National Australia Bank is a large financial services group providing a comprehensive and integrated range of financial products and services throughout Australia, New Zealand and parts of the United Kingdom. NAB is Australia's largest bank. Australian banking operations dominate and represent 60% of group assets.

NAB has altered its previous global expansion strategy following the HomeSide debacle in the US and the divestment of the Irish banks. Management is focused on restoring market share and earnings in the Australian, New Zealand and UK banking operations while expanding domestic wealth management operations. The change in top management in the three geographic regions has had a beneficial impact on culture and this is having a tangible impact on operating efficiency and associated ratios. Restructuring is focused on driving organic growth from existing franchises and acquisition growth is of secondary importance at present.National Australia Bank reported an 8% increase in cash NPAT from $2.071bn to $2.237bn for ongoing operations for the six months to March 31, 2008. Headline NPAT, which includes cash and non-cash items, jumped 25.8% to $2.687bn and included a $225m gain on the Visa IPO and $230m from Treasury shares offset by provisions - non-cash - of $150m for bad and doubtful debts - economic cycle adjustment and $74m for new business initiatives. The result was driven by solid lending growth and excellent cost control emanating from productivity, outsourcing and offshoring programs and despite margin pressure. Cash EPS rose 8.7% from 126.2¢ to 137.2¢ but was 3.4% below 2H07. Interim dividend increased by 11.5% from 87¢ to 97¢ fully franked. The payout ratio based on cash NPAT was 70.5% up from 68.2% in 1H07. The DRP is in operation at a 2.5% discount and is to be fully underwritten indicating the need to conserve capital. Cash return on equity improved 30 points to 16.8% but fell 90 points from 2H07 of 17.7%. Australia Region - Cash NPAT $1.585bn - Banking $1.367bn, MLC $220m and Other ($2m). Australia Banking cash earnings rose 16.8% driven by revenue growth of 11.4% comprising an 8.4% increase in net interest income and a 21.2% jump in non-interest income. Business & Private Banking cash earnings increased 18.2% to $948m while Retail Banking rose 13.9% to $419m. Average interest earning assets rose 11.2% to $247.7bn while retail deposits increased by 13.2% to $104.9bn - both above system growth. Net interest margin (NIM) fell 6 points to 2.36%. Boosting the jump in underlying profit was a 480 point fall in the cost-to-income ratio to 42.6% - the lowest of all major banks. Impairment charge increased 66% from $181m to $301m. MLC increased cash earnings 20% to $220m represented by Investments cash earnings of $125m - up 16.8% and Insurance cash earnings of $95m - up 25%. Spot funds under management (FUM) were up 0.5% to $103bn while average FUM rose 8.5% to $106.5bn. Average annual inforce premiums rose 10.7% to $808.7m. The operating expense to net income ratio fell from 59% to 52%. UK Region - Cash NPAT rose 17.8% to £139m but up just 5.8% to A$311m. The strong A$ dampened the performances in £ Sterling. Flat operating expenses and impairment charge assisted the result. Interest earning assets increased 28% to £32.6bn but a 50 point fall in NIM to 2.66% took the gloss off the volume increase. The cost-to-income ratio fell 200 points from 60.3% to 58.3%. New Zealand Region - Cash earnings increased 14.9% to NZ$239m and by 13.1% to A$207m. Net interest income rose 11.6% with interest earnings assets up 11.6%. Almost all the volume benefit was retained with NIM down just two points to 2.49%. The cost-to-income ratio fell 290 points from 50.7% to 47.8%. nabCapital - Cash earnings increased 10.4% from $338m to $373m driven by a 34.7% jump in net operating income to $1.142bn. Operating expanses rose just 5.4% resulting in a 60% jump in underlying profit from $458m to $731m. Gross loans and acceptances rose 38% to $58.9bn. Impairment charge increased by $232m to $265m and included specific provision charges for two facilities rated as impaired and increased collective provisions associated with liquidity facilities extended to the Securitisation business following uncertainty in this market and related ratings downgrades. Cost-to-income ratio fell 1,000 points from 46% to 36%.

30/09/07

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