RNS Number:5000S
National Australia Bank Ld
26 November 2003
PART 1
Annual Financial Report 2003
Growth through
excellent relationships
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National Australia Bank Limited
ABN 12 004 044 937
This annual financial report 2003 is lodged with the Australian Securities and
Investments Commission and Australian Stock Exchange Limited.
Nothing in this annual financial report 2003 is, or should be taken as, an offer
of securities in National Australia Bank Limited for issue or sale, or an
invitation to apply for the issue or for the purchase of such securities.
All figures in this document are in Australian dollars unless otherwise stated.
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Table of contents
Presentation of information 2
Financial highlights 3
Selected financial data 4
Business overview 8
Introduction 8
Strategy 8
Business operating model 8
Introduction to Financial Services 8
Financial Services Australia 9
Financial Services Europe 10
Financial Services New Zealand 11
Corporate & Institutional Banking 11
Wealth Management 12
Other 13
Competition 13
Regulation of the financial services system 14
Changing regulatory environment 15
Basel II Capital Accord 16
International Financial Reporting Standards 16
Australian tax consolidations regime 16
Payment systems reform in Australia 16
Organisational structure 17
Description of property 17
Certain legal proceedings 17
Financial review 18
Summary 18
Economic outlook 19
Net interest income 20
Net life insurance income 22
Other banking and financial services income 23
Mortgage servicing and origination revenue 24
Movement in the excess of net market value over net assets of life insurance controlled entities 25
Significant revenue 26
Operating expenses 26
Charge to provide for doubtful debts 27
Significant expenses 28
Income tax expense 29
Net profit by segment 30
Employees 35
Assets and equity 37
Return on average equity 37
Earnings and dividends per share 38
Shareholder value 38
Liquidity and funding 39
Capital resources 42
Gross loans and advances 45
Asset quality disclosures, charge to provide and provisions for doubtful debts 46
Deposits and other borrowings 49
Assets under management and administration 50
Risk management 51
Disclosure control and procedures and internal controls over financial reporting 56
Transactions with related and other non-independent parties 56
Risk factors 56
Critical accounting policies 57
Accounting developments 60
Non-GAAP financial measures 60
Corporate governance 62
Report of the directors 70
Financial report 81
Statement of financial performance 82
Statement of financial position 83
Statement of cash flows 84
Notes to the financial statements 85
1 Principal accounting policies 85
2 Supplementary statement of financial position 94
3 Segment information 95
4 Revenue from ordinary activities 98
5 Profit from ordinary activities before income tax expense 99
6 Income tax expense 103
7 Dividends and distributions 104
8 Earnings per share 105
9 Cash assets 105
10 Due from other financial institutions 106
11 Due from customers on acceptances 106
12 Trading securities 106
13 Available for sale securities 107
14 Investment securities 109
15 Investments relating to life insurance business 112
16 Loans and advances 113
17 Provisions for doubtful debts 115
18 Asset quality disclosures 119
19 Mortgage servicing rights 121
20 Shares in controlled entities, joint venture entities and other securities 121
21 Regulatory deposits 122
22 Property, plant and equipment 123
23 Income tax assets 124
24 Goodwill 125
25 Other assets 125
26 Due to other financial institutions 127
27 Deposits and other borrowings 127
28 Life insurance policy liabilities 128
29 Income tax liabilities 129
30 Provisions 129
31 Bonds, notes and subordinated debt 130
32 Other debt issues 132
33 Other liabilities 133
34 Contributed equity 133
35 Reserves 136
36 Retained profits 137
37 Outside equity interest 137
38 Total equity reconciliation 137
39 Employee share, bonus and option plans 138
40 Average balance sheets and related interest 144
41 Maturity analysis 146
42 Interest rate risk 147
43 Notes to the statement of cash flows 152
44 Particulars in relation to controlled entities 154
45 Contingent liabilities and credit commitments 156
46 Derivative financial instruments 159
47 Fair value of financial instruments 165
48 Superannuation commitments 167
49 Operating lease commitments 169
50 Capital expenditure commitments 170
51 Financing arrangements 170
52 Related party disclosures 170
53 Remuneration of directors 173
54 Remuneration of executives 174
55 Remuneration of auditor 175
56 Fiduciary activities 176
57 Life insurance business disclosures 176
58 Reconciliation with US GAAP and other US GAAP disclosures 184
59 Events subsequent to balance date 196
Directors' declaration 197
Independent auditor's report 198
Shareholder information 199
Glossary 215
Principal establishments 217
1
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Presentation of information
Basis of presentation
This annual financial report is prepared in accordance with Australian GAAP,
which differs in some respects from US GAAP (as set out in note 58 in the
financial report). Comparative amounts have been reclassified to accord with
changes in presentation made in 2003, except where otherwise stated.
Currency of presentation
All currency amounts are expressed in Australian dollars unless otherwise
stated. Merely for the convenience of the reader, this annual financial report
contains translations of certain Australian dollar amounts into US dollars at
specified rates. These translations should not be construed as representations
that the Australian dollar amounts actually represent such US dollar amounts or
could be converted into US dollars at the rate indicated. Unless otherwise
stated, the translations of Australian dollars into US dollars have been made at
the rate of US$0.6797 = A$1.00, the noon buying rate in New York City for cable
transfers in Australian dollars as certified for customs purposes by the Federal
Reserve Bank of New York (noon buying rate) on September 30, 2003.
Certain definitions and glossary
The Company's fiscal year ends on September 30. As used herein, the
fiscal year ended September 30, 2003 is referred to as 2003 and other fiscal
years are referred to in a corresponding manner. The abbreviations $m and $bn
represent millions and thousands of millions (ie. billions) of Australian
dollars respectively. Financial statements means the Company's
consolidated financial statements for the year ended September 30, 2003,
September 30, 2002 and September 30, 2001 included herein at pages 81 to 197.
Any discrepancies between total and sums of components in tables contained in
this annual financial report are due to rounding.
A glossary of some of the key terms used in this annual financial report is
contained at page 215. In addition, non-GAAP financial measures have been
defined at page 60.
Forward-looking statements
This annual financial report contains certain 'forward-looking
statements' within the meaning of section 21E of the United States
Securities Exchange Act of 1934. The United States Private Securities
Litigation Reform Act of 1995 provides a safe harbour for forward-looking
information to encourage companies to provide prospective information about
themselves without fear of litigation, so long as the information is identified
as forward-looking and is accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those projected in the information. The words anticipate,
believe, expect, project, estimate, intend, should, could, may, target, goal,
objective, plan and other similar expressions are used in connection with
forward-looking statements.
In this annual financial report, forward-looking statements may, without
limitation, relate to statements regarding:
- economic and financial forecasts, including but not
limited to statements under the financial review and report of the directors;
- anticipated implementation of certain control systems
and programs, including, but not limited to those described under the financial
review - risk management; and
- certain plans, strategies and objectives of
management.
Such forward-looking statements are not guarantees of future performance and
involve known and unknown risks, uncertainties and other factors, many of which
are beyond the control of the Group, that may cause actual results to differ
materially from those expressed in the statements contained in this annual
financial report. For example:
- the economic and financial forecasts contained in
this annual financial report will be affected by movements in interest and
foreign currency exchange rates, which may vary significantly from current
levels, as well as by general economic conditions in each of the Group's
major markets. Such variations, if adverse, may materially impact the Group's
financial condition and results of operations;
- the implementation of control systems and programs
will be dependent on such factors as the Group's ability to acquire or
develop necessary technology or systems, its ability to attract and retain
qualified personnel and the co-operation of customers and third party vendors;
and
- the plans, strategies and objectives of management
will be subject to, among other things, government regulation, which may change
at any time and over which the Group has no control. In addition, the Group
will continue to be affected by general economic conditions in Australia and
worldwide, movements and conditions in capital markets, the competitive
environment in each of its markets and political and regulatory policies.
There can be no assurance that actual outcomes will not differ materially from
the forward-looking statements contained in this annual financial report.
2
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Financial highlights
Profitability
- Net profit attributable to members of the Company
increased 17.3% to $3,955 million.
- Net profit before significant
items(1) increased 4.3% to $3,947 million.
- The current year's result includes no
significant items whilst the 2002 result included the following significant
items:
- restructuring costs of $412 million (after-tax); and
- net profit on sale of SR Investment, Inc. (formerly
known as HomeSide International, Inc.) of $6 million.
Shareholder returns
- Basic earnings per share(1) increased 21.0% to 248.9
cents. Excluding significant items, basic earnings per share increased 7.3% from
231.9 cents.
- Basic cash earnings(1) per share increased 20.9% to
268.5 cents. Excluding significant items, basic cash earnings per share
increased 8.2% from 248.2 cents.
- Return on average ordinary shareholders funds(1)
increased from 15.1% (17.0% excluding the impact of significant items) to 18.3%.
- Dividends were 163 cents per share compared with 147
cents per share last year. In 2003, the interim dividend of 80 cents per share
was fully franked and the final dividend of 83 cents per share will be fully
franked. In 2002, the interim dividend of 72 cents per share was fully franked
and the final dividend of 75 cents was 90% franked.
- Economic Value Added (EVA(R))(1) increased 29.9% to
$1,668 million.
EVA (R) is a registered trademark of Stern Stewart & Co. EVA (R) measures the
economic profit earned in excess of the Group's cost of capital.
Growth and diversification
- Total assets grew by 12.5% in local currency terms.
- Net assets grew by 42.8% in local currency terms.
- Movements in exchange rates decreased total assets
(in Australian dollar terms) by $24.2 billion.
- Gross loans and advances increased 13.4% in local
currency terms.
- Assets under management and administration grew by
13.2%
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(1) Refer to 'glossary' on page 215, 'non-GAAP
financial measures' on page 60 and 'reconciliations of non-GAAP
financial measures' on page 6.
3
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Selected financial data
The information hereunder has been derived from the audited financial report of
the Group, or where certain items are not shown in the Group's financial
report, it has been prepared for the purpose of this annual financial report.
Accordingly, this information should be read in conjunction with and is
qualified in its entirety by reference to the financial report. Comparative
amounts have been reclassified to accord with changes in presentation made in
2003, except where otherwise stated.
Group
2003 2003 (1) 2002 (2) 2001 (3) 2000 (4) 1999
$m US$m $m $m $m $m
Summary statement of financial
performance
Australian GAAP
Net interest income 7,419 5,043 7,222 6,960 6,371 6,066
Net life insurance income 444 302 (10 ) 128 332 -
Other banking and financial 5,010 3,405 7,006 4,749 4,124 4,027
services income
Mortgage servicing and origination - - 378 810 640 536
revenue
Movement in the excess of net (160 ) (109 ) (155 ) 510 202 -
market value over net assets of
life insurance controlled entities
Significant revenue - - 2,671 5,314 - -
Operating expenses (6,354 ) (4,319 ) (8,707 ) (6,470 ) (5,807 ) (5,701 )
Amortisation of goodwill (98 ) (67 ) (101 ) (167 ) (197 ) (206 )
Charge to provide for doubtful (633 ) (430 ) (697 ) (989 ) (588 ) (581 )
debts
Significant expenses - - (3,266 ) (6,866 ) (204 ) -
Profit from ordinary activities 5,628 3,825 4,341 3,979 4,873 4,141
before income tax expense
Income tax expense relating to (1,681 ) (1,143 ) (962 ) (1,891 ) (1,632 ) (1,321 )
ordinary activities
Net profit 3,947 2,682 3,379 2,088 3,241 2,820
Net loss/(profit) attributable to 16 11 (6 ) (5 ) (2 ) 1
outside equity interest - Life
insurance business
Net (profit) attributable to (8 ) (5 ) - - - -
outside equity interest - other
Net profit attributable to members 3,955 2,688 3,373 2,083 3,239 2,821
of the Company
Dividends paid/payable (5) 2,352 1,599 2,266 2,080 1,858 1,655
Adjusted to accord with US GAAP
Net income (6) 3,527 2,397 3,455 1,794 3,004 2,702
Group
2003 2003 (1) 2002 (2) 2001 (3) 2000 (4) 1999
$m US$m $m $m $m $m
Summary statement of financial
position
Australian GAAP
Investments relating to life 35,846 24,365 31,012 31,381 31,103 -
insurance business
Loans and advances (after 247,959 168,538 231,300 207,797 195,492 165,620
provisions for doubtful debts)
Total assets 397,471 270,161 377,387 374,720 343,677 254,081
Total risk-weighted assets 252,365 171,532 247,838 257,513 238,589 197,096
Deposits and other borrowings 210,146 142,836 206,864 190,965 185,097 162,468
Life insurance policy liabilities 32,457 22,061 30,425 30,257 29,879 (?c=8212
Bonds, notes and subordinated debt 22,707 15,434 22,192 24,984 21,051 13,437
Perpetual floating rate notes 367 249 460 507 461 383
Exchangeable capital units (7) 1,262 858 1,262 1,262 1,262 1,262
Net assets 27,211 18,495 23,251 23,557 21,407 18,520
Contributed equity 9,728 6,612 9,931 10,725 9,855 9,286
Ordinary shares 6,078 4,131 7,256 8,050 7,180 6,611
Equity instruments (8) 3,650 2,481 2,675 2,675 2,675 2,675
Total equity (excludes outside 24,407 16,589 23,184 23,489 21,361 18,520
equity interest)
Adjusted to accord with US GAAP
Total assets 398,917 271,144 380,280 377,167 344,227 258,791
Total equity 23,862 16,219 24,005 23,987 21,836 19,226
4
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Group
2003 2003 (1) 2002 (2) 2001 (3) 2000 (4) 1999
$ US$ $ $ $ $
Shareholder information
Australian GAAP
Earnings per share (9)
Basic 2.49 1.69 2.06 1.22 2.02 1.87
Diluted 2.44 1.66 2.03 1.23 1.99 1.83
Earnings per share before
significant items (9) (10)
Basic 2.49 1.69 2.32 2.47 2.11 1.87
Diluted 2.44 1.66 2.27 2.43 2.08 1.83
Cash earnings per share (10)
Basic 2.69 1.83 2.22 1.11 2.06 2.01
Diluted 2.62 1.78 2.18 1.12 2.02 1.97
Cash earnings per share before
significant items (10)
Basic 2.69 1.83 2.48 2.37 2.15 2.01
Diluted 2.62 1.78 2.43 2.33 2.11 1.97
Dividends per share (5) 1.63 1.11 1.47 1.35 1.23 1.12
Total shareholder return (3 year 11.1 11.1 19.2 12.8 11.3 24.9
annualised accumulation) (%) (11)
Economic Value Added (EVA(R)) (12) 1,668 1,134 1,284 1,129 1,379 1,390
Dividends per American Depositary 8.15 5.54 7.35 6.75 6.15 5.60
Share (ADS) (5)
Dividend payout ratio (%) (5) 62.35 62.35 71.12 111.23 61.10 60.25
Net assets per share 18.09 12.30 15.11 15.15 14.12 12.46
Share price at year-end 30.80 20.93 33.48 25.66 25.51 22.43
Number of shares at year-end (No. 1,504,635 n/a 1,534,840 1,551,575 1,516,111 1,486,295
'000)
Adjusted to accord with US GAAP
Net income per share (6)(9)
Basic 2.21 1.50 2.11 1.03 1.87 1.79
Diluted 2.13 1.45 2.06 1.04 1.81 1.74
Dividends per ADS (US$) (5) (13) n/a n/a 4.12 3.51 3.50 3.62
Dividends as percentage of net 66.69 45.33 65.59 115.94 61.85 61.25
income (%) (6)
Group
2003 2002 2001 2000 1999
% % % % %
Selected financial ratios
Australian GAAP
Average equity (ordinary shareholder funds) to 6.9 7.2 7.3 7.3 6.7
average total assets (excluding statutory
funds) (14) (16)
Return on average assets (15) 1.0 0.9 0.5 1.1 1.1
Return on equity (average ordinary shareholder 18.3 15.1 9.0 17.3 17.8
funds) (15) (16)
Average net interest spread 2.2 2.4 2.3 2.4 2.5
Average net interest margin 2.5 2.7 2.7 2.9 3.0
Gross non-accrual loans to gross loans and 0.51 0.62 0.75 0.66 0.82
acceptances
Net impaired assets to equity (parent entity 3.9 4.7 5.2 4.9 6.1
interest)
Total provisions for doubtful debts to gross 163.4 161.0 160.5 182.5 159.5
impaired assets
Capital - risk asset ratios (17)
Tier 1 7.8 7.8 7.5 6.6 7.8
Tier 2 3.3 3.7 3.9 4.0 2.9
Deductions (1.4 ) (1.3 ) (1.2 ) (1.3 ) (0.3 )
Total 9.7 10.2 10.2 9.3 10.4
Ratio of earnings to fixed charges (18) 1.6 1.5 1.3 1.4 1.5
Adjusted to accord with US GAAP
Net income as a percentage of
Average total assets (excluding statutory 1.0 1.0 0.5 1.1 1.0
funds) (6) (14)
Average equity (6) 14.8 14.5 7.7 14.6 15.5
Total equity as percentage of total assets 6.6 6.9 7.0 7.0 7.4
(excluding statutory funds) (14)
Ratio of earnings to fixed charges (6) (18) 1.6 1.5 1.3 1.4 1.4
5
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Group
2003 (1) 2002 (2) 2001(3) 2000 (4) 1999
$m $m $m $m $m
Reconciliations of non-GAAP measures (5)
Net profit to cash earnings before significant
items reconciliation
Net profit attributable to members of the 3,955 3,373 2,083 3,239 2,821
Company
Adjusted for
Net loss/(profit) attributable to outside (16 ) 6 5 2 (1 )
equity interest - Life insurance business
Net (profit) attributable to outside equity 8 - - - -
interest - other
Net profit 3,947 3,379 2,088 3,241 2,820
Adjusted for
Net loss/(profit) attributable to outside 16 (6 ) (5 ) (2 ) 1
equity interest - Life insurance business
Net (profit) attributable to outside equity (8 ) - - - -
interest - other
Distributions on other equity instruments (183 ) (187 ) (213 ) (198 ) (74 )
Movement in the excess of net market value over 160 155 (510 ) (202 ) -
net assets of life insurance controlled
entities
Income tax expense on movement in the excess of 40 (3 ) 177 56 -
net market value over net assets of life
insurance controlled entities
Amortisation of goodwill 98 101 167 197 206
Cash earnings 4,070 3,439 1,704 3,092 2,953
Adjusted for
Significant revenue - (2,671 ) (5,314 ) - -
Significant expense - 3,266 6,866 204 -
Income tax expense/(benefit) on significant - (189 ) 384 (68 ) -
items
Cash earnings before significant items 4,070 3,845 3,640 3,228 2,953
EVA(R) reconciliation
Cash earnings before significant items 4,070 3,845 3,640 3,228 2,953
Adjusted for
Imputation credit value earned 733 622 695 545 431
Net amortisation of prior period significant (272 ) (243 ) (327 ) (25 ) (25 )
items
Other (7 ) (67 ) (127 ) (68 ) (31 )
EVA(R) net operating profit after tax 4,524 4,157 3,881 3,680 3,328
Capital charge (19) (2,856 ) (2,873 ) (2,752 ) (2,301 ) (1,938 )
EVA(R) 1,668 1,284 1,129 1,379 1,390
Average economic capital (20) 24,849 24,985 23,927 20,178 18,457
Cost of capital (21) 11.50 % 11.50 % 11.50 % 11.40 % 10.50 %
Average ordinary shareholders funds
reconciliation
Total average equity 24,111 23,847 23,427 20,261 17,147
Adjusted for
National Income Securities (average) (1,945 ) (1,945 ) (1,945 ) (1,945 ) (1,945 )
Preference Shares (average) (730 ) (730 ) (730 ) (730 ) (730 )
Trust Preferred Securities (average) (5 ) - - - -
Outside equity interest (average) (852 ) (68 ) (67 ) (46 ) -
Average ordinary shareholders funds (16) 20,579 21,104 20,685 17,540 14,472
Group
2003 2002 2001 2000 1999
Other information
Total staff
Full-time and part-time 45,206 46,642 49,710 51,879 51,566
Full-time equivalent (22) 42,540 43,202 47,597 49,514 46,837
Exchange rates (average and closing per A$1.00)
Average
British pound 0.3824 0.3622 0.3626 0.3902 0.3934
Euro 0.5648 0.5798 0.5880 0.6310 0.5825
United States dollar 0.6125 0.5324 0.5227 0.6102 0.6404
New Zealand dollar 1.1142 1.1992 1.2474 1.2648 1.2012
6
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Group
2003 2002 2001 2000 1999
Closing
British pound 0.4072 0.3474 0.3354 0.3710 0.3697
Euro 0.5850 0.5528 0.5393 0.6166 0.6146
United States dollar 0.6804 0.5440 0.4928 0.5427 0.6528
New Zealand dollar 1.1446 1.1565 1.2135 1.3351 1.2589
Group
2003 2002 2001 2000 1999
(US$ per A$1.00)
Average (23) 0.6131 0.5322 0.5221 0.6091 0.6404
September 30 0.6797 0.5429 0.4915 0.5415 0.6528
On November 7, 2003 the noon buying rate was US$0.7092 per A$1.00.
Group 2003
October September August July June May
United States dollar (per A$1.00)
High 0.7094 0.6830 0.6595 0.6822 0.6722 0.6604
Low 0.6810 0.6374 0.6379 0.6476 0.6529 0.6268
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(1) Translated at the noon buying rate on September 30, 2003
of US$0.6797 = A$1.00.
(2) Includes amounts relating to operating assets and
operating platform of HomeSide US to February 28, 2002, sold on 1 March 2002,
and SR Investment, Inc. (the parent entity of HomeSide US) to September 30,
2002, sold on October 1, 2002.
(3) Includes amounts relating to Michigan National Corporation
and its controlled entities to March 31, 2001. The Group sold this entity on
April 1, 2001.
(4) Includes amounts relating to the MLC group from July 1,
2000. The Group acquired these entities on June 30, 2000.
(5) Dividend amounts for a year represent the final and
interim dividend in respect of that year, irrespective of when they are
declared, determined and publicly recommended and includes issues under the
bonus share plan in lieu of cash and the dividend reinvestment plan. Dividends
and book value per ordinary share and per American Depositary Share (ADS)
calculations are based on year-end fully paid equivalent ordinary shares,
adjusted for loans and rights issues as appropriate. Dividend payout ratio is
based on the dividend amounts for a year by net profit attributable to members
of the Company after deducting distributions on other equity instruments.
(6) Net income according to US GAAP for 2002, 2001, 2000 and
1999 has been restated for the revised interpretation of APB 25
"Accounting for Stock Issued to Employees" (refer to note 58(g) for
additional information). Where net income is used to calculate a financial
ratio, comparative information has been restated for 2002, 2001, 2000 and 1999.
(7) The exchangeable capital units of US$1 billion are
recorded in this annual financial report at the historical rate of US$0.7922 =
A$1.00.
(8) Equity instruments incorporate preference shares, National
Income Securities and Trust Preferred Securities.
(9) Refer to notes 8 and 58 in the financial report for an
explanation of earnings per share.
(10) Refer to page 60 for explanations of 'non-GAAP financial
measures'.
(11) Total shareholder return measures the growth in the value of the
investment in shares, assuming reinvestment of dividends. The calculation does
not take into account taxation of returns nor franking credits.
(12) EVA (R) is a registered trademark of Stern Stewart & Co.
(13) Dividend amounts are translated into US dollars per ADS
(representing five fully paid ordinary shares) at the exchange rate on each of
the respective payment dates for interim and final dividends. The 2003 final
dividend of A$0.83 per ordinary share is not payable until December 10, 2003.
Accordingly, the total US dollar dividend per ADS cannot be determined until
that date.
(14) Statutory funds are excluded given the significant restrictions
imposed by life insurance legislation, regulations and the regulators
thereunder, on these assets. However, current Australian accounting requirements
do not allow for these assets and liabilities to be separated and disclosed
separately on the statement of financial position. Refer to note 2 for detailed
discussion of the separation of assets from the Group's total assets.
(15) Return represents net profit attributable to members of the
Company after deducting for distributions on other equity instruments.
(16) Average ordinary shareholders funds represents the average of
total equity adjusted to exclude National Income Securities, preference shares,
Trust Preferred Securities and outside equity interest.
(17) As defined by Australian Prudential Regulation Authority (refer
to 'capital resources' on page 42 and 'regulation of the
financial services system' on page 14).
(18) For the purpose of calculating these ratios, fixed charges are
comprised of interest on all indebtedness including interest on deposits, and
one-third of rental charges (which is used to be representative of an interest
factor). Earnings are calculated after all operating and income deductions,
except fixed charges, extraordinary items and tax based on profit and are stated
before outside equity interest.
(19) Capital charge is the average economic capital multiplied by the
cost of capital.
(20) Average economic capital is a measure of the amount of capital
invested in the Company by shareholders which is based on average ordinary
shareholders' funds adjusted for significant items and those items excluded from
the calculation of cash earnings (refer to 'non-GAAP financial measures on page
60 for an explanation of significant items and cash earnings).
(21) Cost of capital is calculated based on the capital asset pricing
model.
(22) Full-time equivalent employees (FTEs) includes part-time staff
(pro-rated) and non-payroll FTEs (ie contractors).
(23) The daily average of the noon buying rates.
7
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Business overview
Introduction
The Group is an international financial services group that provides a
comprehensive and integrated range of financial products and services.
The Company traces its history back to the establishment of The National Bank of
Australasia in 1858. National Australia Bank Limited is a public limited
company, incorporated on June 23, 1893 in Australia, which is the Company's
main domicile. Its registered office is 24th floor, 500 Bourke
Street, Melbourne, Victoria 3000, Australia. The Company operates under the
requirements of the Banking Act 1959 (Cth) and Corporations Act 2001 (Cth).
Globally, as at September 30, 2003, the Group had:
- total assets of $397 billion;
- over $73 billion in assets under management and
administration;
- $311 billion in funds under custody and investment
administration; and
- 7.8 million banking customers and more than 2.8
million wealth management customers.
The Company is the largest financial services institution (by market
capitalisation) listed on the stock market of ASX and is within the 30 most
profitable financial services organisations in the world (measure: profit;
source: Fortune; date: July 2003).
Strategy
The Group's purpose statement is 'Growth through excellent
relationships'. This simple yet powerful proposition provides clarity
for strategic alignment of the Group. It recognises that growth is important to
shareholders and that the Group's ability to successfully deliver growth
is best achieved by building and maintaining excellent relationships with all
stakeholders.
The Group's vision is that 'We will be a leading international
financial services company which is trusted by you and renowned for getting it
right'. The vision is an aspirational statement that reaffirms the
Group's continued commitment to international growth and reflects an
understanding that excellent relationships must be founded on trust and
'getting things right'.
Underpinning the Group's strategic intentions are five core strategies:
Deliver solutions that help meet customers' complete financial needs:
- deliver a high quality, consistent customer
experience by getting the basics right every time;
- build valued relationships by developing a superior
understanding of the customers' needs and their relationship
preferences; and
- deliver integrated banking and wealth management
advice and solutions;
Build and sustain a high performance culture:
- recruit, develop and retain people who have the
skills and attitude to build excellent relationships and deliver on customer
promises;
- create an environment which values diversity and
encourages people to perform to their full potential; and
- measure and reward to drive individual and
organisational performance;
Build trusted relationships with all stakeholders:
- consider each stakeholder group in a balanced way to
inform all decisions and actions;
- build trust through consistent behaviour, dialogue,
transparency and accountability; and
- protect and enhance the reputation of the Group as a
responsible corporate citizen;
Build and manage the Group's portfolio of businesses for strong and
sustainable total shareholder return:
- pursue sources of sustainable revenue growth in
selected markets;
- base investment and resource allocation decisions on
value to the portfolio; and
- manage risk and capital to optimise economic profit;
and
Create and leverage strategic assets and capabilities for competitive advantage:
- build an organisation based on core capabilities
defined around providing advice and solutions for customers; and
- capture efficiencies and generate revenue growth by
leveraging assets and capabilities within, and between, businesses.
Business operating model
The Group's operating model is a combination of global and
regionally-oriented businesses. Where managing or transferring core skills or
products between geographical markets give the Group a competitive edge, a
global management model exists, and where a regional focus is more important to
ensure customer alignment, a regional management structure exists.
The Group consists of five lines of business:
- Financial Services Australia;
- Financial Services Europe;
- Financial Services New Zealand;
- Corporate & Institutional Banking (formerly Wholesale
Financial Services); and
- Wealth Management.
These business lines are supported by the following global functions - Finance,
Technology, People and Culture, Risk Management, Corporate Development and
Office of the CEO.
Introduction to Financial Services
The Group's Financial Services businesses, or the retailing arms of the
Group, provide a range of financial products and services tailored to the needs
of their customers.
The regional structure of these businesses enables broader authority and more
control over distribution, products and services. Each region is managed
separately with a distinct focus - Financial Services Australia,
Financial Services Europe and Financial Services New Zealand.
The Financial Services businesses in each region are structured to provide
customers with solutions to all their retail financial needs. In each region,
the Financial Services businesses have six core business units - Business,
Personal, Agribusiness, Cards, Payments and Asset Finance and Fleet
Management - supported by the specialist units of Marketing, Channel and
Process Optimisation, and Customer Service and Operations (formerly Shared
Services). The operations of each of these business units are outlined below.
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Business
Business provides financial solutions to its customers, which range from sole
traders to multi-national businesses. Business provides its customers with
access to the broad range of products and services of the Group.
Personal
Personal supports both retail, premium and private customers, with a strong
focus on financial solutions to meet all its customers' personal
financial needs.
Agribusiness
Agribusiness is dedicated to serving the agricultural sector and concentrates
solely on meeting the needs of primary producers, service providers to
agriculture and processors of agricultural produce. With this focus,
Agribusiness has a strong understanding of the financial needs of agricultural
business.
Cards
Cards manages the business and personal debit and credit card requirements of
customers.
Payments
Payments is responsible for the processing and completion of payment
transactions and the development of payment processes and systems, particularly
in e-commerce.
Asset Finance and Fleet Management
Asset Finance and Fleet Management specialises in plant, equipment and motor
vehicle leasing, as well as the broader area of fleet management.
Marketing
Marketing represents the centralisation of marketing and product development
functions within the retailing operations in each region.
Channel and Process Optimisation
Channel and Process Optimisation is responsible for all the electronic delivery
channels, quality delivery of retail products and services and process
efficiencies within the retail operations.
Customer Service and Operations
Customer Service and Operations (formerly Shared Services) enables the Group to
more readily take an end-to-end perspective on what it does and to give greater
control over the services provided to meet the needs of local customers more
effectively. It comprises the following operational services -
Collections, Corporate Real Estate, Lending Services, Strategic Sourcing and
Transaction Business Services and Finance. Within Customer Services and
Operations, the Group undertakes a number of specialised business activities
through its controlled entities and its business units. These include a
property owning company, NBA Properties Limited, which, with its subsidiary
companies, is primarily an owner of the business-related properties of the
Group.
Financial Services Australia
Financial Services Australia is the Australian retailing arm of the Group that
provides financial solutions that meet the financial needs of its 3.4 million
customers in Australia.
At September 30, 2003, Financial Services Australia had 17,233 full-time
equivalent employees.
The vision for Financial Services Australia is to better serve the financial
needs of customers as they change over time and to allow them to meet their life
goals. Delivering this vision means working very closely with Wealth Management
and Corporate & Institutional Banking to ensure customers' needs are
identified and met and the right financial solution is provided every time.
Identifying and meeting customers' needs is of paramount importance to
Financial Services Australia. This is achieved through the physical
distribution network, electronic channels and a strong relationship management
philosophy, all underpinned by a comprehensive customer relationship management
(CRM) system.
Financial Services Australia's customer obsession means time is taken to
have quality conversations with customers, build trusted relationships, assist
them in identifying their financial needs and provide the right solution.
Financial Services Australia's extensive physical distribution operates
to service customers at a location convenient to them. Including 20 integrated
financial service centres (catering for all customers' financial advice
needs), 192 business banking centres, 109 agribusiness locations, 790 branches,
and over 3,000 Australia Post outlets.
The array of financial solutions available to customers includes a range of
deposit and lending products, financial planning, credit cards, payment
facilities, leasing, asset finance and transaction accounts. In addition,
Wealth Management and Corporate & Institutional Banking products and services
are available such as treasury, equity finance, custodian services,
superannuation, insurance and investment solutions.
Financial Services Australia's electronic distribution provides
customers with the choice to meet their financial needs when they want via the
internet, over the telephone, through one of 1,700 ATMs or through an extensive
network of point of sale (EFTPOS) terminals. At September 30, 2003, there were
over 900,000 registered internet banking customers. Only 8% of all transactions
(by volume) are now carried out through the branch network, reflecting changing
customer preferences.
Financial Services Australia's relationship management philosophy is
encapsulated in the Group's purpose statement (refer to 'strategy' on prior
page) and the objective: 'to be the financial service provider that Australians'
trust to meet their needs'.
This supports an integrated financial services model as Business, Personal and
Agribusiness bankers work closely with Wealth Management and Corporate &
Institutional Banking to identify and meet the life goals of customers.
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Financial Services Australia has the largest market share of business lending
(excluding agribusiness) (measure: credit outstandings; source: TNS; date:
September 2003) which is the result of initiatives over a number of years,
centred on the relationship management model.
Initiatives have included the development of Business and Agribusiness banking
teams with specialist knowledge and an understanding of the financial needs of
customers. For premium personal customers, Financial Services Australia has a
relationship management philosophy where each customer has a personal banker to
manage their needs. Specialists, such as financial advisers and estate
planners, are introduced to meet more complex needs.
A comprehensive CRM system underpins the physical and electronic distribution
channels and the relationship management philosophy.
This CRM system has the capability to record and integrate a substantial
proportion of customer interactions, which enables better knowledge of customers'
preferences and future financial needs. Analytical capabilities allow
this knowledge to be used to identify customer needs and provide leads and
information to bankers and financial planners to pro-actively contact customers
to meet those needs.
Refer to page 30 for detailed information of the financial performance of
Financial Services Australia.
Financial Services Europe
Financial Services Europe is the European retailing arm of the Group that
provides financial solutions to meet the needs of its 3.4 million customers in
the UK and Ireland.
At September 30, 2003, Financial Services Europe had 11,423 full-time equivalent
employees.
The Group's retailing activities in Europe (UK and Ireland) operate
under four brands. The Group's regional banks are Clydesdale Bank in
Scotland, Yorkshire Bank in Northern England, Northern Bank in Northern Ireland
and National Irish Bank in the Republic of Ireland. Each bank offers a broad
range of financial services to both retail and business customers. Supporting
these services are the products provided by Wealth Management and Corporate &
Institutional Banking, offering customers a further range of financial
solutions.
Clydesdale Bank is one of the major banks in Scotland, with a strong business
customer franchise, and has been part of the Group since 1987. Yorkshire Bank
was acquired in 1990 and is a significant player in its natural marketing area
of Yorkshire and the surrounding counties. Yorkshire Bank has a strong consumer
franchise, with a growing business segment.
The Group has owned Northern Bank in Northern Ireland and National Irish Bank in
the Republic of Ireland since 1987. Each bank offers a broad range of financial
services.
Northern Bank is one of the largest banks in Northern Ireland (measure: main
current accounts, source: MORI, date: March 2003), and over recent years has
expanded its profile in the consumer segment.
National Irish Bank's primary strength is in the consumer segment. It
has continued to grow consumer lending despite the slowing economy of the
Republic of Ireland.
The focus of Financial Services Europe has been to grow the business and
consumer segments by implementing relationship management models, which have
been successfully adopted elsewhere in the Group. This is supported by the
introduction of innovative products and services (such as Rapid Repay
mortgages), and continued investment in alternative channels to assist customers
by extending the range of channels with which they can choose to manage their
financial affairs. The 2003 year saw the commencement of the heavy investment
in tools, resources and people that will help achieve further organic growth in
an intensely competitive market. This strategy is based on three complementary
objectives:
- growth - not merely for its own sake, but to
enable the provision of a tailored approach to the provision of financial
services to more customers, across a wider area and at competitive prices;
- efficiency - to help deliver the range of
financial services rapidly, flexibly and accurately; and
- quality - to ensure that everything matches
or exceeds the standards that customers demand and to ensure that the needs of
customers are at the forefront of the operations.
There are 756, outlets including 125 business banking centres and premium
outlets. These are supported by two customer contact centres, internet
facilities and 1,195 ATMs. This distribution network allows customers full
choice in their transaction of business. During 2003, growth in electronic
transactions increased threefold compared with over the counter transactions.
Customers carried out more than 159 million transactions using the ATM network,
18.0 million using internet banking, 3.8 million using the customer contact
centres and 8.6 million using the interactive voice-recognition service.
Investment has been made in four new flagship banking centres in Liverpool,
Bristol, Reading and Southampton, providing a single, integrated resource
covering the financial aspects of business. Developed primarily for business
customers, each centre provides access to a relationship manager who acts as
day-to-day contact in a way that aims to create a valued partnership between the
bank and the customer.
Investment has also been made in the branch network with a continuing program of
upgrades and improvements. To reduce the need to queue at busy times, customers
now have a range of in-branch quick service options for withdrawing or
depositing cash and cheques. Some branches are open for longer hours, including
Saturdays. The 24 hour interactive voice-recognition service enables customers
to check their balance, obtain a statement or review recent transactions.
A new front end system is being implemented to provide a more efficient platform
for sales and servicing. By capturing all the relevant information at the point
of contact with the customer, and having it flow directly through the new back
office processing system, more accurate and timely decisions can be made. This
enables better service to customers, more efficient processing for the banks,
and the opportunity to grow market share.
Refer to page 30 for detailed information of the financial performance of
Financial Services Europe.
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Financial Services New Zealand
Financial Services New Zealand is the New Zealand retailing arm of the Group
that provides financial solutions to meet the needs of its more than 970,000
customers in New Zealand.
At September 30, 2003, Financial Services New Zealand had 4,257 full-time
equivalent employees.
The Group's retailing activities in New Zealand operate under the Bank
of New Zealand ('BNZ') brand.
BNZ was acquired by the Group in 1992. BNZ has a strong brand position in the
New Zealand market with comprehensive coverage across the country. It offers a
range of financial services and is one of the largest financial service
providers in New Zealand. BNZ enjoys a strong position in the cards market with
innovative solutions including GlobalPlus (measure: outstandings, source:
Internal data and Reserve Bank of New Zealand, date: September 2003).
Continued growth is being driven through BNZ's CRM strategy called TOPS.
TOPS is a computer-based system that notifies staff of trigger events from
customer transactional activity and milestone attainment, resulting in customers
being contacted by BNZ at a time when they need it. The system has been
developed from the Group's CRM platform.
The ongoing enhancement of the physical distribution network, coupled with
improved technology, automation and functionality through electronic and remote
channels, continues to be a core strategy. BNZ's vision is to provide
customers with tailored financial solutions, which are deliverable through a
range of convenient and cost-effective channels.
The distribution network is comprised of 178 outlets including 14 business
banking centres, 391 ATMs, and shared access to an extensive nationwide EFTPOS
network. BNZ also has well-established telephone banking capabilities, in
addition to its internet banking service catering for more than 150,000 active
users (being users over the last six months of the 2003 year).
BNZ has commenced the introduction of the Integrated Systems Implementation
('ISI program'). The ISI program is a multi-staged project
designed to provide the Group with a common global enterprise resource planning
system across all lines of operations. During the year, BNZ had a successful
roll-out of the ISI program for the human resources, procurement and financial
modules. As a result, this has improved administration processes.
Refer to page 31 for detailed information of the financial performance of
Financial Services New Zealand.
Corporate & Institutional Banking
Corporate & Institutional Banking (formerly Wholesale Financial Services)
manages the Group's relationships with large corporations, banks,
financial institutions, supranationals (such as development banks) and
government bodies. With operations in Australia, Europe, New Zealand, New York
and Asia (Hong Kong, Singapore, Seoul and Tokyo), Corporate & Institutional
Banking has dedicated leadership teams to provide local, accessible senior
management for customers.
At September 30, 2003, Corporate & Institutional Banking had 2,612 full-time
equivalent employees.
Corporate & Institutional Banking provides debt financing, risk management and
investor services and products. It comprises Corporate Banking, Financial
Institutions, Markets, Specialised Finance, National Custodian Services,
Transactional Solutions and a Services unit.
It embraces the Group's purpose statement of 'Growth through
excellent relationships' by devoting considerable resources to
understanding the needs of customers, and to deliver first-class solutions that
exceed their expectations.
Corporate Banking
Corporate Banking is responsible for the Group's relationships with
large corporations and provides corporate lending products and other financing
solutions. Customer teams are selected to provide the appropriate blend of
relationship management, industry knowledge and product skills.
Customer coverage is structured along industry segment lines to promote
specialist knowledge and understanding. There are five major industry segments:
consumer goods and services; telecommunications, media and technology;
industrials, materials and health care; energy and utilities; and property and
construction finance.
Financial Institutions
Financial Institutions manages the Group's relationships with banks,
other financial institutions (insurance and fund managers), supranationals and
government bodies which includes the Group's correspondent banking
relationships.
Markets
Markets focuses on traded products and risk management solutions.
It provides foreign exchange, money market, commodities and derivatives products
globally through a dedicated 24 hour dealing capability. These products assist
both Corporate & Institutional Banking's customers and the Group's
small and medium business customers to manage their diverse financial
risks.
Markets is active in the debt capital markets, securitisation and loan
syndications markets, helping customers to diversify their financing
arrangements and supplying investors with access to a variety of asset classes.
Markets also manages the liquidity portfolio for the Group in each of its major
markets. It assists in interest rate risk management and provides short-term
funding for the Group.
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Specialised Finance
Specialised Finance supplies a range of financial solutions utilised in
large-scale, complex transactions such as project finance, structured finance
and acquisition finance.
Using its specialised knowledge of the respective legal, commercial, regulatory
and financial implications of these transactions, it develops innovative
financing structures for customers.
National Custodian Services
National Custodian Services provides custody and related services to foreign
institutions, superannuation funds, government bodies, fund managers, insurance
companies and other entities within Australia, New Zealand and Great Britain.
The key products offered include sub-custody, global custody, master custody,
investment administration outsourcing, trustee services (Great Britain only),
securities lending and cash deposit facilities.
The Company, through National Custodian Services, is one of the largest
custodian banks in Australia (measure: assets under custody and administration,
source: Australian Custodial Services Association, date: June 2003). Globally,
National Custodian Services had assets under custody and administration of $302
billion at September 30, 2003.
On June 6, 2003, the Company entered into an agreement to purchase custody
contracts of customers of Commonwealth Custodial Services Limited and
Commonwealth Bank of Australia by way of novation, subject to the approval of
customers. The purchase provides National Custodian Services greater presence
in the Australian market.
Transactional Solutions
Transactional Solutions provides a range of products and services including cash
management, e-commerce, merchant facilities, liquidity management and
international payment services.
Customers have access to a committed team that includes a specialist
implementation manager, a transactional manager and a dedicated contact person.
Services
Services are responsible for the management of the operating platform for
Corporate & Institutional Banking, including technology, operations and
marketing. These key areas have two regional hubs (Australia and Europe) to
promote efficiency, optimise future investment and provide common product
capability across five geographic regions.
Refer to page 31 for detailed information of the financial performance of
Corporate & Institutional Banking.
Wealth Management
Wealth Management works closely with Financial Services and Corporate &
Institutional Banking to ensure that customers receive an integrated financial
services experience. This involves identifying customer needs as they change
over time and providing access to the wide range of services and solutions that
the Group offers.
Wealth Management partners with financial advisers to provide quality financial
planning services and a range of wealth creation, wealth protection, banking,
superannuation and retirement solutions to build and protect customers'
wealth throughout their lives. It also provides corporate and institutional
customers with outsourced investment, superannuation and employee benefit
solutions. It comprises four main business activities - Investments,
Insurance, Advice Solutions and Private Bank.
It manages $73.1 billion on behalf of more than 2.8 million retail and corporate
customers in Australia, Europe, Asia and New Zealand. In its core Australian
market, as at June 30, 2003, it held the largest share of the total retail life
insurance market (excluding re-insurers) with a 14.7% share of in force premiums
and a 16.5% share of annual new business premiums (source: DEXX&R; date: June
30, 2003). At the same time, it was ranked as the number one provider of retail
investment platforms (master funds and wraps) with a 19.2% market share
(measure: market share; source: Assirt; date: June 30, 2003).
As at September 30, 2003 Wealth Management employed 6,174 full-time equivalent
employees.
It is the fourth largest manager of managers organisation in the world (measure:
assets under management, source: Cerulli, The Global Multimanager and Mutual
Fund Subadvisory Markets 2003 report), using the MLC investment process
introduced into the Australian marketplace in 1986.
Through its business relationships with financial advisers, it is focused on
assisting customers to meet their financial and lifestyle goals. The financial
adviser network is large, including more than 3,200 aligned and salaried
advisers and relationships with more than 1,600 external advisers.
Investment in the business has continued with a number of enhancements to
financial planning tools, investment platforms and reporting and service
capabilities in the Australian market. This aims to position Wealth Management
as the partner of choice for financial advisers and a leading provider of
quality advice.
Internationally it is growing its competitive advantage by leveraging core
capabilities that the business has developed in Australia into the European and
Asian markets. In the UK, a new business initiative (Pivotal) was launched
during the year to introduce its manager of managers capability to financial
advisers in that market. Its advice capability has also been expanded in Hong
Kong, as well as through China with the expected opening of a representative
office in late calendar 2003.
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Investments
Investments incorporates the following business activities:
- investment platforms, covering investments,
superannuation and retirement solutions for retail customers. This incorporates
investment choices ranging from fully implemented solutions for customers
utilising the manager of managers capability to fully discretionary options
where the customer and financial adviser direct investments to the offering(s)
of their choice. All of these platforms provide reporting and administration
services;
- investment, superannuation and employee benefit
solutions for corporate and institutional customers; and
- asset management, providing investment management
advisory services including research, selection and monitoring of investment
managers under a multi-manager, multi-style approach that underpins Wealth
Management's investment offerings.
Insurance
Insurance includes:
- life insurance, income protection and other risk
insurance cover for retail customers in Australia, New Zealand and Asia;
- life insurance services in the UK;
- general insurance agency services (incorporating home
and contents, motor vehicle, loan protection, credit card and other general
insurance cover) for retail customers in Australia and the UK; and
- group life insurance for corporate, club or business
customers to enable life insurance policies to be incorporated as part of
employee entitlements.
Advice Solutions
Advice Solutions provides the financial planning tools and support services
required by financial advisers to assist customers to meet their financial and
lifestyle goals, including:
- business development and consulting services to
assist advisers to operate their financial planning businesses;
- marketing, business and customer management tools and
processes;
- technology, research and technical support to
advisers, including paraplanning and quality review services; and
- recruitment, education and development of advisers
and their support staff, including quality advice programs.
Private Bank
Private Bank provides financial services to high net worth individuals,
including banking, financial planning, superannuation, and access to taxation,
estate planning and special expatriate services through business partners.
Refer to page 31 for detailed information of the financial performance of Wealth
Management.
Other
Support functions
The Group's support functions focus on strategic and policy direction
for the Group and incorporate the following units: Finance, Technology, People
and Culture, Risk Management, Corporate Development and Office of the CEO.
While these support functions are organised on a global basis, many of their
operations are integrated within the Group's business lines and their
contribution to the Group is reported within the results of those businesses.
Sale of HomeSide US
The sale of the operating assets and platform of HomeSide US to Washington
Mutual Bank, FA. was completed on March 1, 2002, in accordance with the
agreement reached on December 12, 2001. Under the terms of the sale, the Group
received cash of $2,299 million (US$1,184 million) for the operating assets,
which consisted primarily of $2,081 million (US$1,072 million) in warehouse and
pipeline mortgage loans. After allowing for transaction costs and triggered
costs, primarily employee liabilities, a loss (after tax) of $19 million (US$10
million) was recorded by the Group.
On October 1, 2002, the Group sold SR Investment, Inc. (the parent entity of
HomeSide US) to Washington Mutual Bank, FA. Controlled entities other than
HomeSide US were excluded from the sale. The assets and liabilities of SR
Investment, Inc. and its controlled entities' were included in the Group's
financial position up to and including the year ended September 30,
2002 and their results were included in the Group's financial
performance up to and including the year ended September 30, 2002. The Group
received proceeds on sale of $2,671 million (US$1,453 million) for assets with a
cost of $2,686 million, resulting in a profit on sale of $6 million after all
disposal costs and income tax. This result was included in the Group's
financial performance for the year ended September 30, 2002.
Competition
The Australian financial system is characterised by a large number of
traditional and new players and well-developed equity and, more recently,
corporate bond markets. There are four major national banks (including the
Company) and many other financial conglomerates with national operations
offering a complete range of financial services, as well as a number of smaller
regional institutions and niche players. Mutual societies have been a force in
the Australian financial system, although many have demutualised over the past
several years to capture capital-related and other competitive advantages.
These institutions have also widened their portfolio of products and services
from insurance, investments and superannuation (pensions) to compete in the
markets traditionally serviced by banks. Competition also comes from numerous
Australian and, in many cases, international non-bank financial intermediaries
including investment/merchant banks, specialist retail and wholesale fund
managers, building societies, credit unions and finance companies. More
recently, product and functional specialists have also emerged as important
players in the household and business mortgage, credit card and other payment
services markets. The rapid development and acceptance of the internet and
other technologies have increased competition in the financial services market
and improved choice and convenience for customers.
These forces are evident across all of the Group's businesses in each of
its geographic markets. Within the broader financial services industry,
increased competition has led to a reduction in operating margins only partly
offset by
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fees and other non-interest income and increased efficiencies. The latter has
been largely achieved through greater investment in new technologies for
processing, manufacturing and retailing products and services. These trends
towards increasingly contestable markets offering improved access, wider choice
and lower prices are expected to continue in the future.
In a number of countries, regulatory authorities have reviewed competition
issues, including the UK Competition Commission with regard to small business
banking, the Reserve Bank of Australia (RBA) and the Australian Competition
Commission (ACCC) with regard to the payments system (refer to 'payment
system reforms in Australia' on page 16), and the review of the Trade
Practices Act 1974 (Cth) conducted by an Australian Commonwealth Government
appointed committee chaired by Sir Daryl Dawson.
In March 2002, the UK Competition Commission issued its conclusion on its
inquiry into the small to medium enterprise banking market. The Commission
found that major banks in England, Scotland and Northern Ireland, including
Clydesdale Bank and Northern Bank, were acting as part of a complex monopoly.
Yorkshire Bank was not named as part of the complex monopoly, due to its
relatively small share of the English market.
As a result of the Commission's proposals, the four largest clearing
banks operating in England were required to comply with a pricing remedy from
January 1, 2003. The four largest clearing banks were singled out as they were
not only considered to be acting as part of a complex monopoly, but were
considered to be acting against the public interest. This remedy has resulted
in these banks offering their small to medium enterprise banking market
customers a more competitive proposition. It is still too early to gauge the
impact of these changes on the Group's UK operations.
In 2003, the UK Office of Fair Trading also obtained further undertakings from
the eight main banking groups, including Clydesdale Bank and Northern Bank,
relating to the time it takes for small to medium entreprises to switch their
main bank accounts to other lenders. The banks must report their performance
against targets effective January 1, 2004.
The committee chaired by Sir Daryl Dawson reviewing the Trade Practices Act 1974
(Cth) reported its findings on April 16, 2003. At the time of this report, the
Australian Commonwealth Government was yet to introduce enabling legislation.
The recommendations of this review focused on six key areas: mergers and
acquisitions, joint ventures, authorisation, third line forcing, ACCC powers and
ACCC accountability. The Group supports a number of the committee's
recommendations as these will provide greater flexibility and accountability in
the merger approval process, provide more certainty in respect of
pro-competitive joint ventures and simplify the regulatory process for industry
reform.
Regulation of the financial services system
Australia
The Australian Prudential Regulatory Authority (APRA) is the prudential
regulator of Australian authorised deposit-taking institutions (referred to as
ADIs, which comprise banks, building societies, and credit unions) as well as
insurance companies, superannuation funds and friendly societies.
The RBA has overall responsibility for monetary policy, financial system
stability and, through a Payments System Board, payment system regulation
including the operations of Australia's real-time gross settlement
system.
The Australian Securities and Investments Commission (ASIC) and the ACCC have
responsibility for certain consumer protection measures. ASIC has primary
responsibility for market integrity and disclosure issues.
The Banking Act 1959 (Cth) allows APRA to issue prudential standards that, if
breached, can trigger legally enforceable directions. While existing prudential
standards (see below) require an ADI to inform APRA of breaches of prudential
requirements and of any materially adverse events (whether in respect of an ADI
in a group or the overall group containing that ADI), proposed amendments to
Banking Act 1959 (Cth) would bring these requirements into law. The proposed
amendments also make provision for the application of 'fit and proper'
tests for directors and senior management of ADIs.
APRA's prudential framework for ADIs and groups containing ADIs includes
prudential standards covering liquidity, credit quality, market risk, capital
adequacy, audit and related arrangements, large exposures, associations with
related entities and group risk management, outsourcing, funds management and
securitisation, and risk management of credit card activities. APRA is
reviewing board composition, fit and proper requirements and other issues
relating to ADIs. This will involve the issue of draft prudential standards in
the future.
APRA carries the responsibility for depositor protection in relation to the ADIs
it supervises. To achieve this, it has strong and defined powers to direct the
activities of an ADI in the interests of depositors or when an ADI has
contravened its prudential framework. These 'direction powers'
enable APRA to impose correcting action without assuming control.
APRA requires banks to provide regular reports covering a broad range of
information, including financial and statistical data relating to their
financial position and prudential matters. APRA gives special attention to
capital adequacy (refer to 'capital adequacy' on page 43 for
current details), sustainability of earnings, loan loss experience, liquidity,
concentration of risks, potential exposures through equity investments, funds
management and securitisation activities, and international banking operations.
In carrying out its supervisory role, APRA supplements its analysis of
statistical data collected from banks with selective on-site visits by
specialist teams to overview discrete areas of banks' operations. These
include asset quality, balance sheet interest rate risk management, market risk
and operational risk reviews and formal meetings with banks' senior
management and external auditors.
APRA has also formalised a consultative relationship with each bank's
external auditor at the agreement of the banks.
The external auditors provide additional assurance to APRA that prudential
standards agreed with the banks are being observed, and that statutory and other
banking requirements are being met. External auditors also undertake targeted
reviews of specific risk management areas selected at the annual meeting between
the bank, its external auditors and APRA. In addition, each bank's
chief executive officer attests to the adequacy and operating effectiveness of
the bank's management systems to control exposures and limit risks to
prudent levels.
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There are no formal prohibitions on the diversification by banks through equity
involvements or investments in subsidiaries. However, without the consent of
the Treasurer of the Commonwealth of Australia, no bank may enter into any
agreement or arrangement for the sale or disposal of its business (by
amalgamation or otherwise), or for the carrying on of business in partnership
with an ADI, or effect a reconstruction.
Wealth Management is regulated by both ASIC and APRA. ASIC administers
legislation relating to Wealth Management's key financial services,
including managed investments, superannuation, retirement income streams and
insurance. Its role is to ensure industry participants comply with legislation,
while promoting fair, confident and informed participation in the Australian
market by investors and consumers. APRA provides prudential regulation, through
the oversight of approved trustees of superannuation funds.
Non-Australian jurisdictions
APRA, under the international Basel framework, assumes the role of 'home banking
supervisor' and maintains an active interest in overseeing
the operations of the Group, including its offshore branches and subsidiaries.
The Group's branches and banking subsidiaries in Europe (UK and Republic of
Ireland) are subject to supervision by the Financial Services Authority (FSA)
and the Irish Financial Services Regulatory Authority, respectively. The
Group's banking subsidiary in New Zealand is subject to supervision by the
Reserve Bank of New Zealand (RBNZ). Branch operations in the US are subject to
supervision by the Office of the Comptroller of the Currency.
In the UK and the Republic of Ireland, the local regulatory frameworks are
broadly similar to those in force in Australia. Each of the banking regulatory
authorities in these countries has introduced risk-based capital adequacy
guidelines in accordance with the framework developed by the Basel Committee on
Banking Supervision.
The emphasis of RBNZ's regulatory approach is primarily on enhanced
disclosure and directors' attestations to key matters. Under conditions
of registration, banks are required to comply with minimum prudential and
capital adequacy requirements. RBNZ monitors banks' financial condition
and conditions of registration, off-site, principally on the basis of published
disclosure statements.
In the UK, Wealth Management is regulated by the FSA, which is responsible for
maintaining market confidence, promoting public awareness, protecting customers
and reducing financial crime. In other offshore areas of banking and wealth
management activity, the Group is subject to the operating requirements of
relevant local regulatory authorities.
Changing regulatory environment
Both within the financial services industry and more generally, businesses are
working within a changing regulatory environment. There is a heightened
emphasis on corporate governance, disclosure, accounting practices and audit
oversight.
In addition to these legislative requirements, regulators are taking a more
pro-active approach to regulation, monitoring and enforcement.
Other areas are also the subject of substantial regulatory change. Measures
have been adopted to restrict the financial capacity of terrorists and their
organisations in most countries in which the Group operates. International
standards for determining capital adequacy are changing under the Basel II
Capital Accord. The regulation of the Australian financial sector has recently
been significantly altered by the Financial Sector Reform Act 2001 (Cth), and
the Australian Bankers Association recently released a revised Code of Banking
Practice, which has been adopted by the Group. There has also been a sustained
regulatory emphasis within Australia and elsewhere on privacy and the use of
customer information.
In response to these and other new legislative and regulatory requirements, the
Group has established initiatives to implement compliant business processes with
particular focus on improving the customer experience.
The Group continues to develop its business practices and systems for the
detection and prevention of payments that may involve prescribed terrorists.
In July 2003, the Group formally applied to ASIC for its new Australian
financial services licences. The Group's Australian operations will be
operating under 20 licences representing the wide variety of financial services
that it offers. The Group intends to enter the new regulatory regime late in
calendar 2003, ahead of the conclusion of the industry transition period of
March 11, 2004. Plans are underway to complete the required licensing changes
designed to provide even greater protection for the Group's customers.
In August 2003, the Group's Australian banking operations adopted the
revised Code of Banking Practice which brings a series of major benefits for
consumers and small business customers that improves service through defined
principles of conduct, disclosure and standards of service.
The revised Code builds upon the earlier version (1993) and includes new
provisions for small business customers, prospective guarantors, customers
experiencing hardship, direct debit cancellation, and credit card charge-backs.
The Group manages its regulatory obligations within a global compliance
framework. It intends to maintain standards of compliance within the changing
regulatory environment and has mechanisms in place to address the current
regulatory developments impacting on the Group.
On October 8, 2003, the Australian Commonwealth Government released its
Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure)
Bill for public consultation. The underlying objective of the draft legislation
is to improve the operation of financial markets by promoting transparency,
accountability and shareholder rights and improving the overall regulatory
framework for external auditors.
The Group is considering its response to the draft bill, however, the
legislation, when enacted, is not expected to have an material impact on the
financial condition of the Group.
Refer to page 62 for detailed information on the corporate governance regulatory
environment.
15
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Basel II Capital Accord
In 1988, the Bank for International Settlements (BIS) developed the Basel
Capital Accord that sets out international benchmarks for assessing banks'
capital adequacy requirements. In response to recent changes in
banking practices, BIS reviewed the Basel Capital Accord and released new
measures known as the Basel II Capital Accord (Basel II).
APRA has indicated support for Basel II and announced an intention to implement
it in Australia. It is expected that Basel II will be operational in 2007, with
a parallel run of existing and new standards in the 2006 calendar year.
Basel II proposes changes in the formula used to measure banks' minimum
capital requirements with various levels of complexity. The three pillars set
out by Basel II are:
- minimum capital requirements;
- supervisory review; and
- public disclosure.
The Group periodically reviews its risk management framework and Basel II
provides the Group with an opportunity to revisit these frameworks. The Group's
approach is to invest in risk management systems where appropriate
business improvements can be achieved.
The Group is committed to the implementation of Basel II and has a program
underway to evaluate the approach the Group will undertake and assess the areas
of impact on the Group. These areas of impact are expected to include the
Group's risk management processes and public disclosure of the Group's
risk profile.
APRA is due to release Basel II prudential standards in the first quarter of the
2004 calendar year. The Group continues to monitor these developments and will
work with its key regulators in Australia and overseas to ensure that the
Group's Basel II program aligns with their regulatory requirements.
International Financial Reporting Standards
In July 2002, the Financial Reporting Council in Australia formally announced
that for financial reporting periods beginning on or after January 1, 2005 all
entities reporting under the Corporations Act 2001 (Cth) will be required to
comply with accounting standards equivalent to those set by the International
Accounting Standards Board. These standards are referred to as International
Financial Reporting Standards (IFRS).
The Group will be required to adopt these standards for the financial year
commencing October 1, 2005. The Group is committed to the implementation of
IFRS. The Group continues to evaluate the areas most impacted by adoption of
IFRS and the associated technology requirements. 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 as
well as the necessary technology requirements at this time.
A full suite of 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 AASB around April 2004. The Group continues to monitor these
developments.
A project team was assembled to undertake an assessment of overlaps between IFRS
and Basel II, as well as the joint impact upon technology. These overlaps have
been identified and reported to executive management.
Australian tax consolidation regime
Under income tax legislation that has now been enacted (tax consolidation
regime), Australian resident entities of a corporate group may be taxed as a
single taxpayer from July 1, 2002. The tax consolidation regime only applies to
corporate groups that make an election to consolidate for income tax purposes.
The decision by a corporate group to elect to be treated as a single taxpayer
for income tax purposes can only be made by the ultimate Australian parent
entity of that corporate group.
On such an election, the consolidated group would comprise the ultimate
Australian parent entity and all of its wholly-owned Australian resident
controlled entities (tax consolidated group). Further, when that election is
made, the ultimate Australian parent entity must nominate the date from which
the tax consolidated group should be taxed as a single taxpayer. Subject to
certain limitations, this date may be retrospective.
At this time, the Company (as the ultimate Australian parent entity of the
Group) has not made this election. However, the Company may make the election
to form a tax consolidated group and be taxed as a single taxpayer from October
1, 2002. To do so it must make the election no later than the date on which it
is required to lodge its tax return for the year ended September 30, 2003
(currently no later than April 15, 2004). However, a final decision has not
been made and the Company may choose not to elect to form a tax consolidated
group and continue to be taxed as a single taxpayer.
The Board of the directors of the Company (the Board) is responsible for making
the election to have the Group taxed as a single taxpayer. Accordingly, the
Board will determine if, and from when, the tax consolidation regime will apply
to the wholly-owned Australian controlled entities of the Group.
Payment system reforms in Australia
The first stage of the RBA's reforms on the credit card payment system
in Australia was introduced this year, providing merchants with the ability to
charge an additional fee for credit card transactions. The Group has not
noticed any impact from this change.
The second stage of the credit card reforms, effective October 31, 2003,
introduces a new cost-based approach to calculating interchange fees.
Interchange fees are wholesale fees that banks pay one another. The cost-based
approach will significantly reduce interchange fees; however, the impact on
revenues and expenses of the Group should be partly mitigated by a number of
strategic decisions undertaken.
The third stage of the credit card reforms will allow non-banks to issue and
acquire credit cards. Although guidelines have been set by APRA, a date for the
introduction of this stage is still to be determined by the RBA.
16
--------------------------------------------------------------------------------
Two other payment systems reforms initiated by the RBA relate to EFTPOS and ATM
interchange fee arrangements.
In February 2003, an industry working group comprising banks, building societies
and credit unions (of which the Company is a member), lodged an authorisation
application outlining reforms to EFTPOS (debit) interchange fees with the ACCC.
The ACCC has released a draft determination rejecting the proposal on the
grounds that it did not deal with scheme access, and has called for further
submissions from interested parties. The industry working group continues to
pursue the authorisation route, and is awaiting the ACCC's final
determination.
The Group is also part of another industry working group, comprising banks,
building societies, credit unions and ATM operators, which intends to lodge an
authorisation application outlining proposed reforms to ATM interchange fees
with the ACCC.
Organisational structure
National Australia Bank Limited is the holding company for the Group, as well as
the main operating company. During 2003, the Company had seven wholly-owned
main operating subsidiaries: Bank of New Zealand, Clydesdale Bank PLC, MLC
Limited, National Australia Financial Management Limited, National Irish Bank
Limited, Northern Bank Limited and Yorkshire Bank PLC.
Refer to note 44 in the financial report for details of the principal controlled
entities of the Group.
Description of property
The Group operates around 2,092 outlets and offices worldwide, of which 49% are
in Australia, with the largest proportion of the remainder being in the UK.
Approximately 19% of the 2,092 outlets and offices are owned directly by the
Group, with the remainder being held under commercial leases.
The Group's premises are subject to continuous maintenance and upgrading
and are considered suitable and adequate for the Group's current and
foreseeable future requirements.
Certain legal proceedings
Entities within the Group are defendants from time to time in legal proceedings
arising from the conduct of their business.
On August 29, 2003, a civil class action complaint was filed against the Group
and others for alleged violations of the US federal securities law relating
primarily to disclosure concerning the valuation of the mortgage servicing
rights held by HomeSide US (sold in October 2002). The complaint failed to
specify any quantum of damages.
The Group does not consider that the outcome of any proceedings, either
individually or in aggregate, is likely to have a material effect on its
financial position. Where appropriate, provisions have been made.
For further information on contingent liabilities of the Group, refer to note 45
in the financial report.
17
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Financial review
Summary
Group
2003 2002 2001
$m $m $m
Net profit 3,947 3,379 2,088
Adjust for significant items:
Significant revenue - (2,671 ) (5,314 )
Significant expenses - 3,266 6,866
Attributable income tax expense/(benefit) - (189 ) 384
Significant expenses after tax - 406 1,936
Net profit before significant items 3,947 3,785 4,024
Net profit attributable to members of the Company 3,955 3,373 2,083
Adjust for:
Distributions on other equity instruments (183 ) (187 ) (213 )
Significant revenue - (2,671 ) (5,314 )
Significant expenses - 3,266 6,866
Movement in the excess of net market value over net assets of 160 155 (510 )
life insurance controlled entities
Attributable income tax benefit/(expense) 40 (192 ) 561
Amortisation of goodwill 98 101 167
Cash earnings before significant items 4,070 3,845 3,640
Year ended September 30, 2003 compared with year ended September 30, 2002
Net profit of $3,947 million in 2003, increased $568 million or 16.8% compared
with 2002.
Significant items are those individually significant items included in net
profit. There were no significant items in 2003. The prior year result
included the following significant items:
- $412 million (after-tax) of restructuring expenses paid/
provided for; and
- $6 million net profit (after-tax) on sale of SR
Investment, Inc., including its controlled entity, HomeSide US, which conducted
the Group's mortgage servicing rights business in the US.
Net profit before significant items of $3,947 million in 2003, increased $162
million or 4.3% compared with 2002. Cash earnings (before significant items) of
$4,070 million in 2003, increased $225 million or 5.9% compared with 2002.
Net interest income of $7,419 million in 2003, was $197 million or 2.7% higher
than 2002. This was driven by asset growth, particularly in relation to housing
lending, partly offset by exchange rate movements and a 14 basis point decrease
in net interest margin to 2.53%. The fall in margin largely arose from the
impact of strong growth in housing lending within the retail banking business,
which has been slightly offset by the funding benefit on the proceeds from the
sale of HomeSide US. Refer to page 20 for a more detailed discussion of net
interest income.
Net life insurance income increased by $454 million to $444 million in 2003,
from a $10 million loss in 2002. This was driven by an increase in investment
earnings resulting from improved performance in major stock markets over the six
months to September 2003. Refer to page 22 for a more detailed discussion of
net life insurance income.
Other banking and financial services income of $5,010 million in 2003, was
$1,996 million or 28.5% lower than 2002. Excluding the proceeds received from
the sale of HomeSide US's operating assets and operating platform of
$2,314 million in 2002 (refer to page 13 for an explanation on the sale of
HomeSide US), other banking and financial services income was up 6.8%. This was
driven by higher income resulting from fee growth with higher volumes in housing
lending and transaction fees, partly offset by exchange rate movements. Refer
to page 23 for a detailed discussion of other banking and financial services
income.
Mortgage servicing and origination revenue was $nil in 2003, as compared to $378
million in 2002. Following the sale of SR Investment, Inc. (the parent entity
of HomeSide US) on October 1, 2002, mortgage servicing and origination revenue
was no longer derived by the Group. Refer to page 24 for a detailed discussion
of mortgage servicing and origination revenue.
The movement in the excess of net market value over net assets of life insurance
controlled entities was a loss of $160 million in 2003, a slight decline of $5
million from 2002, impacted by the effect of assumption and experience changes
underlying the valuation. Refer to page 25 for a detailed discussion of the
movement in the excess of net market value over net assets of life insurance
controlled entities.
Personnel, occupancy and general expenses of $6,354 million in 2003, were $2,353
million or 27.0% lower than 2002. Excluding the expenses relating to HomeSide
US of $2,693 million in 2002, total expenses increased 5.7%. This outcome
reflects salary increases, higher pension fund expense, computer and software
expenses, an increase in costs associated with regulatory reform and compliance,
partly offset by a reduction in the Group's staff numbers and exchange
rate movements. Refer to page 26 for a detailed discussion of operating
expenses.
The charge to provide for doubtful debts of $633 million in 2003 was $64 million
or 9.2% lower than 2002. The current year's charge has been favourably
impacted by exchange rate movements. Refer to page 27 for a detailed discussion
of the charge to provide for doubtful debts.
Income tax expense relating to ordinary activities of $1,681 million in 2003,
was $719 million or 74.7% higher than 2002. It has been impacted by the
accounting regime, which applies to unrealised gains and losses relating to
Wealth Management's statutory funds of the life business. The income
tax expense in 2003 attributable to this impact was $126 million expense,
compared to an income tax benefit of $248 million in 2002. Refer to page 29 for
a detailed discussion of income tax expense.
Year ended September 30, 2002 compared with year ended September 30, 2001
Net profit of $3,379 million in 2002, increased $1,291 million or 61.8% compared
with 2001.
Significant items are those individually significant items included in net
profit. The 2002 result included the following significant items:
- $412 million (after-tax) of restructuring expenses paid/
provided for; and
- $6 million net profit (after-tax) on sale of SR
Investment, Inc., including its controlled entity, HomeSide Lending US, which
conducted the Group's mortgage servicing rights business in the US.
18
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The 2001 result included the following significant items:
- $1,681 million net profit on sale of Michigan National
Corporation and its controlled entities; and
- $3,617 million (after-tax) write-downs of mortgage
servicing rights and goodwill relating to HomeSide US.
Net profit before significant items of $3,785 million in 2002, decreased $239
million or 5.9% compared with 2001. Cash earnings before significant items of
$3,845 million in 2002 increased $205 million or 5.6% compared with 2001.
Net interest income of $7,222 million in 2002 was $262 million or 3.8% higher
than 2001. This was driven by asset growth, particularly in relation to housing
lending and a 4 basis point decrease in net interest margin to 2.67%. The fall
in margin largely resulted from the loss of contribution of Michigan National
Corporation following its sale and the impact of product mix in Financial
Services Australia.
Net life insurance income decreased by $138 million to a $10 million loss in
2002, from $128 million income in 2001. This was driven by a decline in
investment revenue resulting from uncertain global equity markets in the second
half of the year and an increase in claims more than offsetting higher premium
and related revenue.
Other banking and financial services income of $7,006 million in 2002, was
$2,257 million or 47.5% higher than 2001. Excluding the proceeds received from
the sale of HomeSide US's operating assets and operating platform of
$2,314 million, other banking and financial services income was down 1.2%. This
was driven by a decline in treasury-related income resulting from subdued
foreign exchange and interest rate market volatility, partially offset by fee
growth as housing lending and card volumes grew.
Mortgage servicing and origination revenue of $378 million in 2002, was $432
million or 53.3% lower than 2001. Servicing fees declined as a result of higher
prepayment activity. Following the sale of HomeSide US's operating
assets and operating platform on March 1, 2002, the Group no longer derived
origination revenue.
The movement in the excess of net market value over net assets of life insurance
controlled entities was a loss of $155 million in 2002, a decrease of $665
million from 2001, impacted by the effect of assumption and experience changes
underlying the valuation.
Personnel, occupancy and general expenses of $8,707 million in 2002, were $2,237
million or 34.6% higher than 2001. Excluding the carrying value of HomeSide
US's operating assets and operating platform sold and other expenses
attributable to the sale of $2,322 million, total expenses were down 1.3%,
largely driven by a reduction in employee numbers during 2002.
The charge to provide for doubtful debts of $697 million in 2002, was $292
million or 29.5% lower than 2001. The 2002 year's charge reflected an
improvement in credit risk resulting from a review of the loan portfolio.
Income tax expense of $962 million in 2002, was $929 million or 49.1% lower than
in 2001. The 2001 income tax expense was impacted by a $292 million amount
relating to a non-allowable impairment loss on goodwill, and a $764 million
amount relating to the non-recognition of future income tax benefits relating to
the HomeSide US's mortgage servicing rights impairment loss incurred in
that year.
Adjusted to accord with US GAAP
Prepared in accordance with US GAAP, consolidated net income for the year to
September 30, 2003 was $3,527 million compared to $3,455 million in 2002 and
$1,794 million in 2001. Net income according to US GAAP for 2002 and 2001 has
been restated for the revised interpretation of APB 25 'Accounting for
Stock Issued to Employees' (refer to note 58 footnote (g)). Note 58 in
the financial report discloses reconciliations of the Group's financial
statements for the last three years for any significant adjustments to
Australian GAAP, which would be reported in applying US GAAP. There were no
individually material adjustments between US GAAP net income and Australian GAAP
net profit attributable to members of the Company for the years ended September
30, 2003, 2002 and 2001, other than those disclosed in note 58 in the financial
report.
Economic outlook
This section contains forward-looking statements. Refer to 'forward-looking
statements' on page 2.
The slowdown in the global economy toward the end of calendar 2002 has generally
continued into 2003. Improvement in activity is expected towards the end of
this calendar year. However, the outlook for the economies and markets in which
the Group operates remains varied.
The recovery of the US economy has been uneven and sluggish throughout 2003 due
to the effect on growth of the September 11, 2001 attacks, major corporate
failures, stock price declines, and the war in Iraq. While output growth slowed
markedly at the end of calendar 2002 and early 2003, it has gathered pace as
calendar 2003 progressed.
Economic growth in Europe was lacklustre throughout calendar 2002 and remains
very weak. Against this backdrop, business conditions in the economies that
contain the bulk of the Group's assets - namely Australia, New
Zealand and the UK have generally fared better during calendar 2003. The
magnitude and timing of growth will vary across economies and sectors, with
Australia and New Zealand outperforming the UK. At the sectoral level, house
prices and consumer spending have continued to grow, albeit at more modest
rates, which underpin the ongoing expansion in home mortgage lending and
consumer credit. The outlook for business lending has improved.
The Group's main areas of operation face similar economic risks and
vulnerabilities for the 2004 calendar year. House prices could soften after
their rapid growth in past years. Consumer debt levels have increased as a
proportion of net worth. The household sector will be more sensitive to
increases in interest rates.
19
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Net interest income
2003 $ 7,419 million
2002 $ 7,222 million
2001 $ 6,960 million
Net interest income is the difference between interest income and interest
expense.
Net interest income is derived from diverse business activities, including
extending credit to customers, accepting deposits from customers, amounts due to
and from other financial institutions, regulatory deposits and managing the
Group's other interest sensitive assets and liabilities, especially
trading securities,available for sale securities and investment securities.
Net interest income increased by $197 million or 2.7% to $7,419 million in 2003,
after increases of 3.8% in 2002 and 9.2% in 2001. During 2003, movements in
exchange rates decreased net interest income by $124 million, after increases of
$25 million in 2002 and $264 million in 2001. Excluding the impact of exchange
rate movements, the increase in 2003 was 4.4%, compared with 3.4% in 2002 and
5.1% in 2001. This increase was the result of strong housing lending growth,
modest business lending growth and the lower cost of debt funding, partly offset
by lower Corporate & Institutional Banking income and growth in lower yield
structured finance products.
Volume and rate analysis
The following table allocates changes in net interest income between changes in
volume and changes in rate for the last three years ended September 30. Volume
and rate variances have been calculated on the movement in average balances and
the change in interest rates on average interest-earning assets and
average interest-bearing liabilities. The variance caused by changes of
both volume and rate has been allocated in proportion to the relationship of the
absolute dollar amounts of each change to the total.
2003 over 2002 2002 over 2001 2001 over 2000
Increase/ Increase/(decrease) Increase/(decrease)
(decrease) due to change in due to change in
due to change in
Average Average Total Average Average Total Average Average Total
balance rate balance rate balance rate
$m $m $m $m $m $m $m $m $m
Interest-earning
assets
Due from other
financial
institutions
Australia 41 (34 ) 7 39 (47 ) (8 ) 27 4 31
Overseas (66 ) 15 (51 ) (45 ) (303 ) (348 ) 153 (80 ) 73
Marketable debt
securities
Australia 135 34 169 106 (18 ) 88 (18 ) 4 (14 )
Overseas (129 ) (4 ) (133 ) (29 ) (410 ) (439 ) 448 (39 ) 409
Loans and advances
Australia 1,166 (23 ) 1,143 755 (895 ) (140 ) 797 (69 ) 728
Overseas 645 (648 ) (3 ) 261 (1,559 ) (1,298 ) 883 (206 ) 677
Regulatory
deposits
Overseas 1 (2 ) (1 ) - - - - - -
Other (1,271 ) 765 (506 ) (489 ) (810 ) (1,299 ) 917 (419 ) 498
interest-earning
assets
Change in interest 522 103 625 598 (4,042 ) (3,444 ) 3,207 (805 ) 2,402
income
20
--------------------------------------------------------------------------------
2003 over 2002 2002 over 2001 2001 over 2000
Increase/ Increase/(decrease) Increase/
(decrease) due to change in (decrease)
due to change in due to change in
Average Average Total Average Average Total Average Average Total
balance rate balance rate balance rate
$m $m $m $m $m $m $m $m $m
Interest-bearing
liabilities
Due to other
financial
institutions
Australia 28 (24 ) 4 31 (54 ) (23 ) 42 (9 ) 33
Overseas 164 10 174 39 (652 ) (613 ) 600 (148 ) 452
Savings deposits
Australia 83 (1 ) 82 25 (60 ) (35 ) (18 ) 8 (10 )
Overseas (2 ) 8 6 (22 ) (258 ) (280 ) (19 ) (34 ) (53 )
Other demand
deposits
Australia 32 137 169 124 (302 ) (178 ) 100 111 211
Overseas (45 ) (101 ) (146 ) 82 (120 ) (38 ) 77 (19 ) 58
Time deposits
Australia 437 (7 ) 430 202 (323 ) (121 ) 20 75 95
Overseas 54 (86 ) (32 ) (71 ) (1,019 ) (1,090 ) 635 (127 ) 508
Government and
official
institution
deposits
Australia 4 1 5 3 (8 ) (5 ) (2 ) 1 (1 )
Overseas 5 (21 ) (16 ) (20 ) (59 ) (79 ) 34 (6 ) 28
Short-term
borrowings
Overseas (39 ) (125 ) (164 ) (136 ) (177 ) (313 ) 16 7 23
Long-term
borrowings
Australia 5 (154 ) (149 ) 66 (421 ) (355 ) 320 (6 ) 314
Overseas (103 ) 23 (80 ) (91 ) (55 ) (146 ) 153 (111 ) 42
Other debt issues
Australia (11 ) 2 (9 ) (4 ) (9 ) (13 ) 15 (9 ) 6
Overseas 9 (26 ) (17 ) (7 ) (1 ) (8 ) (4 ) 24 20
Other 107 64 171 830 (1,239 ) (409 ) (171 ) 258 87
interest-bearing
liabilities
Change in interest 728 (300 ) 428 1,051 (4,757 ) (3,706 ) 1,798 15 1,813
expense
Change in net (206 ) 403 197 (453 ) 715 262 1,409 (820 ) 589
interest income
Average interest-earning assets for 2003 increased by $22.8 billion or 8.4% to
$293.3 billion, from $270.5 billion in 2002 and $256.6 billion in 2001. (Refer
to 'volumes' below for information). The impact of the
increasing volumes on interest income, was an increase of $522 million in 2003,
$598 million in 2002 and $3,207 million in 2001. The movement in rates over the
same period resulted in an increase in interest income of $103 million in 2003,
and falls of $4,042 million in 2002 and $805 million in 2001. This reflected an
environment of volume growth in low margin products.
Average interest-bearing liabilities increased by $15.6 billion in 2003, after
increases of $10.8 billion in 2002 and $37.8 billion in 2001. The impact of the
increasing volumes on interest expense was an increase of $728 million in 2003,
$1,051 million in 2002, and $1,798 million in 2001. The movement in rates over
the same period resulted in a decline in interest expense of $300 million in
2003, $4,757 million in 2002 and an increase of $15 million in 2001. This has
resulted from a changing mix of borrowings, with term deposits increasing as
investors seek safe and low risk investments, thus reducing the short-term
borrowing requirements, and a fall in interest rates reducing expense.
Interest spreads and margins
2003 2002 2001
$m $m $m
Australia
Net interest income 3,792 3,613 3,374
Average interest-earning assets 151,225 129,458 115,747
Interest spread adjusted for interest foregone on non-accrual 2.37 2.67 2.59
and restructured loans (%)
Interest foregone on non-accrual and restructured loans (%) (0.04 ) (0.04 ) (0.03 )
Net interest spread (%) (1) 2.33 2.63 2.56
Benefit of net free liabilities, provisions and equity (%) 0.18 0.16 0.35
Net interest margin (%) (2) 2.51 2.79 2.91
21
--------------------------------------------------------------------------------
2003 2002 2001
$m $m $m
Overseas
Net interest income 3,627 3,609 3,586
Average interest-earning assets 160,169 154,282 151,104
Interest spread adjusted for interest foregone on non-accrual 1.86 2.03 2.05
and restructured loans (%)
Interest foregone on non-accrual and restructured loans (%) (0.02 ) (0.02 ) (0.02 )
Net interest spread (%) (1) 1.84 2.01 2.03
Benefit of net free liabilities, provisions and equity (%) 0.43 0.33 0.34
Net interest margin (%) (2) 2.27 2.34 2.37
Group
Net interest income 7,419 7,222 6,960
Average interest-earning assets 293,318 270,527 256,603
Interest spread adjusted for interest foregone on non-accrual 2.21 2.41 2.37
and restructured loans (%)
Interest foregone on non-accrual and restructured loans (%) (0.03 ) (0.02 ) (0.03 )
Net interest spread (%) (1) 2.18 2.39 2.34
Benefit of net free liabilities, provisions and equity (%) 0.35 0.28 0.37
Net interest margin (%) (2) 2.53 2.67 2.71
--------------------
(1) Net interest spread represents the difference between the
average interest rate earned and the average interest rate incurred on funds.
(2) Net interest margin is net interest income as a percentage of
average interest-earning assets.
Net interest income increased by $197 million to $7,419 million in 2003, driven
by 8.4% growth in average interest-earning assets to $293.3 billion, partly
offset by a 14 basis point decline in net interest margin to 2.53%. Australian
net interest income increased by 5.0% to $3,792 million, with average
interest-earning assets growing 16.8% to $151.2 billion and net interest margin
declining 28 basis points to 2.51%. Overseas net interest income increased by
0.5% to $3,627 million, with average interest-earning assets growing by 3.8% to
$160.2 billion, and the net interest margin falling 7 basis points to 2.27%.
Volumes
Average interest-earning assets for 2003 increased by $22.8 billion or 8.4% to
$293.3 billion, from $270.5 billion in 2002 and $256.6 billion in 2001. The
main contributors to the growth were loans and advances in Australia and New
Zealand, which increased by 17.0% and 8.9% respectively, over the year to
September 30, 2003. Loan growth was predominantly in real estate. Average
interest-earning assets were impacted by the sale of HomeSide US. For a further
discussion of the main factors influencing the movement in average
interest-earning assets, refer to 'gross loans and advances' on
page 45.
Net interest margin
The net interest margin (net interest income as a percentage of average
interest-earning assets), which includes the impact of non-accrual and
restructured loans on net interest income, decreased by 14 basis points to 2.53%
in 2003, from 2.67% in 2002 and 2.71% in 2001. The decrease during 2003 was
impacted by lower deposit margins, reduced trading income and an increase in
structured lending products in Corporate & Institutional Banking. The impact of
these items were partially offset by the funding benefit on the proceeds of the
sale of HomeSide US and lower cost of debt funding.
The interest rate on Australian interest-earning assets decreased by 52 basis
points to 6.4% in 2003, from 6.9% in 2002 and 8.5% in 2001, while the interest
rate on interest-bearing liabilities decreased by 24 basis points to 4.1% from
4.4% in 2002 and 6.1% in 2001. Net interest margins in Australia declined
during 2003, resulting from lower deposit margins and adverse product mix with
growth in housing lending and the focus on selective business lending to enhance
the portfolio asset quality.
The interest rate on overseas interest-earning assets was flat at 5.2% in 2003
compared to 5.3% in 2002 and 7.2% in 2001, while the interest rate on interest-
bearing liabilities was also flat at 3.2% in 2003, compared to 3.2% in 2002 and
5.0% in 2001. Overseas net interest margins decreased by 7 basis points to
2.27% from 2.34% in 2002 and 2.37% in 2001. The decrease is due to an increase
in structured lending products in Corporate & Institutional Banking.
Net life insurance income
2003 $ 444 million
2002 $ (10 ) million
2001 $ 128 million
Net life insurance income comprises the revenue and interest component of
premiums, dividends, realised and unrealised capital gains and other returns on
investments under the life insurer's control, net of claims expense,
change in policy liabilities, policy acquisition and maintenance expense, and
investment management fees (refer to note 57 in the financial report for a
definition of the life insurer).
22
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Net life insurance income increased by $454 million to $444 million income in
2003, from a $10 million loss in 2002 and $128 million income in 2001.
Life insurance revenue increased by $3,562 million to $3,708 million in 2003
from $146 million in 2002 and $197 million in 2001. This increase was impacted
by an increase in investment revenue (increase of $3,747 million in 2003)
reflecting the improved performance of global equity markets, particularly over
the six months to September 30, 2003. This is offset by an increase in policy
liabilities. There is a further offset within the income tax expense, which
includes the tax expense for policyholders relating to investment income.
Premium and related revenue decreased $185 million or 16.3% to $949 million due
to decreased premium revenue from the international businesses arising from the
strength of the Australian dollar, decreased investment business sales in
Australia and a decline in premiums from the closed book of traditional
business. This has been partly offset by increased insurance premiums
reflecting growth in volumes.
Life insurance expenses increased by $3,108 million to $3,264 million in 2003
from $156 million in 2002 and $69 million in 2001. This is due to the increase
in policy liabilities resulting from the improved performance of global equity
markets, and is consistent with the increase in investment revenue. Claims
expense increased $2 million or 0.2% to $958 million as a result of increased
surrenders in the closed traditional life business, as well as increased
insurance claims resulting from the growth in volumes, partly offset by the
decrease in claims expense from the international businesses due to the impact
of strengthening Australian dollar.
Other banking and financial services income
2003 $ 5,010 million
2002 $ 7,006 million
2001 $ 4,749 million
Other banking and financial services income includes loan fees from banking,
money transfer fees, fees and commissions, treasury-related income, investment
management fees, fleet management fees and other income (including rental
income, dividends received and profit on sale of property, plant and equipment
and other assets).
Other banking and financial services income decreased by $1,996 million or 28.5%
to $5,010 million in 2003, after increases of 47.5% in 2002 and 15.2% in 2001.
The movement reflects the inclusion in 2002 of the $2,314 million proceeds
received from the sale of HomeSide US's operating assets and operating
platform to Washington Mutual Bank, FA. on March 1, 2002, as well as the loss of
contribution from HomeSide US in 2003. Refer below for a detailed analysis of
the main categories of other banking and financial services income.
Loan fees from banking
2003 $ 1,441 million
2002 $ 1,361 million
2001 $ 1,334 million
Loan fees from banking primarily consist of acceptance fees for accepting bills
of exchange, application fees to cover costs of establishing lending facilities,
commitment fees to compensate for undrawn funds set aside for a customer's
ultimate use, and service fees to cover costs of maintaining credit
facilities.
Loan fees from banking increased by $80 million or 5.9% to $1,441 million in
2003, after increases of 2.0% in 2002 and 7.1% in 2001. This increase reflects
lending growth, primarily in Australia and New Zealand, particularly in relation
to housing lending.
Money transfer fees
2003 $ 1,026 million
2002 $ 1,014 million
2001 $ 1,043 million
Money transfer fees are fees earned on the transfer of monies between accounts
and/or countries and also include fees for bank cheques and teletransfers,
dishonours and special clearances, and periodical payments.
Money transfer fees increased by $12 million or 1.2% to $1,026 million in 2003,
after a decrease of 2.8% in 2002 and 0.5% in 2001. This increase reflects
sustained activity across all regions during the year.
Fees and commissions
2003 $ 1,158 million
2002 $ 1,118 million
2001 $ 998 million
Fees and commissions consist of fees charged to cover the costs of establishing
credit card facilities, commissions from selling insurance and investment
products and other fees.
23
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Fees and commissions increased by $40 million or 3.6% to $1,158 million in 2003,
after an increase of 12.0% in 2002 and a decrease of 9.1% in 2001. This
increase is primarily due to higher fees in relation to structured finance
transactions, partly offset by lower income from the outsourcing of the merchant
acquiring business in Europe.
Treasury-related income
2003 $ 625 million
2002 $ 563 million
2001 $ 721 million
Treasury-related income includes all realised and unrealised profits and losses
resulting directly from foreign exchange trading activities, trading securities
and interest rate-related and other derivative trading activities.
Treasury-related income increased by $62 million or 11.0% to $625 million in
2003, after a decrease of 21.9% in 2002 and an increase of 54.1% in 2001. The
increase during 2003 has primarily resulted from higher activity in Corporate &
Institutional Banking largely due to higher interest rate derivative income,
partially offset by lower foreign exchange derivative income.
Investment management fees
2003 $ 303 million
2002 $ 297 million
2001 $ 305 million
Investment management fee income relates to management fees received for
services rendered acting as a responsible entity and/or an approved trustee for
retail and wholesale unit trusts.
Investment management fees increased by $6 million or 2.0% to $303 million in
2003, after a decrease of 2.6% in 2002. The increase in 2003 reflects sustained
activity in Wealth Management during the year.
Fleet management fees
2003 $ 85 million
2002 $ 56 million
2001 $ 54 million
Fleet management fees consist of fleet and custom fleet management fees.
Specifically, fleet management fees include fleet management, maintenance and
fleet fuel card fees, whilst custom fleet management fees includes operating
lease, sale and leaseback and management service fees.
Fleet management fees increased by $29 million or 51.8% to $85 million in 2003,
after an increase of 3.7% in 2002 and decrease of 12.5% in 2001. The increase
in 2003 reflects the impact of the acquisition of Custom Service Leasing (New
Zealand) Limited (formerly Hertz Fleetlease Limited) on November 1, 2002.
Other income
2003 $ 372 million
2002 $ 2,597 million
2001 $ 294 million
Other income includes rental income, dividends received, profit on sale of
property, plant and equipment and other assets, foreign exchange income and
sundry income.
Other income decreased by $2,225 million or 85.7% to $372 million in 2003, after
increases of 783.3% in 2002 and 36.1% in 2001. Excluding the impact of the sale
of HomeSide US, other income increased by 56.3% during 2003, primarily
reflecting the sale of properties in Australia and a gain on the restructure of
hedging swaps.
Mortgage servicing and origination revenue
Net mortgage servicing fees
2003 $ - million
2002 $ 187 million
2001 $ 474 million
24
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Net mortgage servicing fees related to HomeSide US and represented fee income
derived from mortgage servicing activities less amortisation of capitalised
costs (refer to note 1 in the financial report).
Net mortgage servicing fees decreased from $187 million in 2002 to $nil in 2003.
On October 1, 2002, the Group sold SR Investment, Inc., the parent entity of
HomeSide US, to Washington Mutual Bank, FA. The sale has resulted in the
complete disposal of the associated mortgage servicing rights. Following this
sale, mortgage servicing fees were no longer derived by the Group.
Net mortgage origination revenue
2003 $ - million
2002 $ 191 million
2001 $ 336 million
Net mortgage origination revenue related to HomeSide US and comprised fees
earned on the origination of mortgage loans, gains and losses on the sale of
loans, gains and losses resulting from hedges of secondary marketing activity,
and fees charged to review loan documents for purchased loan production.
Net mortgage origination revenue decreased from $191 million in 2002 to $nil in
2003. On March 1, 2002, Homeside US sold its operating assets and operating
platform to Washington Mutual Bank, FA. Following this sale, mortgage
origination revenue was no longer derived by the Group.
Movement in the excess of net market value over net assets of life insurance
controlled entities
2003 $ (160 ) million
2002 $ (155 ) million
2001 $ 510 million
Australian Accounting Standard AASB 1038 "Life Insurance Business"
(AASB 1038) requires life insurance entities of the Group to value
their investments in controlled entities at market value, with changes in the
excess of net market value over net assets reflected in the consolidated
statement of financial performance.
The revaluation of life insurance entities' interest in controlled
entities gave rise to a loss of $160 million before tax, reflecting the movement
in the excess of the net market value over the net assets of companies owned by
National Australia Financial Management Limited (NAFiM), adjusted for capital.
Values shown are directors' market valuations. The valuations are based
on discounted cash flow (DCF) valuations prepared by Tillinghast-Towers Perrin,
using, for the Australian and New Zealand entities, risk discount rates
specified by the directors.
NAFiM subsidiaries market value summary
Net Value of Embedded Value of Market
assets (1) in force value future new value
business business
(2)
$m $m $m $m $m
Market value at September 30, 2002 1,301 2,252 3,553 2,922 6,475
Operating profit after tax (3) 293 - 293 - 293
Net capital transfers (4) 25 - 25 - 25
Increase in shareholders' net 318 - 318 - 318
assets
Movement in the excess of net market value
over net assets of life insurance
controlled entities, components before
tax:
Roll forward and business assumptions
Roll forward of DCF (5) - 399 399 - 399
Change in assumptions and experience - (235 ) (235 ) (324 ) (559 )
Movement in the excess of net market value - 164 164 (324 ) (160 )
over net assets of life insurance
controlled entities before tax (6)
Excess movements (7) (47 ) 47 - - -
Market value at September 30, 2003 1,572 2,463 4,035 2,598 6,633
--------------------
(1) Net assets represent the shareholder capital, reserves and
retained profits. A portion of these net assets is non-distributable, as it is
required to support regulatory capital requirements. The cost of this capital
support is reflected in the value of inforce business.
(2) For some smaller entities, the projection of future new business
and inforce business is combined for the purposes of valuation. For these
entities, the value of future new business is reflected in the embedded value.
(3) Operating profit after tax is before the movement in the excess
of net market value over net assets of life insurance controlled entities and
excludes the profits of entities outside the market value accounting
environment; ie. the operating profits after tax from NAFiM's own
business, and other entities not owned by NAFiM.
25
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(4) Capital and other movements represent movements in value such as
the payment of dividends, capital injections and reductions, acquisitions of
subsidiaries and foreign exchange movements on intragroup debt related to
international subsidiaries.
(5) The roll forward represents the growth over the period at the
valuation discount rate over and above operating profit.
(6) The movement in excess of net market value over net assets of
life insurance controlled entities before tax does not include revaluation
uplift in respect of NAFiM's own business. AASB 1038 requires assets of
a life company to be valued at net market value; since NAFiM is the parent life
entity, the change in market value of its own life business is not brought to
account.
(7) Excess movements represent excess on the increase of the Group's
interest in Plum Financial Services Limited and Advance MLC Assurance
Co. Ltd and foreign exchange impacts on the net assets of international
subsidiaries and market value of intragroup debt.
The components that contributed to the $160 million ($200 million after tax)
negative movement in the excess of 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
2002, the effect of weaker operating environments reducing the values of the
international businesses, and the over all 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).
Significant revenue
Proceeds from the sale of foreign controlled entities
The results and assets and liabilities of SR Investment, Inc. and its controlled
entities were included up to and including the year to September 30, 2002. On
October 1, 2002, the Group sold SR Investment, Inc. (the parent entity of
HomeSide US) to Washington Mutual Bank, FA. Controlled entities other than
HomeSide US were excluded from the sale. The Group received proceeds on sale of
$2,671 million (US$1,453 million) for assets with a cost of $2,686 million,
resulting in a profit on sale of $6 million after all disposal costs, including
income tax.
Michigan National Corporation and its controlled entities' results were
included up to and including the six months to March 31, 2001. On April 1,
2001, the Group sold Michigan National Corporation and its controlled entities
to ABN AMRO North America, Inc., a subsidiary of ABN AMRO NV. The Group
received proceeds on sale of $5,314 million (US$2,750 million) from the sale of
assets with a cost of $2,929 million, resulting in a profit on sale of $1,681
million after all disposal costs, including taxation. Further, an amount of
$1,118 million was transferred from the foreign currency translation reserve to
distributable retained profits in relation to the sale, giving rise to a total
gain of $2,799 million.
Operating expenses
Personnel expenses
2003 $ 3,416 million
2002 $ 3,379 million
2001 $ 3,725 million
Personnel expenses increased by $37 million or 1.1% to $3,416 million in 2003,
after a decrease of 9.3% in 2002 and an increase of 9.5% in 2001. Excluding the
impact of the sale of HomeSide US, personnel expenses increased 5.7% during
2003. This increase reflects market-based salary increases across regions,
increased pension fund expenses and higher contractor costs. The impact of this
was partly offset by a reduction in staff (full-time equivalent employee)
numbers as a result of the implementation of productivity initiatives across the
Group (refer to 'employees' on page 35).
Occupancy expenses
2003 $ 556 million
2002 $ 559 million
2001 $ 587 million
Occupancy expenses decreased by $3 million or 0.5% to $556 million in 2003,
after a decrease of 4.8% in 2002 and an increase of 14.6% in 2001.
The decrease reflects a reduced contribution from HomeSide US following its
sale, offset by appreciating rental rates and on-costs (ie. security expenses)
and higher costs associated with the sale and lease-back of buildings in
Australia and New Zealand.
26
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General expenses
2003 $ 2,382 million
2002 $ 4,769 million
2001 $ 2,158 million
General expenses decreased by $2,387 million or 50.1% to $2,382 million in 2003,
after increases of 121.0% in 2002 and 13.9% in 2001. Excluding the impact of
the sale of HomeSide US, general expenses increased $146 million during 2003.
The increase has been impacted by higher computer and software expenses impacted
by the write-off of the development work associated with the global roll out of
the SAP core banking module and the write-off of European Monetary Unit
development costs. In addition, higher professional fees and other expenses
associated with the industry-wide regulatory reform such as Basel II, Financial
Services Reform Act, International Financial Reporting Standards, and the United
States Sarbanes-Oxley Act of 2002 have also contributed to the increase. This
has been partially offset by the compensation provided of $64 million in 2002
compared with $27 million in 2003, for investors relating to a reduction in unit
prices. Further, the decrease has been impacted by lower fees and commissions
within Wealth Management, and a reduction in communications, postage and
stationery costs with the renegotiation of telecommunication contracts within
Australia and Europe.
(Refer to notes 4 and 5 in the financial report for details of revenue and
expense items).
Charge to provide for doubtful debts
2003 $ 633 million
2002 $ 697 million
2001 $ 989 million
The total charge to provide for doubtful debts decreased by $64 million or 9.2%
to $633 million in 2003, after a decrease of 29.5% in 2002 and an increase of
68.2% in 2001.
The charge in Australia increased by $213 million to $321 million in 2003, after
a decrease of 77.2% in 2002 and an increase of 128.5% in 2001. The 2003 charge
was impacted by a small number of large corporate exposures in Financial
Services Australia and Corporate & Institutional Banking, During the 2002 year,
a review of the risk profile within the Corporate & Institutional Banking and
Financial Services Australia (Business) loan portfolios, resulted in a reduced
charge.
(The nature of general and specific provisioning is explained in note 1(q)(i) in
the financial report.)
The charge in Europe decreased by $108 million or 28.1% to $277 million in 2003,
after a decrease of 2.8% in 2002 and an increase of 36.1% in 2001. Clydesdale
and Yorkshire Banks' charges decreased by $112 million reflecting a
change in the mix of the loan portfolio, with falling personal loan volumes and
higher housing volumes. Northern and National Irish Banks' charges
decreased by $24 million, reflecting the recovery of a large corporate exposure.
The balance of the reduction reflects the impact of the realignment of Corporate
& Institutional Banking's loan portfolio during 2002, in order to reduce
its risk profile.
The charge in New Zealand increased by $23 million to a charge of $11 million in
2003, compared with a credit of $12 million in 2002 and a charge of $10 million
in 2001. The increase has resulted from a charge in relation to a large
corporate exposure in Corporate & Institutional Banking, whilst during 2002 the
loan portfolio provisioning requirement was reviewed resulting in a write-back
to the general provision.
The charge in the United States decreased by $181 million or 84.2% to $34
million in 2003, after increases of 100.9% in 2002 and of 52.9% in 2001. The
decrease has resulted from the inclusion of a major provisioning charge in 2002
for a large corporate exposure in Corporate & Institutional Banking.
The charge in Asia decreased by $11 million to a credit of $10 million in 2003
compared with a charge of $1 million in 2002 and $3 million in 2001. The
decrease has resulted from a review of the portfolio favourably impacting the
charge to provide for doubtful debts.
Charge to provide for doubtful debts by region
2003 2002 2001 2003/2002
$m $m $m % change
Australia 321 108 473 large
Europe
Clydesdale and Yorkshire Banks 250 362 348 (30.9 )
Northern and National Irish Banks (1 ) 23 16 large
Other 28 - 32 large
277 385 396 (28.1 )
New Zealand 11 (12 ) 10 large
United States 34 215 107 (84.2 )
Asia (10 ) 1 3 large
Total charge to provide for doubtful debts 633 697 989 (9.2 )
27
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Net write-offs (bad debts written off less recoveries) in 2003 were $798 million
compared with $814 million in 2002 and $587 million in 2001. As a percentage of
risk-weighted assets, net write-offs were 0.3% in 2003, 0.3% in 2002 and 0.2% in
2001.
Percentage of risk-weighted assets
2003 2002 2001
% % %
Australia (1)
Charge 0.22 0.08 0.36
Net write-offs 0.29 0.23 0.19
Europe (1)
Charge 0.41 0.53 0.53
Net write-offs 0.49 0.55 0.41
New Zealand (1)
Charge 0.05 (0.05 ) 0.05
Net write-offs 0.05 0.05 0.05
United States (1)
Charge 0.35 1.35 0.43
Net write-offs 0.34 0.64 0.09
Asia (1)
Charge (0.23 ) 0.02 0.04
Net write-offs 0.05 (0.02 ) (0.01 )
Group
Charge 0.25 0.28 0.38
Net write-offs 0.32 0.33 0.23
--------------------
(1) Ratio calculated as a percentage of risk-weighted assets of
Australia, Europe, New Zealand, United States and Asia, as appropriate.
The Group maintains a conservative and prudent approach to actual and potential
loan losses. The overall provision for doubtful debts (refer to notes 1(q)(i)
and 17 in the financial report) is augmented as necessary by a charge against
profit having regard to both specific and general factors. An explanation of
the Group's lending and risk analysis policies is provided within
'risk management' on page 51.
Significant expenses
Restructuring costs
During 2002, the Group recognised restructuring costs of $580 million resulting
from the Positioning for Growth and other restructuring initiatives (refer to
note 5(a) in the financial report). The majority of these costs are expected to
be recovered by the end of 2004 from annual productivity improvements and
revenue enhancements. The Positioning for Growth initiative was a fundamental
reorganisation of the management and organisational structure of the Group,
including the appointment of a new senior management team.
The restructuring costs were incurred to deliver a significant proportion of the
announced cost reduction target of $370 million per annum by September 2004. It
is the achievement of this target that will reflect the recovery of the majority
of the restructuring costs incurred in 2002. Of these savings, approximately
80% relate to personnel costs, which are directly measurable each reporting
period. Redundancy payments have a payback period of approximately one year.
The balance of the savings relate to non-personnel costs, which are not measured
at an account level.
In addition, further costs savings will also effectively be achieved through the
reduction in rental charges over the remaining term of the leases, which extend
beyond 2004, as result of an accounting benefit for the charge to provide for
surplus lease space and the accounting benefit from the write-off of technology-
related property, plant and equipment of $132 million is reflected in the
cessation of future stream of depreciation and amortisation.
Other restructuring costs incurred in 2002 and 2001 have been expensed as
incurred. Such costs were not material (refer to note 5 in the financial
report).
Cost of foreign controlled entities sold
The results and assets and liabilities of SR Investment, Inc. and its controlled
entities were included up to and including the year to September 30, 2002. On
October 1, 2002, the Group sold SR Investment, Inc. (the parent entity of
HomeSide US) to Washington Mutual Bank, FA. Controlled entities other than
HomeSide US were excluded from the sale. The Group received proceeds on sale of
$2,671 million (US$1,453 million) for assets with a cost of $2,686 million,
resulting in a profit on sale of $6 million after all disposal costs, including
income tax.
28
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Michigan National Corporation and its controlled entities' results were
included up to and including the six months to March 31, 2001. On April 1,
2001, the Group sold Michigan National Corporation and its controlled entities
to ABN AMRO North America, Inc., a subsidiary of ABN AMRO NV. The Group
received proceeds on sale of $5,314 million (US$2,750 million) from the sale of
assets with a cost of $2,929 million, resulting in a profit on sale of $1,681
million after all disposal costs, including taxation. Further, an amount of
$1,118 million was transferred from the foreign currency translation reserve to
distributable retained profits in relation to the sale, giving rise to a total
gain of $2,799 million.
Impairment loss on mortgage servicing rights
In July 2001, the directors of the Company determined that the carrying value of
the mortgage servicing rights asset held by HomeSide US, a controlled entity of
the Company, exceeded the fair value. An impairment loss of $888 million was
recognised to reflect the asset at its fair value. This impairment was the
result of hedging positions which were adversely impacted by extreme volatility
in US interest rate markets.
In September 2001, the directors of the Company determined that a second
impairment loss on mortgage servicing rights was required in order to reflect
the mortgage servicing rights asset at their fair value. This impairment loss
of $755 million was the result of an incorrect interest rate assumption
discovered in an internal model used to determine the fair value of HomeSide
US's mortgage servicing rights.
Charge to provide for mortgage servicing rights valuation adjustment
On September 2, 2001, the directors of the Company decided to value HomeSide US
at its estimated market sale value, rather than as an ongoing part of the Group,
after reviewing its position within the Group's current core strategies
of banking and wealth management. As a result of this decision, the carrying
value of HomeSide US's core asset, mortgage servicing rights, was
revalued and a provision for mortgage servicing rights valuation adjustment of
$1,436 million was recognised in order to reflect the mortgage servicing rights
asset at its estimated market sale value.
Impairment loss on goodwill
In conjunction with the directors' decision to value HomeSide US on an
estimated market sale value basis, the decision was made that the carrying value
of goodwill which arose on the acquisition of HomeSide US was in excess of its
recoverable amount. Accordingly, an impairment loss of $858 million was
recognised, in order to reduce the carrying value of this goodwill to $nil.
Income tax expense
2003 $ 1,681 million
2002 $ 962 million
2001 $ 1,891 million
Income tax expense increased by $719 million or 74.7% to $1,681 million in 2003,
after a decrease of 49.1% in 2002 and an increase of 15.9% in 2001. The level
of income tax expense is impacted by the accounting regime which applies to
unrealised gains and losses relating to Wealth Management's statutory
funds of the life business. The income tax expense in 2003 attributable to this
impact was $126 million tax expense, compared to an income tax benefit of $248
million in 2002.
29
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