National Irish Banks
Northern and National Irish Banks' contributed a net profit of $224
million, an increase of 17.2% from the prior year. Excluding significant
expenses of $26 million (after tax), net profit increased 3.2% from the prior
year.
Net interest income was flat. However, excluding exchange rate movements net
interest income increased, as a result of growth in lending (term business
lending and mortgages), which has been partly offset by the impact of higher
fixed deposits. Non-interest income decreased by 8.5%. Excluding exchange rate
movements, non-interest income also decreased, as a result of reduced merchant
service fees reflecting the outsourcing of this business, and lower trading
income from Corporate & Institutional Banking.
Total expenses (before the charge to provide for doubtful debts and during 2002
significant expenses) were flat. However, excluding exchange rate movements
expenses decreased primarily reflecting lower personnel expenses following a
reduction in staff numbers. The cost to income ratio increased slightly to
57.8% from 56.2%. The charge to provide for doubtful debts decreased $24
million or 104.3%, which was favourably impacted by exchange rate movements.
The underlying decrease reflected a change in the mix of the loan portfolio,
with falling personal loan volumes and higher housing loan volumes.
34
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New Zealand
New Zealand's net profit increased 13.9% in the year to $425 million
from $373 million in 2002 and $282 million in 2001. The 2002 result included
$14 million (after-tax) of significant expenses relating to Positioning for
Growth restructuring and efficiency initiatives. Excluding these items, net
profit increased 9.8%.
The New Zealand operations of Bank of New Zealand (BNZ) contributed net profit
(before goodwill amortisation) of $494 million, an increase of 14.1% from the
prior year. Excluding significant expenses of $13 million (after-tax), net
profit increased 11.0% from the prior year.
Net interest income grew $104 million or 14.9% as a result of growth in lending
(particularly housing) and retail deposit volumes, while the net interest margin
increased due to a strong focus on margin management.
Total expenses (before the charge to provide for doubtful debts and during 2002
significant expenses) increased $95 million or 19.8%, primarily reflecting the
impact of the higher personnel expenses as a result of the renegotiation of
standard terms of employment and higher software costs. The cost to income
ratio increased slightly from 45.3% to 45.7%. The charge to provide for
doubtful debts increased by $23 million to a charge of $11 million in 2003. The
increase has resulted from Agribusiness lending requirements, whilst during 2002
the loan portfolio provisioning requirement was reviewed resulting in a
write-back to the general provision.
United States
The United States contributed a net profit of $213 million compared to $129
million in 2002 and a net loss of $3,164 million in 2001. The net profit in
2002 included $4 million (after tax) of significant expenses relating to
Positioning for Growth restructuring and efficiency initiatives. The Group sold
HomeSide US on October 1, 2002. During 2002, HomeSide US contributed net profit
(before goodwill amortisation and significant items) of $98 million. Excluding
these items, net profit increased significantly.
The net profit (before goodwill amortisation) of the Company's New York
branch increased by $89 million from $35 million to $124 million. The 2002 net
profit was impacted by a major provisioning charge for a large corporate
exposure in Corporate & Institutional Banking.
The Group sold Michigan National Corporation and its controlled entities on
April 1, 2001. In the half year to March 31, 2001, Michigan National
Corporation and its controlled entities contributed net profit (before goodwill
amortisation and significant items) of $156 million.
Asia
Asia's net profit attributable to members of the Company increased 43.9%
in the year to $82 million from $57 million in 2002 and $75 million in 2001.
The 2002 result included $8 million (after-tax) of significant expenses relating
to Positioning for Growth restructuring and efficiency initiatives. Excluding
these items, it increased 26.2%.
The increase in net profit attributable to members of the Company was largely
driven by Wealth Management. In 2003, Wealth Management's Asian
operations contributed $19 million to the result, compared to $5 million in
2002. This increase is a result of higher investment earnings on shareholders'
retained earnings with favourable investment markets performance in
Asia during 2003.
Corporate & Institutional Banking's Markets unit experiencing lower
revenues largely from reduced trading opportunities and corporate finance
activities have also decreased due to the slowing of activities in the region.
Employees
The following tables summarise the Group's staffing position as at
September 30:
2003 2002 (1) 2001 (2)
Number Number Number
By region
Australia 23,880 24,294 24,897
Europe 13,104 13,542 13,706
New Zealand 4,688 4,560 4,731
United States 136 165 3,506
Asia 732 641 757
Total full-time equivalents (3) 42,540 43,202 47,597
35
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2003 2002 (1) 2001 (2)
Number (2) Number
Number
By line of business
Financial Services Australia 17,233 17,928 19,631
Financial Services Europe 11,423 11,719 12,125
Financial Services New Zealand 4,257 4,277 4,001
Corporate & Institutional Banking 2,612 2,564 2,596
Wealth Management 6,174 6,105 5,559
Other (4) 841 609 3,685
Total full-time equivalents 42,540 43,202 47,597
--------------------
(1) Divisional full-time equivalent employees in relation to 2002 have
been restated as described in note 3 in the financial report.
(2) Includes full-time equivalent employees for SR Investment, Inc. (the
parent entity of HomeSide US) of 38 at September 30, 2002 and 3,363 at September
30, 2001.
(3) Full-time equivalent employees (FTEs) includes part-time (pro-rated)
and non-payroll FTEs (ie. contractors).
(4) Includes Corporate Centre functions and prior to March 1, 2002
includes HomeSide US.
The Group's full-time equivalent employee numbers reduced by 662 or 1.5%
from 43,202 for 2002 to 42,540 for 2003. Excluding the impact of acquisitions
in 2003 (Custom Service Leasing (New Zealand) Limited (formerly Hertz Fleetlease
Limited), the client custody contracts of Commonwealth Custodian Services
Limited and the Commonwealth Bank of Australia and increased interest in Plum
Financial Services Limited, and Advance MLC Assurance Co. Ltd) and the sale of
HomeSide US in 2002 (refer to page 13 for an explanation on the sale of HomeSide
US), full-time equivalent employee numbers decreased 2.4%. This compares with a
2.4% increase from 2001 to 2002, excluding the impact of the sale of HomeSide
US. The reduction during 2003 has generally resulted from the efficiency
improvements as a result of the Positioning for Growth program.
The focus of the Positioning for Growth program has been to improve and
streamline processes, create efficiency improvements and realign employees to
areas of revenue growth. This has resulted in a reduction in employee numbers
across the Group.
It was recognised early on in the Positioning for Growth program that
organisational and process changes would only succeed when supported by a
workforce that is empowered and motivated to deliver high quality customer
service. A revitalisation project was established to effect this dynamic of
cultural change. The project launched a wide range of initiatives as a catalyst
in the process of cultural renewal; these have been well received by employees
and continued to produce the desired outcomes.
In Australia, there was a net decrease in employee numbers of 414 in 2003,
having decreased by 603 in the previous year. Excluding the impact of
acquisitions in 2003 (Custom Service Leasing (New Zealand) Limited, the client
custody contracts of Commonwealth Custodian Services Limited and the
Commonwealth Bank of Australia and increased interest in Plum Financial Services
Limited), there was a net decrease in employee numbers of 627 in 2003 mainly
resulting from a reduction in employees in Financial Services Australia, as well
as in Group support functions. This was a result of productivity initiatives
within Financial Services Australia.
In Europe, employees decreased by 438 in 2003, having decreased by 164 in the
previous year. The net decrease in employees in 2003 resulted from a reduction
in employees through initiatives such as outsourcing and efficiency savings in
the back office.
In New Zealand, employees increased by 128 in 2003, having decreased by 171 in
the previous year. Excluding the acquisition of Custom Service Leasing (New
Zealand) Limited, employees numbers were flat in 2003.
In the United States, employees decreased by 29 in 2003 primarily as a result of
the sale of SR Investment, Inc. (the parent entity of HomeSide US) on October 1,
2002.
In Asia, employees increased by 91 in 2003, and decreased by 116 in the previous
year (the prior year decrease was a result of 109 joint venture employees being
excluded from 2002 in order to apply consistent treatment across the Group).
Excluding the impact of consolidating Advance MLC Assurance Co. Ltd, employees
increased by 71 in 2003 due to growth within Wealth Management.
Approximately 42% of Group employees in Australia are members of the Finance
Sector Union of Australia (FSU). Over the last 12 months, the Company continued
to have a good relationship with the FSU, especially through the enterprise
bargaining process. A negotiated settlement of a new enterprise agreement with
the FSU was certified in the Australian Industrial Relations Commission on
October 24, 2002. This agreement covered many aspects of employment issues such
as training, career structures and significant reforms to employee renumeration.
36
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Assets and equity
Year-end total assets increased to $397.5 billion from $377.4 billion at
September 30, 2002. Following the sale of SR Investment, Inc. (the parent
entity of HomeSide US) on October 1, 2002, $4.1 billion of total assets were
removed from the Group's balance sheet. The appreciation of the Australian
dollar, primarily against the British pound and US dollar, decreased total
assets by $24.1 billion in 2003, compared to a $7.1 billion increase in 2002.
Excluding the impact of the sale of SR Investment, Inc. and exchange rate
movements, total assets (in Australian dollar terms) grew $48.3 billion or 13.8%
during 2003, primarily reflecting growth in lending.
Year-end total equity increased from $23.3 billion at September 30, 2002 to
$27.2 billion during 2003. The increase in total equity has been due to the
consolidation of the registered schemes of the Group's life insurance
statutory funds of $2.5 billion during the year (refer to note 43(e) for further
details). Total parent entity interest in equity increased $1.2 billion to
$24.4 billion during 2003. The movement in the parent entity interest included
an increase of $2.6 billion (2002: $0.8 billion) in retained profits, dividend
reinvestment and share issues totalling $0.4 billion (2002: $0.5 billion), the
issue of $1.0 billion Trust Preferred Securities (2002: $nil) and the general
reserves $0.3 billion (2002: $0.2 billion). These factors were offset by $1.6
billion resulting from the on-market share buy-back (2002: $1.2 billion) and the
impact of negative movements in the foreign currency translation reserve of $1.5
billion (2002: negative $0.5 billion).
In Australia during 2003, total assets grew by $30.3 billion to $243.7 billion
with gross loans and advances increasing by 16.8% to $141.2 billion. The major
contributor to this increase was housing loans, which grew by 21.3% to $83.0
billion, buoyed by a continuing low interest rate environment. In Australian
dollar terms, total assets in Europe decreased by 3.1% to $103.9 billion during
2003. Excluding the effect of exchange rate movements, total assets in Europe
grew by 12.1%, reflecting growth in Corporate & Institutional Banking lending,
as well as solid housing lending growth. In Australian dollar terms, total
assets in New Zealand increased by 7.4% to $32.6 billion in 2003. Excluding the
effect of exchange rate movements, total assets in New Zealand increased by
6.2%, buoyed by strong retail lending growth, particularly in relation to
housing lending, up 17.9% and growth in other term lending. In Australian
dollar terms, total assets in the United States decreased by 52.4% to $8.3
billion in 2003. Excluding the effect of exchange rate movements, total assets
in the United States fell by 38.1%. This was due to the sale of SR Investment,
Inc. which removed $4.1 billion of assets from the Group's balance sheet, and
reduced activity in Corporate & Institutional Banking. In Australian
dollar terms, total assets in Asia were flat at $9.0 billion in 2003. Excluding
the effect of exchange rate movements, total assets in Asia increased 17.5%,
reflecting increased activity in Corporate & Institutional Banking.
Assets and equity adjusted to accord with US GAAP
Year-end total assets calculated in accordance with US GAAP increased to $398.9
billion in 2003 after an increase to $380.3 billion at September 30, 2002. In
US dollar terms, year-end total assets increased by US$64.6 billion, or 31.3%,
from US$206.5 billion in 2002 to US$271.4 billion in 2003. The increase in
total assets in 2003 is mainly attributable to the factors outlined above
(offset in part by the impact of the strong Australian dollar). In 2003, total
equity under US GAAP reported in Australian dollars remained flat at $23.9
billion. (Refer to note 58 in the financial report for a detailed
reconciliation of total assets and total equity according to US GAAP.)
Return on average equity
2003 2002 2001 2000 1999
$m $m $m $m $m
Weighted average equity (1) 20,579 21,172 20,752 17,586 15,915
Return on average equity (%) (1) (2) 18.3 15.1 9.0 17.3 17.8
Return (before significant items) on average 18.3 17.0 18.4 18.1 17.3
equity (%) (1) (2)
--------------------
(1) Based on amounts attributable to ordinary shareholders.
(2) Based on average ordinary shareholders funds.
Profitability is measured by return on average equity, which increased to 18.3%
in 2003 from 15.1% in 2002 and 9.0% in 2001. Excluding the impact of
significant items, return on average equity increased to 18.3% in 2003 from
17.0% in 2002 and 18.4% in 2001. This was impacted by growth in the regional
financial services and the wealth management businesses during 2003. Weighted
average equity decreased 2.8% due to the impact of the buy-back of ordinary
shares, partly offset by the retention of profits within the Company funding
business growth.
37
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Earnings and dividends per share
2003 2002 2001 2000 1999
Cents Cents Cents Cents Cents
Earnings per share
Basic 248.9 205.7 121.5 202.3 186.6
Diluted (1) 243.6 202.5 122.8 199.1 183.4
Earnings per share before significant items
Basic 248.9 231.9 247.4 211.3 186.6
Diluted (1) 243.6 227.4 243.2 207.7 183.4
Cash earnings per share
Basic 268.5 222.0 110.7 205.7 201.0
Diluted (1) 262.3 218.2 112.4 202.0 197.0
Cash earnings per share before significant
items
Basic 268.5 248.2 236.6 214.8 200.6
Diluted (1) 262.3 243.0 233.0 211.0 197.0
Dividends per share 163.0 147.0 135.0 123.0 112.0
--------------------
(1) Calculated based on the weighted average diluted number of ordinary
shares, which includes the impact of options, potential conversion of
exchangeable capital units, performance rights and partly paid ordinary shares,
as set out in note 8 in the financial report.
Basic earnings per share increased 21.0% in 2003 to 248.9 cents, from 205.7
cents in 2002 and 121.5 cents in 2001. Excluding the impact of significant
items, basic earnings per share increased 7.3% for 2003 to 248.9 cents, from
231.9 cents in 2002 and 247.4 cents in 2001.
Basic cash earnings per share increased 20.9% in 2003 to 268.5 cents, from 222.0
cents in 2002, and 110.7 cents in 2001. Excluding the impact of significant
items, basic cash earnings per share increased 8.2% in 2003 to 268.5 cents, from
248.2 cents in 2002 and 236.6 cents in 2001. The increase in basic cash
earnings per share before significant items reflects strong growth in
profitability before significant items, goodwill amortisation and the movement
in the excess of net market value of life insurance controlled entities. It
further reflects the active capital management activities of the Group during
the year, in particular the impact of the continuation of the Company's
ordinary share buy-back program.
An interim dividend of 80 cents per fully-paid ordinary share was paid during
the year ended September 30, 2003, compared to an interim dividend of 72 and 67
cents per share in 2002 and 2001 respectively. The final dividend declared from
the 2003 profit was 83 cents per share, an increase of 8 cents, or 10.7%
compared with 2002 at 75 cents and 2001 at 68 cents. The 2003 final dividend is
payable on December 10, 2003.
The Company expects to continue its policy of paying regular cash dividends;
however, there is no assurance as to future dividends. Future dividends will be
determined by the Board with regard to the Company's earnings, capital
requirements, financial conditions and applicable government regulations and
policies. The dividend payout ratio for 2003 was equivalent to 60.4% of after
tax cash earnings (before significant items). As a consequence of the planned
reinvestment in the European operations, a temporary increase in the dividend
payout ratio is expected in 2004. In addition, the payment of dividends is
subject to the restrictions described in note 7 in the financial report.
The interim dividend paid was fully franked and the final dividend will be fully
franked. These dividends carry imputation tax credits at a tax rate of 30%,
reflecting the current Australian company tax rate of 30%. For non-resident
shareholders of the Company for Australian tax purposes, the dividends will not
be subject to Australian withholding tax.
The extent to which future dividends will be franked will depend on a number of
factors, including the level of the Group's profits that will be subject
to Australian income tax and any future changes to the Australian business tax
systems as a result of the Australian Commonwealth Government's tax
reform initiatives.
The Company has a bonus share plan enabling shareholders (principally those who
do not benefit from dividend imputation) to elect to take all or part of their
dividend in the form of unfranked bonus ordinary shares. The Company's
dividend reinvestment plan permits reinvestment of cash dividends in new
ordinary shares. In addition, the UK dividend plan permits ordinary
shareholders to receive dividends paid out of the profits of a UK controlled
entity.
Shareholder value
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. Refer to 'non-GAAP financial
measures' on page 60 for a further discussion on EVA(R).
EVA(R) is a registered trademark of Stern Stewart & Co.
38
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In order to encourage longer-term management decision making and sustained value
creation, the Group sets EVA(R) growth targets for three year periods. The
Group's EVA(R) target of 5% compound growth per annum was set in 2000,
for the three 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% per
annum 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 29.9%.
2003 2002 2001 2000 1999
$m $m $m $m $m
EVA(R) net operating profit after tax (1) 4,524 4,157 3,881 3,680 3,328
Deduct: Cost of capital (1) (2,856 ) (2,873 ) (2,752 ) (2,301 ) (1,938 )
EVA(R) 1,668 1,284 1,129 1,379 1,390
Average annual cost of capital (%) 11.5 11.5 11.5 11.4 10.5
--------------------
(1) Refer to 'reconciliation of non-GAAP measures' on page
6, for a reconciliation.
Liquidity and funding
Liquidity risk is the risk that the Group is unable to meet its financial
obligations as they fall due. These obligations include the repayment of
deposits on-demand or at their contractual maturity dates, the repayment of
borrowings and loan capital as they mature, the payment of insurance policy
benefits, claims and surrenders, the payment of operating expenses and tax, the
payment of dividends to shareholders, and the ability to fund new and existing
loan commitments.
The Group's banking entities comply with the regulatory liquidity
requirements of the banking regulators in Australia, the UK, the Republic of
Ireland, New Zealand, the United States, Singapore, Hong Kong, Korea and Japan
as required. Wealth Management also complies with the regulatory liquidity
requirements of their dealers' licences. Liquidity within the Group is
also managed in accordance with policies approved by the Board, with oversight
from regional and Group Asset and Liability Management Committees (refer to
'liquidity risk' under 'risk management' on page 54 for a detailed discussion).
The principal sources of liquidity for the Group are:
* the maturity of available for sale and investment
securities;
* interest received from customer loans;
* customer deposits;
* life insurance premiums received;
proceeds from bonds, notes and subordinated debt issues;
* fee income; and
* interest and dividends from investments.
The Group's primary source of funding is from customer deposits - either on-
demand and short-term deposits, and term deposits and bank issued certificates
of deposit. Of total liabilities at September 30, 2003 of $370.3 billion,
funding from customer deposits and certificates of deposit amounted to $186.9
billion (50.5%). Although a substantial portion of customer accounts are
contractually repayable within one year, on-demand, or at short-notice, customer
deposit balances have traditionally provided a stable source of core long-term
funding for the Group.
Deposits taken from the inter-bank market of $45.1 billion as at September 30,
2003 supplement the Group's customer deposits.
The Group also accesses the domestic and international debt capital markets
under its various funding programs. As at September 30, 2003, the Group had on
issue $22.7 billion of term debt securities (bonds, notes and subordinated debt)
and the following funding programs available to fund the Group's general
banking businesses:
Short-term funding programs:
* US commercial paper program;
* Global commercial paper and certificate of deposit
program; and
* Bank of New Zealand (BNZ) global commercial paper and
certificate of deposit program; and
Long-term funding programs:
* US medium-term note (MTN) program;
* US MTN program (New York branch);
* Euro MTN program;
Australian transferable certificates of deposit
program;
* BNZ domestic bond program; and
* Yen shelf.
39
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The cost and availability of senior unsecured financing is influenced by credit
ratings. At September 30, 2003, the Company's credit ratings were as
follows:
Short-term debt Senior long-term
debt
Standard & Poor's Corporation A-1+ AA
Fitch, Inc. F1+ AA
Moody's Investors Service, Inc. P-1 Aa3
The ability to sell assets quickly is also an important source of liquidity for
the Group. The Group holds sizeable balances of marketable treasury and other
eligible bills and debt securities which could be disposed of to provide
additional funding should the need arise. As at September 30, 2003, the Group
held $23.7 billion of trading securities and $6.5 billion of available for sale
securities. In addition, the Group held $248.0 billion of loans and advances to
customers, of which $95.7 billion is due to mature within one year - although a
proportion of these maturing customer loans will be extended in the normal
course of business.
Within the Group's Wealth Management business, the principal sources of
liquidity are premiums received from policyholders, charges levied upon
policyholders, investment income and proceeds from the sale and maturity of
investments. The investment policies adhered to by the Group's life
insurance companies consider the anticipated cash flow requirements by matching
cash inflows with projected liabilities.
Based on the level of resources within the Group's businesses, and the
ability of the Group to access wholesale money markets and issue debt securities
should the need arise, overall liquidity is considered more than sufficient to
meet current obligations to customers, policyholders and debtholders.
The following table sets out the amounts and maturities of the Group's
contractual cash obligations at September 30, 2003:
Payments due by period
Less than 1 to 3 to After Total
1 year 3 year(s) 5 years 5 years
$m $m $m $m $m
Long-term debt - dated 4,540 6,793 5,975 5,410 22,718
Operating leases 167 343 324 958 1,792
Total contractual cash obligations 4,707 7,136 6,299 6,368 24,510
The above table excludes deposits and other liabilities taken in the normal
course of banking business and short-term and undated liabilities, including
life insurance policy liabilities. At September 30, 2003, the Group had $1,743
million of undated long-term debt outstanding.
The following table sets out the amounts and maturities of the Group's
contingent liabilities and other commercial commitments at September 30, 2003:
Amount of commitment expiration per period
Less than 1 to 3 to After Total
1 year 3 year(s) 5 years 5 years
$m $m $m $m $m
Contingent liabilities
Guarantees 3,043 145 76 10 3,274
Letters of credit 4,364 617 193 697 5,871
Performance-related contingencies 2,092 86 66 25 2,269
Other contingent liabilities 116 - 1 - 117
Other commercial commitments
Other binding credit commitments (1) 56,312 8,964 2,372 2,735 70,383
Investment commitments (2) 454 - - - 454
Total commercial commitments 66,381 9,812 2,708 3,467 82,368
--------------------
(1) Credit-related commitments arise from contracts entered into in the
normal course of business generally relating to financing needs of customers
(refer to note 45 in the financial report).
(2) In the normal course of business of the Group's life insurance
business statutory funds, various types of investment contracts are entered into
that give rise to contingent or future obligations.
Refer to note 45 in the financial report for further discussion of 'contingent
liabilities and credit commitments'.
Special purpose entities
Special purpose entities (SPEs) are entities that are typically set up for a
specific, limited purpose and generally would not enter into an operating
activity or have any employees.
40
--------------------------------------------------------------------------------
The primary purposes of SPEs relating to the Group are as follows:
* to obtain an alternative form of funding by the
securitisation of certain Group assets;
* to assist customers to securitise their assets;
* to provide diversified funding sources to customers;
and
* to tailor new products to satisfy customers'
funding requirements.
The most common form of SPEs involves the acquisition of financial assets that
are funded by the issuance of securities to external investors. The repayment
of these securities is determined by the performance of the assets acquired by
the SPE. These vehicles form an integral part of many financial markets.
The Group generally does not hold any subordinated or residual interest in SPEs
that it sponsors or sets up. The Group may provide standby liquidity facilities
to SPEs. Exposures that relate to such facilities are included within
contingent liabilities and credit-related commitments (refer to note 45 in the
financial report). Generally, an SPE may only make a drawing under a standby
liquidity facility in certain limited circumstances such as 'market
circumstances' (where commercial paper is unable to be issued at an
economic rate on a maturity date). Standby liquidity facilities are not
available to be drawn where an obligor defaults in respect of assets held by an
SPE. If such an event occurs, the commitment in respect of the liquidity
facility is reduced to the extent of the amount in default.
An important feature of financial accounts prepared under Australian GAAP is
that they are required to present a true and fair view, which includes
reflecting the economic substance of transactions and arrangements and not just
their legal form or structure.
Australian Accounting Standard AASB 1024 "Consolidated Accounts" (AASB 1024")
requires a company to consolidate entities it controls and not just
entities in which it has majority ownership. Therefore, an SPE would be
required to be consolidated if the Group had the capacity to dominate decision
making, directly or indirectly, in relation to the financial and operating
policies of the SPE, so as to enable the SPE to operate with it in pursuing the
objectives of the Group.
Further, Urgent Issues Group Abstract 28 "Consolidation - Special
Purpose Entities" provides additional guidance as to some of the factors
that would indicate control relating to the activities, decision making powers,
risks and benefits of an SPE that would generally require the SPE to be
consolidated.
An SPE is consolidated in the Group if it either meets the requirements of AASB
1024 or if the risks and rewards associated with the SPE lie with the Group such
that the substance of the relationship is that of a controlled entity.
Substance over form means examining all the agreements in relation to the
transaction, including side letters or agreements relating to either the
provision of guarantees or collateral on loans, or equity funding based on the
value of the entity.
The Group, in the ordinary course of business, has established or sponsored the
establishment of SPEs for various types of transactions, which are described
below along with their Australian GAAP treatment.
Asset securitisation
The Group makes limited use of asset securitisation arrangements. SPEs for
securitisation are created when the Group has a financial asset (ie. a
residential mortgage loan portfolio), which it sells to an SPE. The SPE in turn
sells interests in the asset as securities to investors. This type of
securitisation program benefits the Group by providing an alternative source of
funding and enables the Group to monetise long-term assets which positively
impacts the Group's regulatory capital requirements and reduces the
Group's credit exposure.
The Group does not recognise the assets and liabilities of these SPEs and they
are not reported on the Group's statement of financial position at
September 30, 2003. This is because the risks and rewards of the assets in the
SPEs no longer lie with the Group (ie. the Group no longer retains any
significant exposure to the returns on these assets). Further, the Group does
not retain control over the financial or operational decision-making of these
SPEs.
During the year ended September 30, 2001, the Group securitised Australian loans
amounting to $1,924 million through its HomeSide Mortgage Securities Trust
2001-1 securitisation program. No loans were securitised during the 2003
financial year. Class A mortgage-backed floating rate notes of US$1.06 billion
were issued into offshore markets and Class B notes of $20 million were issued
into the Australian domestic debt capital market. Outstanding securitised loans
of the program totalled $585 million as at September 30, 2003 (2002: $929
million). The securities issued by the program do not represent liabilities of
the Company or the Group. Neither the Company nor the Group stands behind the
capital value or performance of securities or assets of the program except to
the limited extent provided in the transaction documents for the program through
the provision of arm's length services and facilities. The Company and
the Group do not guarantee the payment of interest or repayment of principal due
on the securities. The Company and the Group are not obliged to support any
losses that may be suffered by the investors and do not intend to provide such
support. The Company and the Group have no obligation to repurchase any of the
securitised loans other than in limited circumstances. Certain administrative
activities and the provision of interest rate and currency swaps have been
transacted with the SPE on an arm's length basis. (Refer to notes 1 and
16 in the financial report for additional information).
Multi-seller securitisation conduits
The Group manages two multi-seller securitisation conduits, Titan and Quasar.
These conduits provide off-balance sheet funding for the Group's
corporate customers. This type of securitisation program has no material impact
on the Group's liquidity, capital resources or credit risk because the
substance of the economic arrangement is to provide a securitisation service to
our customers. These securitisation conduits use SPEs to provide access to
funding via the asset-backed commercial paper and MTN investor markets.
41
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These securitisation arrangements generally involve the sale of financial assets
by customers to SPEs, which then issue commercial paper or MTNs to fund the
purchases. The assets acquired by the conduits, which totalled $1,863 million
at September 30, 2003, included debt securities, mortgages, lease receivables,
commodity receivables and loans. These financial assets represent assets in
which the Group has no interest and which are not reported on the Group'
s statement of financial position at September 30, 2003. Certain administrative
activities and the provision of liquidity and credit facilities to the programs
are performed by the Group under arm's length contracts that it, or the
conduits' independent board of directors, can terminate. Fees received
by the Group for performing these services are recorded as fees and commission
income when earned.
Repackaging securitisation
The Group sponsors and manages a repackaging securitisation vehicle, Script
Securitisation Pty Ltd (Script). Script acquires debt instruments and, through
the application of derivatives, generates master-funded repackaged debt
instruments for sale to customers of the Group. This type of securitisation
arrangement has no material impact on the Group's liquidity, capital
resources or credit risk because the substance of the economic arrangement is to
provide a securitisation service to our customers. The Group has no interest in
the debt instruments acquired and these instruments are not reported on the
Group's statement of financial position at September 30, 2003.
Structured finance transactions
The use of an SPE to isolate cash flows and assets is common in the banking
industry to enable a customer to minimise their funding cost or maximise their
investment returns, and the bank to have access to specific collateral. The
Group has relationships with numerous SPEs to provide financing to customers.
Any financing relationships are entered into under normal lending criteria and
are subject to the Group's credit approval process. The assets arising
from these financing activities are generally included in loans and advances to
customers, investment securities, or shares in entities and other securities
depending on the economic substance of the transaction. The Group also has
relationships with SPEs to enable the placement of customers' surplus
funds with the Group. These surplus funds are in all cases included in the
Group's statement of financial position as deposits and other
borrowings.
Capital resources
2003 2002 2001
$m $m $m
Total equity (parent entity interest) 24,407 23,184 23,489
Outside equity interest - Other 69 67 68
Perpetual floating rate notes 367 460 507
Exchangeable capital units 1,262 1,262 1,262
Total liquidity and capital resources 26,105 24,973 25,326
The Group assesses its capitalisation against market, regulatory and ratings
agency expectations, having regard to Australian and international peers and the
Group's own asset base, risk profile and capital structure. The Group
believes it has sufficient capital to meet current and future commitments.
As indicated in the above table, the Group's capital position increased
during the year, primarily due to the issue of $975 million in Trust Preferred
Securities (refer to note 34 in the financial report for further discussion on
the Trust Preferred Securities). The Group has a history of internally
generating capital through retained profits and has traditionally relied on
retained profits to augment its capital resources to allow for real and
inflation-induced growth in its asset base. The capital position also increases
from the reinvestment of dividends under the Company's dividend
reinvestment plan (DRP), bonus share plan (BSP), issue of shares under the share
purchase plan (SPP) and share issues pursuant to employee share and option
plans.
During the years ended September 30, 2003, 2002 and 2001, 10.8 million, 13.8
million and 23.5 million fully paid ordinary shares were issued under the DRP,
BSP and SPP to shareholders at varying prices.
In November 2001, the Group adopted a continuing policy to buy back fully paid
ordinary shares equal to new shares issued under the Group's various
share and option plans. In May 2002, the Group announced its intention to
extend the buy-back program until September 30, 2003, and to increase the value
of shares subject to the buy-back by an additional $1,000 million. The DRP was
also modified by introducing a cap of 15,000 on the number of shares per
shareholder eligible to participate in the DRP. On August 28, 2002, following
the announcement of the sale of SR Investment, Inc. (the parent entity of
HomeSide US), the Group announced a further increase of $750 million in the
value of shares subject to the ongoing share buy-back. On October 1, 2003, the
Group announced its intention to buy back ordinary shares on-market equal to
approximately the number of shares issued under the Company's dividend
package plans and staff share and option plans. The Company expects this to be
up to approximately 25,500,000 ordinary shares. The period of the buy-back is
expected to be from November 11, 2003 until September 30, 2004.
During the year, the Group bought back 48,949,487 ordinary shares. The shares
were bought back at an average price of $31.98 per share, thereby reducing
ordinary equity by $1,565 million. The highest price paid was $34.35 per share
and the lowest price paid was $28.40 per share. All buy-backs are subject to
appropriate pricing parameters and an assessment of the circumstances facing the
Group at the relevant time.
42
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Capital adequacy
As at September 30, 2003, the Group's total capital adequacy ratio was
9.7%, consisting of Tier 1 capital of 7.8%, Tier 2 capital of 3.3% and
deductions of 1.4%.
The Group's primary prudential supervisor is APRA. APRA imposes capital
adequacy requirements on banks, the prime objective of which is to ensure that
an adequate level of capital is maintained, thereby providing a buffer to absorb
unanticipated losses from activities. Consistent with the international
standards of the Basel Committee on Banking Supervision, APRA's approach
to assessing capital adequacy of banks focuses on three main elements: the
credit risk associated with a bank's exposures, the market risk
associated with a bank's trading activities, and the form and quantity
of a bank's capital.
In order to provide a broad indication of relevant credit risk, all assets are
risk weighted according to four categories (0%, 20%, 50% and 100%). The assets
to which those weightings apply are described more fully below (refer to
'risk-adjusted assets and off-balance sheet exposures').
Off-balance sheet transactions are converted to balance sheet equivalents, using
a credit conversion factor, before being allocated to a risk-weighted category.
Off-balance sheet activities giving rise to credit risk are categorised as
follows: direct credit substitutes such as financial guarantees and standby
letters of credit; trade and performance-related contingent items such as
performance bonds, warranties, and documentary letters of credit; long-term
commitments such as formal credit lines with a residual maturity exceeding one
year; and market-related transactions such as foreign exchange contracts,
currency and interest rate swaps and forward rate agreements.
Market risk is defined as the risk of losses in on- and off-balance sheet
positions arising from movements in market prices pertaining to interest
rate-related instruments and equities in the trading book, and foreign exchange
risk and commodity risk throughout the Group. APRA's current capital
requirements for market risk, which involve creating equivalent risk-weighted
exposures (refer to 'risk-adjusted assets and off-balance sheet
exposures') are broadly consistent with the Basel Committee on Banking
Supervision's recommendations.
For regulatory purposes, capital comprises two elements, eligible Tier 1 and
Tier 2 capital, from which certain deductions are made to arrive at Tier 1 and
Tier 2 capital. Tier 1 capital includes paid-up ordinary shares, hybrid
instruments (such as National Income Securities), non-cumulative irredeemable
preference shares, reserves (other than asset revaluation reserves), retained
profits less goodwill and other intangible assets. In addition, where
recognised future income tax benefits are greater than deferred income tax
liabilities, the net future income tax benefit is deducted from Tier 1 capital.
Tier 2 capital includes asset revaluation reserves, general provision for
doubtful debts (net of associated future income tax benefits), certain hybrid
debt/equity instruments, and subordinated long-term debt.
The total amount of the resultant capital is subject to further deductions to
form the capital base. Such deductions include net assets in controlled
entities that are deconsolidated for regulatory capital purposes and holdings of
capital instruments in other non-subsidiary banks. Tier 1 capital must
constitute at least 50% of the capital base.
Under guidelines issued by APRA, investments in life insurance and funds
management are deconsolidated for the purposes of calculating capital adequacy
and those activities are excluded from the calculation of risk-weighted assets.
The tangible component of the investments comprised of the embedded value and
value of future business are deducted at the capital base level. The intangible
component (the difference between acquisition costs and tangible assets) is
deducted from Tier 1 capital. Additionally, any profits from these entities
included in the Group's results, to the extent that they have not been
remitted to the Company in the form of dividends are excluded from the
determination of Tier 1 capital.
As the measure of capital adequacy, Australian banks are required to maintain a
minimum ratio of capital base to total risk-weighted assets of 8%, of which a
minimum of 4% must be held in Tier 1 capital. The numerator of the ratio is the
capital base. The denominator of the ratio is the total risk-weighted asset
exposure (ie. sum of credit risk-weighted exposures and the equivalent market
risk-weighted exposure).
The Basel Committee on Banking Supervision has released wide-ranging and
detailed proposals for the reform of capital adequacy guidelines for banks in
the Basel II. The Basel Committee on Banking Supervision's reform
objective is to develop more risk-sensitive, internationally-accepted, capital
adequacy guidelines that are aligned more accurately with the individual risk
profiles of banks.
Refer to Basel II Capital Accord on page 16 for further information.
Capital ratios
2003 2002 2001
% % %
Tier 1 7.8 7.8 7.5
Tier 2 3.3 3.7 3.9
Deductions (1.4 ) (1.3 ) (1.2 )
Total capital 9.7 10.2 10.2
The capital ratios at September 30, 2003, include the effect of the on-market
share buy-back program, and the issue of the Trust Preferred Securities.
43
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Regulatory capital
2003 2002 2001
$m $m $m
Tier 1
Contributed equity 9,728 9,931 10,725
Reserves 893 2,105 2,427
Retained profits 13,786 11,148 10,337
Outside equity interest 2,804 67 68
Estimated reinvestment under the dividend reinvestment plan (1) 140 127 365
Deduct:
Asset revaluation reserve (16 ) (7 ) (16 )
Goodwill (740 ) (775 ) (876 )
Intangible component of investment in non-consolidated controlled entities (2,448 ) (2,448 ) (2,448 )
(2)
Estimated final dividend (3) (1,248 ) - -
Fair value of mortgage servicing rights (10% of MSR) - (131 ) (507 )
Deconsolidation of wealth management profits net of dividends (290 ) (719 ) (777 )
FITB (excluding FITB on the general provision for doubtful debts) (66 ) - -
Non-qualifying outside equity interest (2) (2,804 ) (67 ) (68 )
Total Tier 1 capital 19,739 19,231 19,230
Tier 2
Asset revaluation reserve 16 7 16
General provisions for doubtful debts 1,248 1,414 1,538
Perpetual floating rate notes 367 460 507
Exchangeable capital units 1,262 1,262 1,262
Dated subordinated debt 5,390 6,174 6,815
Notional revaluation of investment securities to market 37 12 11
Total Tier 2 capital 8,320 9,329 10,149
Total Tier 1 and 2 capital 28,059 28,560 29,379
Deductions (4) (3,591 ) (3,253 ) (3,225 )
Total regulatory capital 24,468 25,307 26,154
--------------------
(1) The amount is derived from reinvestment experience on the Company's
dividend reinvestment and bonus share plans.
(2) Refers to controlled entities that are required to be de-consolidated
for regulatory capital adequacy purposes.
(3) The Group has adopted the new Australian Accounting Standard AASB 1044
'Provisions, Contingent Liabilities and Contingent Assets', which has resulted
in a change in the accounting for dividend provisions. Under APRA guidelines
the estimated dividend must be deducted from Tier 1 capital.
(4) Includes $2,959 million investment in non-consolidated controlled
entities (net of intangible component deducted from Tier 1).
Risk-adjusted assets and off-balance sheet exposures
2003 Balance 2001 Risk Risk-adjusted balance (1)
2002 weights
2003 2002 2001
$m $m $m % $m $m $m
Assets
Cash, claims on Reserve Bank 29,867 25,191 21,663 0 - - -
of Australia, Australian
Commonwealth and State
Governments, OECD central
governments and central banks
(2)
Claims on Australian banks, 32,361 45,053 47,438 20 6,472 9,011 9,488
local governments and banks
incorporated in OECD countries
Housing loans (3) 104,712 88,212 81,515 50 52,356 44,106 40,757
All other assets 157,349 163,854 166,843 100 157,349 163,854 166,843
Total assets (4) 324,289 322,310 317,459 216,177 216,971 217,088
44
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Contract Credit Risk Risk-adjusted balance (1)
or equivalent weights
notional amount
amount 2003
2003 2003 2002 2001
$m $m % $m $m $m
Off-balance sheet exposures
Financial guarantees, standby letters of 11,646 10,338 0 - 100 9,872 7,788 9,115
credit and other letters of credit
Performance-related guarantees, 2,712 1,356 0 - 100 1,319 1,452 1,347
warranties and indemnities
Commitments to provide finance facilities 91,416 14,713 0 - 100 11,252 11,032 15,672
with residual term to maturity of over 12
months and other commitments
Foreign exchange, interest rate and other 1,554,207 34,386 0 - 50 9,688 7,120 10,817
market-related transactions (5)
Total off-balance sheet exposures 1,659,981 60,793 32,131 27,392 36,951
Total risk-adjusted assets 216,177 216,971 217,088
Total risk-adjusted assets and 248,308 244,363 254,039
off-balance sheet exposures - credit risk
Add: Risk-adjusted assets - market risk 4,057 3,475 3,474
(6)
Total assessed risk exposure 252,365 247,838 257,513
--------------------
(1) Claims secured by cash, government securities
or guarantees from banks and governments reflect the risk weight attaching to
the collateral security or a direct claim on the guarantor.
(2) Short-term claims on the Australian
Commonwealth Government are those with a residual term to maturity of less than
12 months; longer-term claims are those with residual term to maturity of
greater than 12 months. Both categories held in the banking book attract a 0%
risk weighting.
(3) Housing loans approved after September 5, 1994
having a loan to market valuation ratio in excess of 80% must be risk weighted
at 100%. However, these loans may qualify for the 50% risk weighting if they
are covered by an adequate level of mortgage insurance provided by an acceptable
lenders mortgage insurer. These loans are reported under 'all other
assets'.
(4) Total assets differ from those in the Group
's statement of financial position due to the adoption of APRA's
classification of certain items for capital adequacy purposes, particularly
goodwill and general provision for doubtful debts. In addition, fair values of
trading derivative financial instruments have been excluded as they have been
incorporated into the calculation of the credit equivalent amount of off-balance
sheet exposures.
(5) Refer to note 46 for additional information on
derivative financial instruments.
(6) Under APRA Prudential Standard APS 113 Capital Adequacy: Market Risk",
Australian banks are required to hold sufficient levels of capital to cover
market risk.
Gross loans and advances
Average balances
2003 2002 2001
$bn $bn $bn
Average gross loans and advances
Australia 130 113 102
Overseas 114 103 99
Total average gross loans and advances 244 216 201
The diversification and size of the Group is such that its lending is widely
spread both in terms of geography and types of industries served. The loan
portfolio continues to consist of short-term outstandings with 38.6% of the
loans at September 30, 2003 maturing within one year and 21.2% maturing between
one year and five years. Real estate mortgage lending comprises the bulk of the
loan portfolio maturing after five years. The average balance of loans and
advances in 2003 equated to 63.9% of the average total assets of the Group.
This compares with 59.5% in 2002 and 56.7% in 2001.
The loan portfolio within Australia is largely comprised of real estate lending
($83.0 billion) which equates to 58.9% of the Australian portfolio at September
30, 2003. The loan portfolio overseas comprised of real estate lending of $28.5
billion or 25.6%, other commercial and industrial lending of $22.3 billion or
20.0% financial, investment and insurance lending of $24.4 million or 22.0% of
the overseas portfolio as at September 30, 2003. The nature of the Group
's lending reflects the operations of the Group's five discrete
business segments, and the regional lending markets in which these segments
operate. These segments include three financial services businesses, or
retailing arms, Corporate & Institutional Banking and Wealth Management. The
financial services businesses operate in Australia, Europe and New Zealand,
however, Corporate & Institutional Banking and Wealth Management operate across
a number of regions (including Australia). This is reflected in the composition
of the Group's lending portfolio.
Average gross loans and advances increased $28.7 billion or 13.3% to $244.2
billion in 2003, from $215.5 billion in 2002 and $201.3 billion in 2001. A
continuing low interest rate environment assisted the growth in lending volumes,
particularly in relation to housing.
Australian average gross loans and advances accounted for 53.5% of the total
average gross loans and advances in 2003, compared with 52.3% in 2002 and 50.7%
in 2001. Australian average gross loans and advances increased $17.8 billion,
or 15.8% to $130.5 billion in 2003, from $112.7 billion in 2002 and $101.9
billion in 2001. The increase mainly reflects strong growth in housing lending.
45
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Overseas average gross loans and advances increased $10.8 billion, or 10.6% to
$113.6 billion in 2003, from $102.8 billion in 2002 and $99.3 billion in 2001.
The increase mainly related to Europe and New Zealand, reflecting strong housing
growth and higher Corporate & Institutional Banking lending.
Loans by industry for the Group as at September 30, 2003
Australia Europe New United Asia Total
Zealand States
$m $m $m $m $m $m
Government and public authorities 498 374 208 315 114 1,509
Agriculture, forestry and fishing 5,368 2,049 3,611 12 46 11,086
Financial, investment and insurance 6,053 19,159 3,288 1,083 887 30,470
Real estate - construction 1,935 1,647 164 512 188 4,446
Manufacturing 2,630 3,877 1,053 463 840 8,863
Real estate - mortgage 83,018 16,552 11,337 - 580 111,487
Instalment loans to individuals and 12,473 11,560 1,499 - - 25,532
other personal lending (including
credit cards)
Lease financing 7,596 7,323 27 - 31 14,977
Other commercial and industrial 21,497 13,466 6,795 1,259 745 43,762
Total gross loans and advances 141,068 76,007 27,982 3,644 3,431 252,132
Deduct: Unearned income (1,041 ) (892 ) - - - (1,933 )
Provisions for doubtful (1,204 ) (782 ) (144 ) (95 ) (15 ) (2,240 )
debts
Total net loans and advances 138,823 74,333 27,838 3,549 3,416 247,959
In Australia, net loans and advances grew by $20.1 billion, or 17.0% to $138.8
billion at September 30, 2003, with strong growth in housing lending and other
personal lending. Residential mortgage loans increased by $14.6 billion, or
21.3% to $83.0 billion, aided by a low interest rate environment and consumer
confidence. Financial, investment and insurance lending grew by $3.0 billion,
or 98.3% during 2003 to $6.1 billion, primarily in relation to growth in
securities under reverse repurchase agreements.
In Europe, net loans and advances decreased by $1.7 billion, or 2.3% to $74.3
billion at September 30, 2003; however, excluding the impact of exchange rate
movements, net loans and advances grew by 13.1%. Financial, investment and
insurance lending increased 42.4%, reflecting growth in Corporate &
Institutional Banking lending of securities under reverse repurchase agreements.
In New Zealand, net loans and advances grew by $2.3 billion, or 8.9% to $27.8
billion at September 30, 2003; however, excluding the impact of exchange rate
movements, net loans and advances grew by 7.5%. Growth was principally in
relation to residential mortgages up 19.0%, reflecting the success of products
such as GlobalPlus and Fly Buys housing loans, and increased other commercial
and industrial lending in Corporate & Institutional Banking.
In the United States, net loans and advances decreased by $3.6 billion, or 50.1%
to $3.6 billion at September 30, 2003; however, excluding the impact of exchange
rate movements, net loans and advances decreased by 38.7%, resulting primarily
from movements in end of period loan balances in relation to the Corporate &
Institutional Banking operations.
In Asia, net loans and advances decreased by $0.5 billion, or 12.5% to $3.4
billion at September 30, 2003, resulting from movements in end of period loan
balances in relation to the Corporate & Institutional Banking operations.
Asset quality disclosures, charge to provide and provisions for doubtful debts
Non-accrual loans
Gross 2003 Net Gross 2002 Net
Specific Specific
provision provision
$m $m (1) $m $m $m (1) $m
Australia 658 238 420 888 299 589
Europe 373 127 246 545 145 400
New Zealand 202 15 187 27 4 23
United States 145 41 104 128 51 77
Asia 1 1 - 2 1 1
Total 1,379 422 957 1,590 500 1,090
Percentage of risk-weighted assets 0.5 % 0.2 % 0.4 % 0.6 % 0.2 % 0.4 %
46
--------------------------------------------------------------------------------
2003 2002 2001
$m $m $m
Net non-accrual loans 957 1,090 1,204
Equity (parent entity interest) 24,407 23,184 23,489
Percentage of net non-accrual loans to equity 3.9 % 4.7 % 5.1 %
--------------------
(1) Includes specific provisions for impaired off-balance sheet credit
exposures.
Total non-accrual loans less specific provision for doubtful debts at September
30, 2003 were $957 million, a decrease of $133 million, or 12.2% from the 2002
balance of $1,090 million. This decrease reflects an improvement in asset
quality following a review of loan portfolios, most notably in relation to
Corporate & Institutional Banking, with a view to reducing their risk profile.
The balance also reflects the impact of a recovery of a large non-accrual loan
in Financial Services Europe.
Gross non-accrual loans (being, non-accrual loans before specific provision for
doubtful debts) at September 30, 2003 were $1,379 million, a decrease of $211
million, or 13.3% from the balance at September 30, 2002.
The Group's gross non-accrual loans to risk-weighted assets were 0.5% at
September 30, 2003, a decrease from 0.6% at September 30, 2002, primarily
reflecting an improvement in asset quality in relation to the Group's
balance sheet (refer comment noted above). The Australian component of the
gross non-accrual loans at September 30, 2003 was $658 million, decreasing $230
million, or 25.9% from 2002. In Europe, gross non-accrual loans decreased by
$172 million or 31.6% to $373 million; however, excluding the impact of exchange
rate movements, gross non-accrual loans decreased by 20.8%. In New Zealand,
gross non-accrual loans increased by $175 million to $202 million; however,
excluding the impact of exchange rate movements non-accrual loans increased by
656.6%, reflecting the status of a large corporate exposure in Corporate &
Institutional Banking. In the United States, gross non-accrual loans increased
by $17 million to $145 million; however, excluding the impact of exchange rate
movements, gross non-accrual loans increased 39.5%, reflecting the status of a
small number of large corporate exposure in Corporate & Institutional Banking.
The Group has specialist Credit Restructuring units operating in each region,
which continues to result in the earlier identification and workout of problem
loans.
Provisions for doubtful debts closing balance by region
2003 2002 2001 2000 1999
$m $m $m $m $m
Australia
General 955 971 1,140 1,056 995
Specific (1) 248 219 266 208 231
1,203 1,190 1,406 1,264 1,226
Europe
General 641 809 803 642 528
Specific (1) 141 169 222 178 164
782 978 1,025 820 692
New Zealand
General 130 135 154 137 132
Specific (1) 14 10 10 14 22
144 145 164 151 154
United States
General 56 75 85 383 377
Specific (1) 39 48 5 51 15
95 123 90 434 392
Asia
General 11 32 25 20 23
Specific (1) 5 2 5 3 26
16 34 30 23 49
Group
General 1,793 2,022 2,207 2,238 2,055
Specific (1) 447 448 508 454 458
Total provisions for doubtful debts 2,240 2,470 2,715 2,692 2,513
Percentage of risk-weighted assets 0.9 % 1.0 % 1.1 % 1.1 % 1.3 %
--------------------
(1) Excludes specific provisions for impaired off-balance sheet credit
exposures.
47
--------------------------------------------------------------------------------
Total provisions for doubtful debts, excluding off-balance sheet credit
exposures, held at September 30, 2003 were $2,240 million or 0.9% of
risk-weighted assets, compared with $2,470 million or 1.0% of risk-weighted
assets at September 30, 2002. Of the total provisions for doubtful debts at
September 30, 2003, the general provision represented $1,793 million or 0.7% of
risk-weighted assets.
Credit quality data
The Group has adopted a statistically-based provisioning methodology to
determine its general provision for doubtful debts (refer to notes 1(q) and 17
in the financial report). Under this methodology, the Group estimates the level
of losses inherent but not specifically identified in its existing credit
portfolios at balance date.
For retail lending (smaller-balance homogeneous loans), the general provision is
assessed at a portfolio level and is based on product loss rates, to make a
provision for losses inherent in the portfolio but not yet identified at balance
date. These rates are determined by reference to observed historical loss
experience for the relevant product types.
In respect of non-retail lending, the amount of the general provision is
determined by multiplying the customer's probability of default by the
loss given default. The probability of default is determined by the Group
's internal customer rating system. Internal ratings are assigned at
the customer level. This system utilises objective, verifiable external data,
such as external credit ratings, and is supplemented with an assessment of
economic and industry outlooks, conducted by the Group's discrete
specialist economics unit. The loss given default is the amount of an
individual loan at risk having regard to the level of collateral held against
that facility. The level of collateral held is determined on a loan-by-loan
basis, based on the Group's assessment of the loan security's
value at the time of loan application and any subsequent valuations.
The operation of the statistically-based provisioning methodology is such that
when individual loans are impaired, a specific provision will be raised by
making a transfer from the general provision for doubtful debts. The general
provision for doubtful debts is then re-established based on the remaining
portfolios of credit exposures applying the above methodology.
The specific provision for doubtful debts is established to cover all identified
doubtful debts and is recognised when there is reasonable doubt over the
collectability of principal and interest in accordance with the loan agreement
('an impaired loan'). Amounts provided for are determined by
specific identification or by management's determination of probable
losses for individual loans that are considered impaired in relation to loan
portfolios where specific identification is impracticable. All bad debts are
written-off against the specific provision for doubtful debts in the reporting
period in which they are classified as irrecoverable.
2003 2002 2001 2000 1999
$m $m $m $m $m
Provisions for doubtful debts
Specific (excluding off-balance sheet 447 448 508 454 458
credit exposures)
General 1,793 2,022 2,207 2,238 2,055
Gross non-accrual and restructured 1,379 1,596 1,736 1,471 1,573
loans
Charge to profit and loss account 633 697 989 588 581
Ratios (1) % % % % %
Provisions for doubtful debts at year
end as a percentage of year-end loans
(before provisions)
Specific 0.18 0.19 0.24 0.23 0.27
General 0.71 0.86 1.04 1.12 1.21
0.89 1.05 1.28 1.35 1.48
Provisions for doubtful debts at year
end as a percentage of year-end loans
and acceptances (before provisions)
Specific 0.16 0.18 0.22 0.20 0.24
General 0.66 0.79 0.95 1.00 1.07
0.82 0.97 1.17 1.20 1.31
Provisions for doubtful debts at year
end as a percentage of year-end
risk-weighted assets
Specific 0.18 0.18 0.20 0.19 0.23
General 0.71 0.82 0.86 0.94 1.04
0.89 1.00 1.06 1.13 1.27
48
--------------------------------------------------------------------------------
Ratios (1) 2003 2002 2001 2000 1999
% % % % %
Non-accrual and restructured loans as 0.55 0.68 0.82 0.74 0.93
a percentage of year-end loans
(before provisions)
Charge to profit and loss account as
a percentage of
Year-end loans 0.25 0.30 0.47 0.29 0.34
Year-end loans and acceptances 0.23 0.27 0.43 0.26 0.30
Average loans and acceptances 0.24 0.29 0.44 0.29 0.29
Year-end risk-weighted assets 0.25 0.28 0.38 0.25 0.29
--------------------
(1) Ratios exclude specific provisions for impaired off-balance sheet credit
exposures.
Provisioning coverage ratio
The provisioning coverage ratio (ie. the level of provisioning for non-accrual
loans) is determined having regard to all identifiable losses anticipated to
result from non-accrual loans. The identifiable losses anticipated is
management's determination of probable losses for individual loans that
are considered impaired. This considers all available information, including
future cash flows, the effective rate of interest, the secondary market value of
the loan and the fair value of collateral. The estimate is not determined over
the life of the loan, only at the point at which the loan is considered
impaired. Accordingly, the balance of the specific provision is maintained
equal to the total of all estimated losses.
To ensure that adequate provisions and write-offs are maintained, rigorous
credit monitoring procedures are in place to facilitate the early identification
of all doubtful debts and correspondingly, the estimated losses likely to arise.
Central to this process, all entities in the Group are required to formally
review their loan portfolio at least quarterly to ensure all doubtful debts have
been identified and loss estimations made. Provisions must be adjusted upwards
or downwards to equate to the current estimates of loss on doubtful loan
accounts.
The actual levels of specific provisioning set aside to cover estimated losses
on loans which are considered to be sufficiently non-accrual and impaired to
warrant raising of a provision are set out below:
2003 2002 2001
% % %
Specific provision coverage (1) 30.7 31.3 30.4
Total provision coverage (1) 163.4 161.0 160.5
--------------------
(1) Ratios include specific provisions for impaired off-balance sheet credit
exposures.
The general provision provides further coverage against these loans of 130.0% at
September 30, 2003, bringing total effective coverage to 163.4%.
Deposits and other borrowings
Total deposits and other borrowings (net of set-offs) increased by $3.3 billion,
or 1.6% to $210.1 billion at September 30, 2003, compared with $206.9 billion at
September 30, 2002. Excluding the effect of exchange rate movements during
2003, deposits and other borrowings increased by 8.8%. The increase was the
result of business growth, aided by the general increase in cash deposits with
investor sentiment causing investors to seek safe, lower risk investments.
Non-interest-bearing deposits at September 30, 2003 represent 6.2% of total
deposits compared to 6.6% at September 30, 2002.
In Australia, deposits and other borrowings increased by $19.6 billion or 20.6%
to $114.5 billion. In Europe, deposits and other borrowings decreased by $15.5
billion, or 21.2% to $57.6 billion; however, excluding the impact of exchange
rate movements, the decrease was 8.8%. In New Zealand, deposits and other
borrowings increased by $1.4 billion, or 6.5% to $22.3 billion; however,
excluding the impact of exchange rate movements, the increase was 5.4%. In the
United States, deposits and other borrowings decreased by $2.5 billion, or 17.2%
to $11.8 billion; however, excluding the impact of exchange rate movements, the
increase was 1.6%. In Asia, deposits and other borrowings remained flat.
Deposits and other borrowings for the Group as at September 30, 2003
Australia Europe New United Asia Total
Zealand States
$m $m $m $m $m $m
Deposits not bearing interest 5,724 5,868 930 529 2 13,053
(net)
On-demand and short-term 48,428 28,205 6,192 4,301 106 87,232
deposits
Certificates of deposit 15,902 11,433 3,363 503 - 31,201
Term deposits 26,653 12,119 10,236 2,548 3,861 55,417
Borrowings 17,754 2 1,540 3,947 - 23,243
Total deposits and other 114,461 57,627 22,261 11,828 3,969 210,146
borrowings
49
--------------------------------------------------------------------------------
Assets under management and administration
The assets of the Group as reported on the statement of financial position
include certain assets managed on behalf of others, for instance, where
statutory funds and registered schemes are required to be consolidated by the
Group under Australian Accounting Standards. Assets on trust relate to funds
held in trust by the Group's trust services businesses. The Group and
its associated entities also manage and perform administration for entities such
as superannuation funds and unit trusts, the assets of which do not form part of
the total assets recorded on the Group's statement of financial
position, as set out below:
2003 2002 2001
$m $m $m
By type
Assets under management 58,390 51,794 51,333
Assets under administration 9,414 7,677 6,055
Assets on trust 5,289 5,123 6,449
Total assets under management and administration 73,093 64,594 63,837
By region
Australia 66,225 60,138 59,865
Europe 4,322 1,835 1,774
New Zealand 2,030 2,151 1,777
Asia 516 470 421
Total assets under management and administration 73,093 64,594 63,837
By investor
Retail 56,554 52,073 53,112
Corporate 16,539 12,521 10,725
Total assets under management and administration 73,093 64,594 63,837
Total assets under management and administration increased by 13.2% to $73,093
million at September 30, 2003, compared with $64,594 million at September 30,
2002. The growth in total assets under management and administration reflects
funds flow and investment returns as a result of improved investment markets in
the six months to September 30, 2003.
50
--------------------------------------------------------------------------------
Risk management
Management of risk is fundamental to the business of being a financial services
provider and is an essential element of the Group's strategy. Financial
services organisations face an array of risks.
An enterprise-wide risk management model structure implemented throughout the
Group comprises a common policy framework and a set of controls to achieve
standardisation of risk/reward practices across the Group. Each business unit
is responsible for the identification and quantification of the particular risks
it is exposed to and for implementation of appropriate policies, procedures and
controls.
Overview and monitoring of this process throughout the Group is undertaken by
Risk Management. Risk Management comprises Credit Risk Management, Internal
Audit, Operational Risk and Insurance, Regulatory Compliance, Market Risk and
Prudential Control, Legal, Corporate & Institutional Banking Risk Management and
Wealth Management Risk Management.
Risk Management's role is to monitor and systematically assess the Group
's risk profile in existing and proposed business operations, and to
assist business units in the design and implementation of appropriate risk
management policies and strategies. Risk Management also works with the
businesses to promote awareness of the need to manage risk.
Developments continue to be made in the quantification of risks, and the
allocation of appropriate risk capital. Portfolio management methods are being
adopted to manage the Group's risk profile. Modelling to forecast
future risk management trends is being used increasingly to assist in decision
making. This will continue to increase in importance as the Group prepares to
implement Basel II across the various risk streams.
Risk Management prepares and submits the Group risk profile to the Board. This
document profiles the major recognised on-balance sheet and off-balance sheet
strategy, performance and operational risks, together with procedures for their
day-to-day responsibility, control and management.
A Risk Committee of the Board has been established to review in greater detail
the Group's risk and return appetite and oversee the Group's
overall control framework. This Risk Committee will have cross membership with
the Audit Committee.
The Risk Committee covers key elements of risk, including regulatory compliance,
operational risk, market risk and prudential control, internal audit, credit
risk, balance sheet management, and business risk management.
The framework is consistent with the proposed supervisory review process (Pillar
2) of Basel II.
Refer to page 65 for Risk Committee members, responsibilities and charter.
The majority of risk policy decisions are made within each business unit.
A Group Risk Forum, comprising executive and senior management, is the principal
risk policy decision making body within executive management.
This forum, reviews and approves the more strategic risk assessments, and is
supported by the Central Risk Management Committee, which has an operational
focus, and Business Risk Management Committees in each region and/or line of
business.
Major balance sheet risk areas and their management are outlined below, but many
other types of risks such as payment systems, computer systems fraud,
legislative compliance - environmental, business continuity/disaster recovery,
and e-commerce risks are managed throughout the Group.
Credit risk
Credit risk is the potential that a bank borrower or a counterparty will fail to
meet its obligations in accordance with agreed terms.
The Group's credit risk management infrastructure is framed to provide
sound management principles and practices for the maintenance of appropriate
asset quality across the Group.
Credit Risk Management, a division of Risk Management, is structured to develop
and maintain credit policies and key credit risk systems, provide monitoring and
reporting of asset quality and undertake the independent oversight of credit
portfolios across the Group.
The management of credit risk within the Group is achieved through a focus on
approval and monitoring of individual transactions together with analysis of the
performance of the various credit risk portfolios. Portfolio monitoring covers
such areas as industry or geographic concentrations and delinquency trends.
Establishing an appropriate credit risk environment
Significant credit risk strategies and policies are approved, and reviewed
annually, by the Board. Through such policies as borrower (single large
exposure) and industry concentration limit, the Board establishes the Group
's tolerance for risk. These policies are delegated to, and
disseminated under the guidance and control of, executive management.
The Group's credit policies, which are subject to ongoing review, are
documented and disseminated in a form that provides a consistent view of all
major credit policies supporting the credit operations of the Group.
For complex credit products and services, Credit Risk Management provides a
product profile that identifies and quantifies risks and establishes the means
of mitigating such risks.
Single large exposure policies and industry concentration limits are in place
across the Group. Overall composition and quality of credit portfolio exposures
are monitored and periodically reported to the Board, and, where required, to
the relevant regional supervisory authorities.
A key factor in the introduction of new products and services is the
identification of credit risk inherent in such products and services. This is
managed through a process requiring acceptance by all impacted areas of the
business and approval by Risk Management Committees prior to implementation.
51
--------------------------------------------------------------------------------
Operating under a sound credit granting process
The Group has established processes for the granting of credit. These include:
* establishment of overall credit limits at the
level of individual borrowers and counterparties, and groups of connected
counterparties for both on-balance sheet and off-balance sheet exposures;
* satisfaction with repayment capacity and
integrity of the counterparty;
* use of financial covenants;
* use of collateral;
* consideration of economic and industry
conditions; and
* an objective customer rating assessment system.
Supporting these expectations are defined and documented policies and processes
for the granting of credit. The key elements of the process include:
* clearly-defined authorities for the approving of
credit; and
* a system of overview of credit approvals by a
higher level of authority to ensure adherence to policies and good credit
practice.
During the year, the delegated authorities were further aligned to the
counterparty risk by the inclusion of customer ratings in the authority matrix.
The Group's credit rating system has been the hub of credit assessment
and related processes for a number of years. The system, based on probability
of default of a counterparty, has been implemented globally and provides
meaningful differentiation of credit risk and focus in pricing for risk.
For consumer credit, scoring solutions are in place and are supported by the
mandatory use of appropriate monitoring tools. These tools provide the
essential continual review of data integrity, scorecard performance and decision
strategies. Software to validate and verify input data is used globally to
support data integrity and reduce fraudulent activity.
Maintaining an appropriate credit administration, measurement and monitoring
process
Efficient and effective credit administration operations and adequate control
over back office procedures such as monitoring documentation, contractual
requirements, legal covenants and collateral, are recognised as being vitally
important aspects of the end-to-end credit process.
The Group assigns these responsibilities to various business units (ie.
Business, Personal, Cards, Payments, and Asset Finance and Fleet Management),
together with centralised structures supporting the branch network, and business
bankers, such as Customer Service and Operations.
Monitoring the condition of individual credits in the business units in the
Financial Services businesses and Corporate & Institutional Banking principally
rests with the customer-facing relationship managers, with overview by
supervising authorities.
Ensuring adequate controls over credit risk
There is a formal process, undertaken by specialist units, of independent
oversight of credit in each region across the Group. Periodic reporting is
submitted to executive management and the Audit Committee.
Additionally, credit processes and policy compliance are subject to internal
auditing and targeted credit reviews of specific business units or regions are
undertaken as considered appropriate.
On a regular basis, credits that are outside agreed arrangements are reported to
the appropriate levels of authority for attention and monitoring of actions
taken.
Credits showing adverse trends are passed to specialist units that undertake the
collections and recovery processes. The Group utilises skilled internal
resources supported by external secondments.
The role of supervisors
The Group is subject to supervision by APRA, together with the local supervisors
in each of the countries in which the Company or its subsidiary banks, carry on
business. In addition to regular dialogue, APRA undertakes periodic visits to
the Company to review asset quality and the operation of credit risk management
processes.
The Group also provides quarterly information to APRA, detailing large exposures
to individual customers or groups of related customers in excess of 10% of total
Tier 1 and Tier 2 capital. APRA imposes restrictions on the Group's
ability to accept large exposures.
Basel II
As a globally active financial institution, the Group aspires to the advanced
internal-ratings based approach under Basel II.
The Group has a Basel II program in place entrusted with developing the required
capability (processes, policies, systems and data) to achieve an internal
ratings based approach.
Refer to page 16 for a more detailed discussion of the Basel II Capital Accord.
Market risk
Market risk is the potential for losses to the Group resulting from adverse
changes in interest rates, foreign exchange rates, option volatility, equities
in the trading book and commodity prices in the financial markets in which the
Group operates.
Trading risk management
The Group has a comprehensive market risk control framework in operation.
Market Risk and Prudential Control is responsible for approving and monitoring
trading limits and the approval of new products to be used by the Markets unit.
This risk control function is fully segregated from Corporate & Institutional
Banking to ensure the independence necessary for prudent internal risk
management and to satisfy regulatory requirements.
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Value at risk (VaR)
Trading risk is managed using VaR limits, supplemented by stress testing,
scenario analysis and concentration limits, together with position and
sensitivity limits. The Markets unit has a VaR limit approved by the Board to
cover all trading activities. Limits for the management of trading risk are
delegated to regional or global management in accordance with the organisational
structure of the Markets unit. VaR is applied to all activities conducted by
Markets irrespective of whether mark-to-market or accrual accounting applies to
the specific activity.
VaR methodology
VaR is an estimate of potential losses resulting from shifts in interest rates,
currency exchange rates, option volatility, equity prices and commodity prices.
The estimate is calculated on an entire trading portfolio basis, including both
physical and derivative positions.
VaR can be calculated using a number of different methods. The Group's
VaR is predominantly calculated using historical simulation. Portfolio
transactions are repriced according to daily market shifts over two years of
market price history. The 99th percentile loss is reported as the VaR.
For example, a VaR exposure of $1 million means that on 99 days out of 100,
given the historical behaviour of rates, an overnight loss on the trading
portfolio should not exceed $1 million.
The Group's VaR should be viewed in light of the limitations of the
methodologies used. These limitations include:
* the historical data used to calculate VaR is not
always an appropriate proxy for current market conditions. The historical data
may cause the underestimation of losses in more volatile market conditions, or
the over-estimation of losses in placid market conditions;
* market rate movements may exceed the most extreme
rate movement in the historical data leading to significant underestimation of
losses;
* VaR methodology assumes that positions are held for
one day and no attempt is made to manage risk during that day. The positive or
negative impact of transactions intended to manage risk on the portfolio are
excluded from the loss estimate; and
* VaR is calculated at the close of business and
positions may change substantially during the course of the trading day.
Intra-day exposures are not subject to intra-day VaR calculations.
Given these limitations of VaR methodology, the Group employs supplementary risk
measures in the form of stress testing, to estimate losses resulting from
extreme market shifts, and position and sensitivity limits, which provide
specific controls on risk at a portfolio level.
The following table shows the Group's VaR for all member banks'
trading portfolios, including both physical and derivative positions. The
figures reflect the potential losses across products and regions in which the
Group operates.
Value at risk at 99% confidence interval 2003 2002
$m $m
Average value during reporting period
Foreign exchange risk 7 7
Interest rate risk 17 15
Volatility risk 4 4
Commodity risk 1 -
Diversification benefit (7 ) (7 )
Total 22 19
Minimum value during reporting period (1)
Foreign exchange risk 2 2
Interest rate risk 9 9
Volatility risk 2 2
Maximum value during reporting period (1)
Foreign exchange rate 20 26
Interest rate 25 23
Volatility risk 7 5
Commodity risk 1 1
--------------------
(1) The VaR numbers in these tables could be taken from
different days; hence, they are not additive.
Balance sheet (non-trading) risk
The Group Asset and Liability Management Committee (Group ALCO), under delegated
Board authority, sets policies in relation to the management of structural
balance sheet exposures. These exposures include structural interest rate risk,
structural foreign exchange risk and liquidity risk. The Group's global
structural balance sheet risk is monitored against approved policies by Group
Balance Sheet Management and reported on a monthly basis to Group ALCO.
Wealth Management and each regional bank in the Group has an Asset and Liability
Management Committee (ALCO) which is delegated the responsibility for managing
local structural balance sheet risks in accordance with Group Balance Sheet
Management policies. Group ALCO supervises the management of these local
structural risks and monitors activity for compliance with Group policies.
Structural interest rate risk
In carrying out its business activities, each regional bank and non-banking
entity in the Group strives to meet customer demands for products with various
interest rate structures and maturities. Sensitivity to interest rate movements
arises from mismatches in the repricing dates, cash flows and other
characteristics of assets and liabilities. As interest rates and yield curves
change over time, the size and nature of these mismatches may result in a loss
or gain in earnings.
Structural interest rate risks arise mainly in the Group's banking
operations. The primary management objective is to limit the extent to which net
interest income could be impacted by an adverse movement in interest rates.
Each regional bank's ALCO is responsible for managing the structural
interest rate risk within the region, in accordance with approved Group policy.
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Structural interest rate risk is calculated using balance sheet simulation
processes, which are undertaken across the Group's banking operations.
The balance sheet simulation process is based on planned product volumes and
margins, which are regularly updated to reflect the Group's latest views
on business projections and interest rate environments.
The results of balance sheet simulations in the Group's banking
operations, together with other balance sheet risk management information and
strategies, are presented and reviewed by each regional bank ALCO and the Group
ALCO on a monthly basis and at scheduled Board meetings. Similarly, Wealth
Management's balance sheet risk management information and strategy are
presented and reviewed by Wealth Management ALCO on a monthly basis.
The table below presents a summary of the aggregated structural earnings at risk
relating to non-trading assets and liabilities. Based on the structural
interest rate risk position at balance date, the table shows the possible impact
on net interest income, for the year ending September 30, 2004, under a rising
or declining interest rate environment.
The Group applies a wide range of interest rate scenarios in measuring
structural interest rate risk. These interest rate scenarios are derived using
estimates of volatility to generate a range of potential outcomes around the
market implied yield curve. This provides the ability to derive a statistical
distribution of potential movements in net interest income. To capture a wide
range of potential outcomes, structural interest rate risk is measured to a 99%
confidence interval. The Group also measures potential movements in the market
value of equity of the banking operations using a 200 basis point change in the
market interest rates.
The impact of interest rate movements on the net interest income of life
insurance and funds management entities is not incorporated within the table
below. However, interest rate movement is one of the factors taken into account
in determining the change in net market value of life insurance and funds
management entities when applying Australian Accounting Standard AASB 1038
"Life Insurance Business".
Forecast effect on net Forecast effect on net
interest income 2004 (1) interest income 2003 (1)
Rising Declining Rising Declining
rates rates rates rates
$m $m $m $m
Australian dollars 39 (18 ) 67 (44 )
Non-Australian dollars (23 ) 12 21 (8 )
--------------------
(1) Represents the forecast effect on net interest
income for the year ending September 30, 2004 and the prior year comparative.
The exposure expressed in non-Australian dollars is the net exposure of offshore
banking and non-banking entities. Structural interest rate exposure in some
currencies may be biased towards rising interest rates, whilst in others may be
biased to declining interest rates.
Structural foreign exchange risk
Structural foreign exchange risk arises from investments in the Group's
foreign branches and controlled entities. Both earnings and capital are exposed
to movements in foreign exchange rates as the result of these investments.
Reported earnings and equity are exposed to movements in exchange rates as a
result of the need to translate earnings and net assets of the foreign
operations into the Australian dollar consolidated financial statements.
This exposure of reported earnings and equity to movements in exchange rates is
sometimes referred to as an accounting or translation exposure which, in the
absence of any long-term realignment in exchange rates, has no impact on
underlying economic exposures.
The policy of the Group is that the net asset position of integrated foreign
operations is to be fully hedged, whilst the net asset position and earnings of
offshore subsidiaries and self-sustaining foreign operations are not to be
hedged. The rationale for this approach is that the Group bases its hedging
decisions on economic considerations and not on the potential impact which
short-term currency fluctuations may have on reported net assets and earnings.
The net assets of the Group's integrated foreign operations are
denominated in US dollars. As at September 30, 2003 the net assets of US$132
million were fully hedged.
Real foreign exchange exposures, on the other hand, arise independently of the
accounting process. Such transaction exposures arise from the risk that future
cash flows will be converted to Australian dollars at less favourable rates than
at present. Such cash flows could result from the repatriation of profits or
capital back to the Company. The policy of the Group is to fully hedge these
exposures at the time of commitment, if they are of a material nature. Hedging
of transaction exposures relating to offshore acquisitions and divestments is
assessed on a case-by-case basis.
Liquidity risk
Liquidity risk is the risk that the Group is unable to service its cash flow
obligations today or in the future. Liquidity within the Group is managed in
accordance with policies approved by the Board, with oversight from the regional
bank ALCOs, Wealth Management ALCO and Group ALCO.
Throughout the year, the Group managed liquidity risk by a combination of
positive cash flow management, the maintenance of portfolios of high quality
liquid assets, and diversification of its funding base. In accordance with the
requirements of APRA, cash flow liquidity risk is measured and managed in the
Group's banking entities on a cash flow basis. Each regional bank is required
to monitor liquidity under both 'going concern' and 'name crisis' scenarios, and
cash flow mismatch limits have been established to limit the Group's liquidity
exposure. In addition, regional banks are required to hold liquid asset
portfolios to meet any unexpected cash flow requirement.
Regulatory authorities in some countries in which the Group operates may impose
additional requirements to ensure that liquidity is managed prudently. These
requirements may require the holding of a reserve deposit account with the
central bank or the holding of a portfolio of liquid securities.
Liquidity is managed on a regional basis, with day-to-day responsibility
residing with regional banks, offshore branches and regional treasury operating
divisions of the Group.
A contingency plan has also been established for management of an escalated
liquidity requirement where the Group experiences either restricted access to
wholesale funding, or a large increase in withdrawal of funds.
Refer also to 'liquidity and funding' on page 39.
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Life insurance and funds management market risk
The life insurance business is exposed to market risk arising from adverse
movements in market prices affecting fee income on investment-linked policies
and the returns obtained from investing shareholder funds held in each life
company. Market risk is also affected by mismatches between assets and the
guaranteed returns offered on some classes of policy, which may not have been
effectively hedged through the matching of assets.
The Group attempts to, wherever possible, segregate policyholder funds from
shareholder funds. Appropriate investment mandates are then developed for each.
The Group (for investment mandates set for assets in policyholder funds)
attempts to match asset characteristics with the nature of policy obligations;
however, certain clauses included in policy and sales documents, regulatory
constraints or the lack of suitable investments may affect this.
The majority of the policyholder assets are held for investment-linked policies
where the policyholder bears the risk of movements in the market value and
determines the allocation of the assets. Should markets fall, fee income will
decrease as it is based on the amount of assets invested.
Market risk in the life insurance and funds management businesses also arises
from movements in the value of the controlled entities of National Australia
Financial Management Limited. The economic value of these assets fluctuates
based on a number of factors including interest rates, retention rates and fee
income.
Country risk
Sound international credit practices require not only commercial credit analysis
of the counterparty, of the type normally associated with domestic credit, but
also an assessment of country risk. Country risk arises from economic,
financial, political or social factors within a country, which may affect a
counterparty's ability and willingness to repay loans made by the Group.
This consideration is applied notwithstanding the fact that the counterparty's
own credit standing domestically might not have been impaired.
The Group has an established process for measuring country risk, which is used
in determining and monitoring its cross border exposures. This includes setting
prudential cross border limits based upon the Group's risk appetite for
each country. Among other things, these limits are reflective of a country's
credit grading, size, level of foreign exchange reserves and ability
to meet financial obligations.
Limits are allocated into maturity time bands, which vary according to the risks
of the country concerned and the outlook for the economic/political landscape.
Exposures are monitored daily. The Board reviews these individual country
limits on a periodic basis.
Cross border outstandings by industry category
The following table analyses the aggregate cross border outstandings due from
countries other than Australia where such outstandings individually exceed 0.75%
of the Group's assets. For the purposes of the annual financial report,
cross border outstandings are based on the country of domicile of the
counterparty or guarantor of the ultimate risk, and comprise loans, balances due
from banks, acceptances and other monetary assets. Local currency activities
with local residents by foreign branches and subsidiaries are excluded.
Bank and Other Total % of Commitments
other commercial Group including
financial and total irrevocable
institutions industry assets letters of
credit
$m $m $m $m
As at September 30, 2003
Canada 922 1,159 2,081 0.5 -
Germany 2,166 1,281 3,477 0.9 1,807
United Kingdom 2,761 1,607 4,368 1.1 4,980
United States 1,956 2,748 4,704 1.2 10,913
As at September 30, 2002
Germany 5,132 2,075 (1) 7,207 1.9 3,748
United Kingdom 4,358 1,507 5,865 1.6 6,686
United States 1,596 3,540 5,136 1.4 11,916
As at September 30, 2001
Germany 6,164 874 7,038 1.9 3,660
United Kingdom 4,007 1,153 5,160 1.4 5,882
Japan 4,053 249 4,302 1.1 129
United States 2,056 2,589 4,645 1.2 10,776
--------------------
(1) Includes $79 million relating to governments.
Operational risk
Operational risk is the risk of loss resulting from inadequate or failed
processes, people, systems, or from external events.
Individual business units own and are responsible for the identification,
assessment and mitigation of their risk profile. Various reports are produced
at executive management and Board level for their information and to assist in
monitoring and where necessary determining appropriate actions.
The Operational Risk and Insurance function is responsible for:
* operational risk policy development;
* operational risk advice;
* business continuity planning advice;
* support in risk evaluation;
* operational risk reporting; and
co-ordination of the risk assessment and approval
process of new and re-engineered products and processes to ensure change
initiatives are robustly assessed from a risk perspective.
To enhance the Group's ability to identify, measure and manage
operational risk, a systematic framework and methodology for operational risk
management has been developed and implemented. The methodology includes risk
modelling and risk evaluation. Risk modelling is the statistical estimation of
operational risk exposure based on internal and external historical loss
experience. Risk evaluation involves the quality mapping and appraisal of the
internal control environment based on end-to-end evaluation criteria.
55
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Regulatory compliance risk
Regulatory compliance risk is the risk that the Group, or any business unit,
fails to meet the requirements or expectations of regulatory authorities or
supervisors responsible for enforcing legislation, regulations or industry codes
and standards, potentially resulting in financial loss, restrictions on
operating licences, reputational damage, and customer and stakeholder
dissatisfaction. Regulatory compliance risk can also arise where the Group
fails to anticipate and effectively manage the impact of regulatory change on
its operations.
The Group aims to pro-actively manage and meet the obligations imposed on it
across all business lines, customer segments and products in the jurisdictions
in which it operates.
The Group's regulatory compliance policy and operating framework set out
the underlying compliance management expectations and control standards. The
framework being enhanced to ensure the delivery of practical compliance
processes, systems and tools to assist the business in tailoring and embedding
its compliance obligations into core operations.
Each business unit is responsible for the implementation and maintenance of
those controls necessary to meet and satisfy its regulatory compliance
obligations. Regulatory compliance teams work in each line of business
assisting management to fulfil these responsibilities and to address the impact
of regulatory change on business practices.
Fostering a positive compliance culture throughout all levels of the Group is
recognised as an integral part of excellent relationships with customers and
regulators as well as good corporate governance.
Life insurance risk
Life insurance risk occurs when the experience of mortality and morbidity claims
compares adversely to that assumed when pricing life insurance policies.
Factors affecting this include the trend of future claims and incidence of
actual claims, unforeseen diseases or epidemics, and longer than assumed
recovery periods for morbidity claims. Life insurance risk also occurs when the
mortality and morbidity experience is higher than the assumptions used to
determine the fair value of the life insurance business.
These risks are controlled by ensuring that the Group's underwriting
policies and procedures adequately identify any potential risk, while retaining
the right to amend premiums on risk policies where appropriate, and through the
effective use of reinsurance. The experiences of the Group's life
insurance business and that of the industry are reviewed on an annual basis to
ensure that the risks continue to be effectively managed.
Disclosure controls and procedures and internal control over financial reporting
Under the requirements of the United States Sarbanes-Oxley Act of 2002, the
Chief Executive Officer and the Chief Financial Officer must each review and
evaluate the Group's disclosure controls and procedures, including
internal control over financial reporting.
This evaluation was performed as at September 30, 2003, under the supervision of
and with the participation of the Company's management, including the
Chief Executive Officer and the Chief Financial Officer. Based on that
evaluation, the Company's management, including the Chief Executive
Officer and Chief Financial Officer, concluded that the Company's
disclosure controls and procedures were effective as at September 30, 2003.
There have been no changes in the Company's internal control over
financial reporting that occurred during the year that has materially affected,
or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
Transactions with related and other non-independent parties
In the year to September 30, 2003, the Group had a number of related party
transactions (refer to note 52 in the financial report). These transactions
were made in the ordinary course of business and were made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons or charged on the basis of
equitable rates agreed between the parties. These transactions did not involve
more than the normal risk of collectability or present other unfavourable
features.
Other non-independent parties are parties that are able to negotiate terms of
transactions that are not on an arm's length basis, but do not meet the
definition of a related party. The Group is not aware of any relationships or
transactions with such parties that would materially affect its financial
position or results of operations.
Risk factors
Business conditions and general economy
As an international financial services group, the Group's businesses are
affected by the external environment in the markets in which it operates. The
profitability of the Group's businesses could be adversely affected by a
worsening of general economic conditions in Australia, New Zealand, the UK, the
US, or elsewhere, as well as by foreign and domestic trading market conditions.
Such factors could also adversely affect the credit quality of the Group
's on-balance sheet and off-balance sheet assets. An economic downturn
can impact the Group's results and financial position by affecting
demand for the Group's products and services. Such a downturn,
international disruption, dispute or event, or significantly higher interest
rates, could impact the credit quality of the Group's counterparties,
increasing the risk that a greater number of the Group's customers would
default on their loans or other obligations to the Group, or would refrain from
seeking additional credit.
For a discussion of the Group's economic outlook, refer to '
economic outlook' on page 19.
Competitive forces
The Group faces intense competition in all markets in which it operates
For a discussion of the competitive factors facing the Group, refer to '
competition' on page 13.
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Government policies and economic controls
The Group's businesses and earnings are affected by the fiscal or other
policies that are adopted by various regulatory authorities of the Australian
Commonwealth Government, foreign governments and international agencies. The
nature and impact of future changes in such policies are not predictable and are
beyond the Group's control.
Fluctuations in currency exchange rates
As the Group prepares its accounts in Australian dollars, changes in currency
exchange rates, particularly between the Australian dollar and the British pound
or US dollar, may have an adverse effect on the earnings that it reports.
For a discussion of the Group's risk management procedures, including
the management of currency risk, refer to 'risk management' on
page 54.
Credit risk
The Group's provisions for doubtful debts provide for risks of losses
inherent in loans and advances. Estimating losses inherent in the loan
portfolio is of its very nature uncertain and the accuracy of those estimates
depends on many factors, including general economic conditions, rating
migration, structural changes within industries that alter competitive
positions, and other external factors such as legal and regulatory requirements.
For a discussion of the Group's risk management procedures, including
the management of credit risk, refer to 'risk management' on
page 51.
Market risk
The Group's earnings are also subject to market risk exposures,
principally changes in market interest and foreign exchange rates, equity and
commodity prices, and associated financial derivatives. The Group has in place
stringent controls and processes governing market risk activities together with
oversight at the appropriate level of management.
For a discussion of the Group's risk management procedures, including
the management of market risk, refer to 'risk management' on page 52.
Operational risk
As a financial services group, the Group is exposed to a number of other risks
relating to people, processes, and systems and from external events. These
risks are identified, measured and managed by the co-ordinated efforts of the
individual business units and the Operational Risk unit, through the rigorous
application of the Group's systematic risk framework and methodology.
For a discussion of the Group's risk management procedures, including
the management of operational risk, refer to 'risk management'
on page 55.
Control systems and programs
The implementation of control systems and programs is dependent upon factors
such as the Group's ability to acquire or develop necessary technology
or systems, its ability to attract and retain qualified personnel, the
competence and performance of employees, the co-operation of customers, or third
party vendors.
Critical accounting policies
The reported results of the Group are sensitive to the accounting policies,
assumptions and estimates that underlie the preparation of its financial
statements. The Group's annual financial report has been prepared in
accordance with Australian GAAP.
The Group's principal accounting policies are disclosed in note 1 to the
financial report and in note 58 with respect to policies that differ from US
GAAP.
Certain of these policies are considered to be critical to the representation of
the Group's financial performance and position, since they require
difficult, subjective, or complex judgements. The following disclosure is
intended to provide an enhanced level of understanding of these judgements and
their impact on the Group's financial statements. These judgements
necessarily involve assumptions or estimates in respect of future events, which
can frequently vary from what is forecast. However, the Company believes that
its financial statements and its ongoing review of the estimates and assumptions
utilised in preparing those financial statements, are appropriate to provide a
true and fair view of the Group's financial performance and position
over the relevant period.
Management has discussed the development and selection of its critical
accounting policies with the Audit Committee and the Committee has reviewed the
Group's disclosure relating to them in this financial review.
The following are considered critical accounting policies of the Group.
Provision for doubtful debts
Under Australian GAAP, loans and advances are carried at their recoverable
amount, representing the gross value of the outstanding balance adjusted for
provisions for doubtful debts and unearned income. To best meet this
requirement, the Group has adopted a statistically-based provisioning
methodology for its general provision for doubtful debts, which is consistent
with other large financial institutions in Australia and the US. Under this
methodology, the Group estimates the level of losses inherent, but not
specifically identified, in its existing credit portfolios at balance date. The
statistical provisioning methodology is applied to existing credit portfolios,
including loans and advances drawn down in the current year.
In applying the statistically-based provisioning methodology, two key inputs are
used in a statistical model: probability of default and the level of collateral
held.
In respect of non-retail lending, the amount of the general provision is
determined by multiplying the customer's probability of default by the
loss given default. The probability of default is determined by the Group
's internal customer rating system. Internal ratings are assigned at
the customer level. This system utilises objective, verifiable external data,
such as external credit ratings, and is supplemented with an assessment of
economic and industry outlooks, conducted by the Group's discrete
specialist economics unit. A small degree of subjective data is input into the
model in relation to an assessment of the borrower's management and any
changes in this assessment would be unlikely to result in a material change to
the Group's general provision. The key driver of changes in the general
provision for non-retail lending is changes in credit quality.
57
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The loss given default is the amount of an individual loan at risk having regard
to the level of collateral held against that facility. The level of collateral
held is determined on a loan-by-loan basis, based on the Group's
assessment of the loan security's value at the time of loan application
and any subsequent valuations. Changes in the level of collateral held will
impact the loss given default and, in turn, the determination of the general
provision.
For retail lending (smaller-balance homogeneous loans), provisions are assessed
at a portfolio level and are based on product loss rates, to make a provision
for losses inherent in the portfolio but not yet identified. These rates are
determined by reference to observed historical loss experience for the relevant
product types and are the key driver of changes in the general provision for
retail lending.
For retail lending, historical collateral levels have directly influenced
product loss rates. For example, mortgage lending has historically had high
levels of collateral. Product loss rates, based on this history, are therefore
lower than for unsecured lending, such as credit cards.
The Group undertakes periodic sensitivity analysis to assess the impact of
deterioration in credit risk on the credit portfolio. The Group considers the
key inputs and assumptions used in the calculation of the general provision for
doubtful debts to be reasonable and supportable in the existing economic
environment.
In addition to the general provision, specific provisions for doubtful debts are
recognised once a loan is classified as impaired to cover any potential losses
inherent in the loan. A loan is considered impaired when there is reasonable
doubt over the collectability of principal and interest in accordance with the
relevant loan agreements. Amounts provided for are determined by specific
identification or by management's determination of probable losses for
individual loans that are considered impaired in relation to loan portfolios
where specific identification is impracticable.
Upon identification of a loan requiring a specific provision (that is an
impaired loan), the respective loan's general provision balance is
transferred to the specific provision. An assessment is then made by management
as to whether the transferred balance is adequate to cover the estimated credit
loss at balance date on that impaired loan.
For larger-balance, non-homogeneous loans that have been individually determined
to be impaired, the level of specific provision required is based on an
assessment of the recoverability of each loan. This takes into account
available evidence on the collateral and other objective and subjective factors
that may impact the collectability of the outstanding loan principal and
interest. Management judgement is required in determining the valuation of the
loan collateral. Independent valuations are frequently obtained by management
to provide expert advice.
Each portfolio of smaller-balance, homogenous loans, including credit cards and
personal loans, is collectively evaluated for impairment. The Group uses both
dynamic modelling and specific provisioning at the account level. Management
considers overall portfolio indicators, including historical credit losses and
delinquency rates, in determining the level of specific provision required for
each portfolio.
The historical experience of the Group has shown that management's
judgement of the specific provisions required in the past has been appropriate.
The Group considers the assumptions used in the calculation of the specific
provision for doubtful debts to be reasonable and supportable in the existing
economic environment.
Valuation of life insurance controlled entities
The Group is required by Australian Accounting Standard AASB 1038 "Life
Insurance Business" to measure all the assets and liabilities of its
life insurance controlled entities at net market value. Movement in the excess
of net market value over net assets of life insurance controlled entities is
recognised in the profit and loss account as an unrealised gain or loss.
Directors' bi-annual valuations of the life insurance controlled
entities are carried out by management using industry-accepted actuarial
valuation methodologies. Value is determined in three distinct areas, being
value of:
* each entity's net assets;
* future profits from current business contracts; and
* future profits from future (yet to be written)
business contracts.
In determining the value of all future profits to emerge from the life insurance
controlled entities, careful consideration is given to both future business and
economic assumptions affecting the business. Many of these assumptions require
significant judgement because they are dependent on a number of factors that
cannot be precisely determined at the time the valuation is made.
The key business assumptions used relate to sales (volume and growth), profit
margin squeeze, discontinuances, expenses and claims. These assumptions are
determined after an examination of the experience of the Group's life
insurance controlled entities, their short-term and long-term business plans,
and industry experience and expectations.
The key economic assumptions used relate to investment earnings, risk discount,
inflation and tax rates. These assumptions are determined after an examination
of current market rates and future market expectations. In addition, the
overall assumptions set and their impact on value are reviewed against
transactions in the market place, current prices of listed entities and other
publicly-available information.
Changes in management's assessment of key business factors and economic
conditions (global, regional and sector specific) in the future would affect the
valuation of life insurance controlled entities. As a result, the carrying
value of life insurance controlled entities recorded in the statement of
financial position and the movement in the excess of net market value over net
assets of life insurance controlled entities recorded in the statement of
financial performance could be materially different in the future. The Group
considers the assumptions used in the valuations to be reasonable and
supportable in the existing economic environment. Further, the valuations are
supported by discounted cash flow valuations prepared by Tillinghast-Towers
Perrin and the key business and economic assumptions are approved by a committee
of senior management and a non-executive director of the Wealth Management
holding company (National Wealth Management Holdings Limited). Recommendation
of the final valuation is then made to the Wealth Management audit and
compliance committee and the board of directors of the Wealth Management holding
company.
Key valuation results and assumptions are disclosed in note 25 to the financial
report.
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Life insurance policy liabilities
Policy liabilities in the Group's statement of financial position and
the change in policy liabilities disclosed as an expense have been calculated
using the Margin on Services methodology in accordance with guidance provided by
the Life Insurance Actuarial Standard Board's Actuarial Standard AS 1.03
"Valuation of Policy Liabilities".
Policy liabilities for investment-linked business are calculated using the
accumulation method. The liability is generally the accumulation of amounts
invested by policyholders plus investment earnings less fees specified in policy
contracts. Deferred acquisition costs are offset against this liability.
Policy liabilities for non-investment-linked business are measured mainly using
the projection method, which is based on the net present value of estimated
future policy cash flows. Future cash flows incorporate investment income,
premiums, expenses, redemptions and benefit payments (including bonuses).
The measurement of policy liabilities is subject to actuarial assumptions, which
involve complex judgements. Assumptions made in the calculation of policy
liabilities at each balance date are based on best estimates at that date. The
assumptions include the benefits payable under the policies on death,
disablement or surrender, future premiums, investment earnings and expenses.
Best estimate means that assumptions are neither optimistic nor pessimistic but
reflect the most likely outcome. The assumptions used in the calculation of the
policy liabilities are reviewed at each balance date.
Economic assumptions are based on the prevailing interest rate and economic
environment. Other assumptions are based on company experience, or where this
is insufficient, industry experience. A summary of the significant actuarial
methods and assumptions used is contained in note 57 to the financial
statements. Many of these assumptions are based on actuarial tables published
by the Institute of Actuaries of Australia.
The Group considers the assumptions used in the calculation of life insurance
policy liabilities to be reasonable and supportable in the existing economic
environment. Changes in actual experience and management's assessment
of economic conditions (global, regional and sector specific) in the future
could affect the level of life insurance policy liabilities recorded. As a
result, the amount of policy liabilities recorded in the Group's
statement of financial position and the change in policy liabilities recorded in
the statement of financial performance could be different in the future.
Defined benefit superannuation and pension arrangements
The Group maintains several defined benefit superannuation and pension
arrangements, details of which are given in note 48 to the financial report. In
accordance with applicable accounting rules, the Group does not consolidate the
assets and liabilities associated with these defined benefits plans. Instead,
the Group recognises a prepaid asset for contributions the Group has made to the
pension plan in excess of pension expense. The measurement of the prepaid asset
and the annual pension expense involves actuarial and economic assumptions. The
four key variables used in pension accounting relate to the size of the employee
and pensioners population, actuarial assumptions, expected long-term rate of
return on plan assets, and the discount rate. The annual pension expense and
balance sheet position for the Group is currently most sensitive to discount
rate and return on asset assumptions.
The discount rate is used to determine the present value of the Group's
future benefit obligations. It is an assumption that reflects the rates
available on long-term high-quality fixed-income debt instruments.
The Group calculates the expected return on plan assets based on the balance in
the pension asset portfolio and the expected long-term rate of return on that
portfolio. The expected long-term rate of return is designed to approximate the
long-term rate of return actually earned on the plan assets over time and is
generally held constant so that the pattern of income/expense recognition more
closely matches the stable pattern of services provided by the Group's
employees over the life of the pension obligation.
There is an acceptable range in which the estimates for assumptions can validly
sit. If different estimates within that range had been chosen, the cost
recognised in the profit and loss account and balance sheet position could be
significantly altered.
In relation to the actuarial assumptions such as mortality rate, turnover rate,
retirement rate, disability rate and the rate of compensation increases, because
these factors do not tend to change materially over time, the range of actuarial
assumptions is generally narrow.
Changes in actuarial assumptions, discount rate and return on asset assumptions
would affect the prepaid pension cost asset and pension expense and, in certain
circumstances, require the recognition of a pension liability. The Group
considers the assumptions used in the calculation of the prepaid pension cost
asset and pension expense to be reasonable and supportable in the existing
economic environment. Further, the assumptions were considered reasonable by
the actuaries of the respective defined benefit pension plans.
Carrying value of plant and equipment, including application software
The asset class plant and equipment reported on the Group's statement of
financial position includes leasehold improvements, furniture, fixtures and
fittings and other equipment, data processing equipment, and application
software. The largest balance of these items at September 30, 2003 related to
application software.
Plant and equipment is carried at the lower of cost less accumulated
depreciation/amortisation and recoverable amount. Recoverable amount is the net
amount expected to be recovered through the net cash flows arising from an asset
's continued use and subsequent disposal. These cash flows are not
discounted. Any write-down to recoverable amount is recognised in the Group
's profit and loss account.
The Group assesses the value of plant and equipment each six months. If
impairment indicators are identified, management makes an assessment about
whether the carrying value of such assets remains fully recoverable. Where a
group of assets work together to support the generation of cash inflows, such as
corporate infrastructure assets (eg. enterprise application software),
recoverable amount is assessed in relation to the cash-generating unit in which
those assets operate.
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Changes in management's assessment of whether indicators of impairment
have occurred and the recoverable amount in relation to impaired plant and
equipment would affect the carrying value of plant and equipment. The Group
considers the impairment identification process in place to be sound and the
assumptions used in the valuation of recoverable amount to be reasonable and
supportable in the existing economic environment.
Accounting developments
The following is a summary of the impact of recently issued accounting standards
and other developments that are expected to have a material effect on the Group
's future financial performance or position:
International Financial Reporting Standards
In July 2002, the Financial Reporting Council in Australia formally announced
that Australian reporting entities would be required to comply with accounting
standards equivalent to those set by the International Accounting Standards
Board (IASB). These standards are referred to as International Financial
Reporting Standards (IFRS). The adoption of IFRS is expected to have a material
effect on the Group's financial performance and position.
The Group will be required to adopt these standards for the financial year
commencing October 1, 2005. The Group continues to evaluate the areas most
impacted by adoption. IFRS frequently require application of fair value
measurement techniques. This will potentially introduce greater volatility to
the Group's financial performance. Hedge accounting will be a major
area of activity affected by the proposed changes, together with life insurance
accounting. Several important IFRS, including standards on hedging and life
insurance accounting, are not yet finalised and as a consequence it is difficult
to assess the full impact of the changes upon the Group's financial
performance and financial position at this time.
A full suite of the IFRS equivalent standards to be applied by Australian
reporting entities for reporting periods beginning on or after January 1, 2005
is expected to be published by the AASB around April 2004. The Group continues
to monitor these developments.
Variable interest entities
In January 2003, the Financial Accounting Standards Board (FASB) in the US
issued FASB Interpretation no. 46 "Consolidation of Variable Interest
Entities" (FIN 46). FIN 46 addresses consolidation of variable interest
entities. Variable interest entities have one or both of the following
characteristics:
* equity that is not sufficient to finance its
activities without additional financial support from other parties; and/ or
* equity investors lack the ability to make decisions
about the entity, or do not absorb expected losses or expected residual returns
of the entity.
The provisions of FIN 46 apply immediately to variable interest entities where
the Group obtained an interest in or created after January 31, 2003. For
variable interest entities that the Group acquired before February 1, 2003, FIN
46 applies in the first financial year ending after December 15, 2003.
The Group has applied FIN 46 to variable interest entities that an interest was
obtained in or was created after January 31, 2003. As a result of this
application, Medfin Trust has been consolidated under US GAAP (refer to note 58
(m) in the financial report for additional information).
The Group is evaluating the impact of applying FIN 46 to existing variable
interest entities. This analysis is not yet complete and may result in the
consolidation of additional variable interest entities under US GAAP in future
reporting periods that have not been previously consolidated.
Non-GAAP financial measures
The following is a summary of the key non-GAAP financial measures used
throughout the annual financial report:
Cash earnings
Cash earnings is a key performance measure and financial target used by the
Group. Dividends paid by the Company are based on after-tax cash earnings
(adjusted for significant items). Cash earnings per share is a key performance
measure used in the investment broking community, as well as by those Australian
peers of the Group with a similar business portfolio. Management considers that
the exclusion of the intangible and other items detailed below from net profit
is a prudent and useful indicator of the Group's underlying operating
performance. Cash earnings does not refer to, or in any way purport to
represent the cash flows, funding or liquidity position of the Group. It does
not refer to any amount represented on a statement of cash flows.
Adjustments are made between net profit and cash earnings as follows:
Outside equity interest - this reflects the allocation of profit to
minority interests in the Group, and is adjusted from net profit to reflect the
amount of net profit that is attributable to ordinary shareholders.
Distributions - this reflects payments to holders of National Income
Securities, Trust Units Exchangeable for Preferred Shares and Trust Preferred
Securities, and is adjusted from net profit to reflect the amount of net profit
that is attributable to ordinary shareholders.
Movement in net market value of investments in life insurance controlled
entities - relates to the movement in net market value (including the
value of intangible assets) of investments in life insurance controlled entities
recorded on the statement of financial position in accordance with Australian
Accounting Standards. As it relates to an intangible asset, management believes
it is prudent to isolate this amount from the underlying operating result. It
is separately identified and discussed in detail. Management further wishes to
separate this, as the method for accounting for the value of life insurance
controlled entities is not comparable on an international basis.
Goodwill amortisation - relates to the straight-line method of
amortising goodwill (an intangible asset recorded on the statement of financial
position) in accordance with Australian Accounting Standards. Management
generally do not regard goodwill amortisation expense as being useful
information in analysing investments. As it relates to an intangible asset,
management believes it is prudent to isolate this amount from the underlying
operating result.
Refer to page 6 for the reconciliation of cash earnings to net profit.
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Significant items
Significant items including significant revenue, significant expenses and the
associated income tax expense is defined as follows. When the revenue or an
expense from ordinary activities is of such a size, nature or incidence that its
disclosure is relevant in explaining the financial performance of the entity for
the reporting period and its disclosure is not otherwise required under
Australian Accounting Standards, its nature and amount must be disclosed
separately either on the face of the statement of financial performance or in
the notes to the financial report.
Management believes that the inclusion of these items distorts the underlying
operating results of the Group and causes difficulty in identifying underlying
performance trends and issues. Through the clear separation and identification
of these items, the Group ensures that they are identified and discussed in
full, as well as ensuring that the underlying performance is highlighted and
discussed in full.
Economic Value Added (EVA(R) )
EVA(R) is a profitability measure designed to recognise the requirement to
generate a positive return on the economic capital invested in the business. If
the business produces profit in excess of its cost of capital, then value is
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 three year periods. The
Group's EVA(R) target of 5% compound growth per annum was set in 2000,
for the three years ending September 2003.
EVA (R) is a registered trademark of Stern Stewart & Co.
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Corporate governance
Importance of corporate governance
The Board of directors of the Company (the Board) is responsible for the
corporate governance of the Company and its controlled entities (the Group).
Corporate governance is a matter of high importance in the Company and is
undertaken with due regard to all of the Company's stakeholders and its
role in the community. Good corporate governance is a fundamental part of the
culture and the business practices of the Group. The main corporate governance
practices that were in place during the year to September 30, 2003, or otherwise
as referred to below, are discussed in this section.
The Board has approved corporate governance guidelines, which set out the
specific roles, duties, responsibilities and rights of the directors of the
Company. Each director is expected to have regard to these guidelines in the
performance of his or her duties as a director of the Company.
The major processes by which the directors of the Group meet their duties are
described in this corporate governance statement.
Responsibilities and functions of the Board
The Board has adopted a formal charter that details the functions and
responsibilities of the Board. The most significant responsibilities of the
Board are to:
Stakeholder interests
* serve in the interests of all stakeholders, being
the shareholders, customers, staff and the communities in the geographic regions
in which the Group operates;
* build trust in the Group through consistent
behaviour, transparency and accountability; and
* establish, review and monitor processes for corporate
governance throughout the Group;
Future strategy
*
develop an in-depth understanding of each
substantial segment of the Group's business;
* review, approve and monitor corporate strategy and
plans and review the assumptions and rationale underlying the annual plans;
* make decisions concerning the Group's
capital structure and dividend policy; and
* review, approve, and monitor major investment and
strategic commitments;
Review of past performance
* review business results, monitor budgetary control
and review, approve and monitor necessary corrective actions and processes;
Integrity of external reporting
* review and monitor the processes, controls and
procedures which are in place to maintain the integrity of the Group's
accounting and financial records and statements with the guidance of the Audit
Committee;
review and monitor the reporting to shareholders
providing objective comprehensive, factual and timely information to the various
markets in which the Company's shares are listed; and
* monitor and receive reports from the Audit
Committee in relation to internal controls and internal and external audit
reports;
Risk management and compliance
* establish, monitor and review the risk management
processes with the guidance of the Risk Committee;
*
review and monitor processes for compliance with
prudential regulations and standards and other regulatory requirements;
* review and monitor processes for the maintenance of
adequate credit quality; and
* review and monitor processes for the documentation
and regular review and updating of the Group's risk profile;
Executive review, succession planning and culture
* approve key executive appointments and monitor and
review executive succession planning;
* review and monitor the performance of the Managing
Director and Chief Executive Officer and senior management;
* review and approve executive remuneration with the
guidance of the Compensation Committee;
* approve all appointments of directors to the boards
of controlled entities and appointments made by the Group to non-controlled
entities; and
* monitor and influence the culture, reputation and
ethical standards of the Group; and
Board performance
* monitor Board composition, director selection,
Board processes and performance with the guidance of the Nomination Committee;
* monitor and review the processes to assist
directors in having sufficient time to devote to Board matters in order that
they discharge their duties effectively; and
* review the charter and its continuing adequacy from
time to time.
Composition of the Board
The Board requires that each of its directors possess unquestionable integrity
and character. The Nomination Committee will assist the Board in identifying
other appropriate skills and characteristics required for the Board as a whole
and the Board's individual members in order for the Group to fulfil its
goals and responsibilities to shareholders and other key stakeholders.
The composition of the Board is based on the following factors:
* the size of the Board will be of a size to assist in
efficient decision making;
* the Chairman of the Board should be an independent
non-executive director and shall be elected by the directors annually;
* the Chairman must not be a former executive officer
of the Group;
* the Board should comprise a majority of independent
non-executive directors; and
* the Board should comprise directors with a broad
range of expertise, skills and experience from a diverse range of backgrounds.
62
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