National Australia Bank Limited · ASX:NAB
National Australia Bank — H1 2004 Earnings Presentation
53 slides from National Australia Bank's earnings presentation, Jun 2, 2004
Slide 1: Half Year Investor Pack 2004
HALF YEAR INVESTOR PACK 2004 John Stewart, Managing Director and CEO Richard McKinnon, Chief Financial Officer
Slide 2: Key result summary
04 key result summa Basic cash earnings per share (before significant items) 76% Vv 9.3% v Diluted cash earnings per share (before significant items) TB%Y 9.3%Y Cash earings (before significant items) 87% 94% v Dividend of 83 cents Bonet Retum on equity (before significant items) at 18.8% 200 bps‘ 1
Slide 3: Europe high returns but not sustainable
Europe high returns but not sustainable Return on Equity - UK Banks (2000-2003) Net Interest Margin — UK Banks (2000-2003) 8% a6) ir rete AVG Ex NAB — SS Vos T : 1 O% 2000 2001 «20022008 2000 2001-2002 2003 —uovostsa = — Hoos — 8 = NORTHERN ROCK —-—= BARCLAYS
Slide 4: Short term focus means turnaround will take time
Short term focus means turnaround will take time Cumulative Growth in Profit before Tax UK Banks (2000-2003) (Normalised to 100 in 2000) 175 = Customer attrition erodes income growth 150 ExNAB UK AVG * Limited investment in 125 growth NAB UK Banking = Expense growth driven * by regulatory and compli
Slide 5: Early signs that turnaround is underway
Early signs that turnaround is underway Recent Actions = Recruiting new talent - Third party ~_ IFS expansion = New competitive products launched - Current account - Offset mortgage * Expanding IFS centres in the South of England Green Shoots Customer attrition slowing Now growing customers in premi
Slide 6: Corporate & Institutional Banking - focus on maintaining the franchise
Corporate & Institutional Banking - focus on maintaining the franchise Corporate & Institutional banking Income Growth Custodian Services: ‘Specialised Finance Financial institutions Risk & Trading| Other 0 50 100 150 200 250 © March 03 IE Growth on Mar 03 ex FX Bl Decline on Mar 03 ex FX Focus cont
Slide 7: Financial Services Australia strong franchise refocusing on growth
Financial Services Australia strong franchise refocusing on growth Strong Franchise Refocusing on growth Overall Business* Getting the risk balance right - Maintaining market share 26% - Leading share of wallet 64% Addressing the soft spots - Some loss in sole proprietor - Personal loans and cards s
Slide 8: Financial Services Australia de-risking outcomes
Financial Services Australia de-risking outcomes Level of security Financial Services Australia CRS 1-6 (investment grade equivalent) —— im 67% 8 = ‘ —> g 66% 2 ie : cd . 7 Z 65% os [8 = — Fem os Level of security key § 13 (A-B) - fully secured 2 63% 14 (C)- Partially secured 's (O)- Unsecured | Mar
Slide 9: Australia wealth management
Australia wealth management No 1 retail risk insurance products in Australia No 1 retail platform brand in Australia Significant potential for wealth sale through banking channel General Insurance (Home & Contents) LoanCover (Life) Cross Sales Cross Sales (% of new mortgages) (% of new mortgages) 3x
Slide 10: New Zealand strong franchise
New Zealand strong franchise Financial Services New Zealand Auckland University Cash Earnings Customer Satisfaction 200 90 CAGR 12% 80 a 70}j— 175 150 60 _ 50} ae 125. 40 = 400 || 39 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 ‘Sep 98 Sep 99 Sep 00 Sep 01 Sep 02 Sep 03 % Satisfiedi/Vory Satisfied ANZ —=ASB —
Slide 11: Strong provisioning adequacy through the cycle
Strong provisioning adequacy through the cycle 1997 - 2004 Provisioning adequacy through the cycle 1997 - 2004 Net write-offs to Risk-weighted assets (excluding housing) ‘$m Average net write offs mf Average net write offs % Average P&L charge" Average P&L charge ae 114% oe 600 0.30) TB average Ae 0
Slide 12: Risk management
Risk management = APRA undertakings - Good progress on planning with 12 work streams - Initial deadlines met; - Confirmed trading limits - New market risk management and policy - Application of standard method - Markets activity now well within approved limits - Average VAR for last 2 months $15 mil
Slide 13: Capital management
Capital management Major drivers of ratio movements ACE and Tier 1 Sale of strategic stakes 12 basis points, Change to standard model for market risk (-44) basis points and Underwritten DRP 45 basis points % * ts rget 8 Ranges (%) ACE/RWA 475-525 | 5.36 6 Core Tier 1 6.00-6.50 | 6.41 4 Tier 1 7.00 -
Slide 14: Europe turnaround will take two years
Europe turnaround will take 2 to 3 years Corporate & Institutional Banking faces near term challenge Financial Services Australia is jewel in crown but needs some work Wealth and New Zealand are in good shape Addressing APRA issues / Sound capital position Culture will be transformed over next 2 yea
Slide 15: Next Steps
Next Steps APRA remedial work Cultural change European strategy Strategy for Australian businesses e=xzm: “ Yeretional
Slide 16: Appendix
Appendix Divisional Results / Market Share 16 - 29 Asset Quality 30 - 32 Economics / Housing 33-41 Banking Results 42-47 Capital / Dividend 48-49 Capitalised Software 50 Exim 5 ¥cnational
Slide 17: 2004 cash earnings
2004 cash earnings Cash earnings ($m) Mar04 Mar03— Var Financial Services Australia 999 904 10.5 10.5 Financial Services Europe 308 490 (37.1) (27.5) Financial Services New Zealand 158 159 (0.6) 29 Corporate & Institutional Banking 375 430 (12.8) (65) Wealth Management operating profit 221 161 37.3
Slide 18: Financial Services Australia - Solid underlying performance
Financial Services Australia - Solid underlying performance Cash earnings H1 03 H2 03 H104 * Total income up 4.8% = Housing lending (including investment housing) up 18.0% * Retail deposit (average) volumes up 9.5% * Cost to income ratio improved from 45.6% to 45.0% = Improved asset quality - NAL/ L
Slide 19: Financial Services Australia - Cash earnings component movement
Financial Services Australia - Cash earnings component movement $m Cash earnings Tax OOE 26.1% (4.4%) Ni OO 2.6% Soe 7.0% (0.6%) (1.1%) Mar 03 Sep 03 Mar 04 8 YWNational
Slide 20: Financial Services Australia - Continued strong volume growth
Financial Services Australia - Continued strong volume growth Net interest margin © (©) es Mix Product mmm 202) a oo 2 = funds Sep 03 ‘Mar 04 Portfolio changes from 30 September 2003 to 31 March 2004 Housing Tht B YWNational
Slide 21: Interest rate environment - Australia
Interest rate environment - Australia * Interest rate environment impacted FSA’s margin. = 90 day rate (used for funding) and 3 feet rate (used to invest core free funds) converged dramatically over the period Australian Interest Rates — Cash — 90 Day — 3yr Moving Average Sep 02 Mar 03 Sep 03 Mar 04
Slide 22: Financial Services Australia - Market share
Financial Services Australia - Market share Personal Market Share = Housing market share has = 190 grown from 16.5% to 18.1% E tas Housing since 2000, however has i 180 declined since June 2003 178 alter, from 18.6% 170 rel ac Deposits * Ranks No. 2 in the Premium 4 g8888 ane 3 = and Retail segments
Slide 23: Financial Services Europe down 27.5%
Financial Services Europe down 27.5% An Cash earnings (17.5%) pre-pensions (27.5%) = Net interest margin contraction = Mortgages up 11.9% = Other operating income down 44% = Other operating expense (excluding pensions) up 11.3% H103 2.03 H104 = Asset quality improved - NALs/ Loans down to 0.53% [BB
Slide 24: Financial Services Europe - Cash earnings component movement
Financial Services Europe - Cash earnings component movement (pre-pensions) Mar 03 Sep 03 Mar 04
Slide 25: Financial Services Europe - Margin contraction
Financial Services Europe - Margin contraction Net interest margin (1b) tt bps) ae ee Margin “Eocerek Core free Capital funds ‘Sep 03 Mar 04 Volume growth in local currency - 30 September 2003 to 31 March 2004 Mortgages Cy Business. 6% 5% Personal credit Retail deposits 1% 4%) 0% 4% 8%
Slide 26: Financial Services Europe - Underlying core expenses
Financial Services Europe - Underlying core expenses £m Mar04 Sep 03 Maro3 ar Oey: Core expenses 305 311 292 (4.5) Growth 13 3 5 large Provisions Az 2 2 large Write-offs - 4 2 large Expenses (excluding pensions) 335 320 301 (11.3) Pensions 39 21 15 large Total expenses 374 341 316 (18.4)
Slide 27: Financial Services New Zealand - Stable cash earnings growth
Financial Services New Zealand - Stable cash earnings growth with strong housing growth Cash earnings H103 H2 03. H1 04 = Net interest income up 5.8% = Growth in housing 18.7% against market 16.0% = Retail Deposit growth 6.4% against market 5.8% = Cost to income ratio 49.6%, improved from 50.8% * As
Slide 28: Corporate & Institutional Banking - Lower result
orporate & Institutional Banking - Lower result impacted by a difficult operating environment Cash earnings* = Impact of FX Options issue = Debt Markets down - Increased charge for doubtful debts _ = Reduced VaR levels H1 03, H2 03 H1 04 “Before significant items ex 2 Yeretional
Slide 29: Corporate & Institutional Banking - Cash earnings component movement
Corporate & Institutional Banking - Cash earnings component movement ‘$m Cash earnings Total income OOE 1.2% (8.9%) 4.0% BOD large Mar 03 Sep 03
Slide 30: Wealth Management - Solid operating profit
Wealth Management - Solid operating profit Operating profit after tax = Continued solid performance in $m the Insurance business up 22% ey 37.3% __.Growth = Investments up 33% 150 = Private bank up 28% 100 = Business valuation growth to $6,662m delivering revaluation sd profit of $148m after tax C)
Slide 31: Active management of non-accrual loans
Active management of non-accrual loan: Gross non-accrual loans General provision for doubtful debts. sm Sm 2,000 1.5% 305 Wo 4,793 Transfer px | 1,788 Specific (*8) 4,000 R | Provision 05% Charge to profit 500 0.484 & loss 0 0.0% 4 —EE——EEE CL ‘Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep 03 Mar 04 9
Slide 32: Maintained sound asset quality
Maintained sound asset quality Group Business and Corporate rating distribution Financial Services Australia - CRS 1-6 "I Moros HE Mor.04 823983 AMA 888 BB+ BB. > 8B. BONAL to BBB+ to BBB. TOBE tecce Retail Banking (Business) secured lending % of balance Maroa ‘Sep03 Maroa Financial Services Europe
Slide 33: Coverage ratios remains sound
Coverage ratios remains sound 200% sh 175% Se 150% 426% Total provision to impaired assets 100% on Specific provision to impaired assets 41% 2% | ——_—$ 0% Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar 99 00 00 Of Of 02 02 03 03 04
Slide 34: Group Economic Environment
Group Economic Environment In the markets where the Group operates, GDP growth is forecast to pick up to about 4%in 2003/04, before easing to around 3’4% in the 2004/05 bank year. Unemployment rates should remain at relatively low levels in our main regions. -Magnitude & timing of economic activity
Slide 35: Group Economic Environment
Group Economic Environment Business conditions will remain somewhat mixed across the Group. +In Australia, some moderation in domestic activity (largely household spending) partly offset by a pick up in the tradeables sector. +In NZ, domestic conditions will moderate during the next year, while lowe
Slide 36: Economic Environment...
Economic Environment... Sustained growth & low unemployment " ¥ g a a € & y 8 @ @ a a 8 f) f ue oN SSeS ie V i ! GQuneTEnn BemeEEmEE System Secured Housing: —Gowth Unerpogtent sar oapeannin _ ‘Source: Group Economics ex % Yeretonat
Slide 37: $A very much a $US story...
$A very much a $US story... albeit some local dynamics as well. Model & Confidence intervals v Actual Structural Break “Tiihiiiiiiihid Our “fundamental” economic models, based on our global forecasts suggest “fair'value in the low US70s cents currently. So $A may have overshot somewhat recently - no
Slide 38: Link to searchable text
Link to searchable text of slide shown above
Slide 39: Geopolitics - Both political & trade tensions overhang the outlook
Geopoltics - Both political & trade tensions overhang the outlook. Unbalanced global growth — Much still depends on the US & Asia. Continental Europe continues to lag. Anglo-Saxon household leverage — Increased household gearing, low savings and “expensive” housing leaves some consumers vulnerable t
Slide 40: Housing in Australia continues to remain sound
Housing in Australia continues to remain sound We remain comfortable with our exposure to housing in Australia, + Owner occupied housing is 2/3rds of the portfolio + Our exposure to inner city remains constant at 2% + LVR's remain lower for investment compared to owner occupier (Average dynamic LVR
Slide 41: Loan to value ratios consistent across investment and owner occupied housing
Loan to value ratios are consistent across investment and owner occupied housing ppnanas vn ‘Bowner Occied miovetment + LVR's for investment housing is lower 70% than owner occupier ew ‘Average LVR 41% *Average dynamic LVR for Investment property is 40% and owner occupied is ome 42% cl se Stress tes
Slide 42: Risk profile for inner city apartments acceptable
Risk profile for inner city apartments acceptable Housing portfolio segmentation for Australia 2% 34 64% = Recently completed a comprehensive review of this segment of the portfolio = This includes the CBD and surrounding postcodes * Tighter credit criteria for this lending * Average LVR for inner c
Slide 43: Banking cash earnings down 4.7%
Banking cash earnings (before pensions and currency impact)* down 4.7% $m 01 4M Expenses ox) Gon . (12.1%) Pension Mar 03 justed Mar 04 jar 04 Note: * Before significant items Pension refers to Banking pension costs (after tax) x= ° Scnetionet
Slide 44: Reasonable volume growth
Reasonable volume growth Growth in gross loans & advances 31 March 2003 to 31 March 2004 Gross loans and advances 1% | 11% Housing 15% | 17% Term loans 8% Retail deposits [E/E 6% © Growth from 31 March 2003 '§ Growth from 31 March 2003 excluding FX impacts 43 %national
Slide 45: Subdued growth in net interest income
Subdued growth in net interest income Net interest income $m $m 1.5% FX Volume Margin 9%" 43%Y Mar 03 Mar 04 Mar 04 Mar 03 Sep 03
Slide 46: Group drivers on margin compression
Group drivers on margin compression Net interest margin * Product mix « Yield curve - basis risk - Asset & Liability Management (ALM) = Capital & core free funds = Product margin = Retail & wholesale funding mix 4s %national
Slide 47: Banking other operating income down 7.0%
Banking other operating income down 7.0%* Loan fees from Banking flat Money Transfer fees Fees and ‘commissions. Trading income 10.7% 13.7% % Other OO! 45.1% rot, $m 40 140 240 340 440 540 640 740 #203 If Growth on H2 03 ex FX: _ . Decline on H2 03 ex FX “Before significant items [sonia ca “s ¥inati
Slide 48: Banking expenses (excluding pensions) down 2%
Banking expenses (excluding pensions)* down 2%
Slide 49: Movement in ACE & regulatory capital
Movement in ACE & regulatory capital = Net increase in ACE ratio of 41 basis points = Net increase in Core Tier 1 of 3 basis points " Difference reflects regulatory versus ACE treatment of sale of strategic stakes Movement in Core Tier 1 Ratio & ACE 0.81 (0.54) 0.45 (0.44) (0.10) (0.19) 6.41% (1,05)
Slide 50: Dividend maintained
Dividend maintained Cane = Interim dividend of 83 cents Pee Dividend growth per share, franked to 100% share ee = Consistent dividend ree growth 120 400 83c = 3.8% increase from 80 March 2003 60 40 = Payout ratio on diluted ae cash earnings (before OS ol Ge a as significant items) of 69% ™ Final div
Slide 51: Capitalised software were $981m
Capitalised software were $981m 30% an% 16% 13% asi 1m Sotware over $50m 'B Software over $25m mAtlother capiiaised softw are * Software over $50m includes = Front end teller system = CRM = Software over $25m includes = Internet banking *eBL/eCL = Endeavour = Amazon 50
Slide 52: National Australia Bank
National Australia Bank
Slide 53: Searchable text section of graphics shown above
Searchable text section of graphics shown above [ GRA PHIC] HALF YEAR INVESTOR PACK 2004 John Stewart, Managing Director and CEO Richard McKinnon, Chief Financial Officer [GRAPHIC] [LOGO] Mar ch 2004 key result summary Mar v Mar 03 Mar v Sep 03 Basic cash earnings per share (before significant items
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