1999 Half Year Financial Results

National Reports Solid First Half Increase

National Australia Bank today reported a Group operating profit after tax (before abnormals) of $1,390 million for the six months to 31 March 1999 compared with $1,109 million earned in the March 1998 half year, an increase of 25.3 per cent. There were no abnormal items included in the March 1999 half year result.

Operating profit after tax (before abnormals) for the March 1999 quarter was $666 million compared with $724 million for the previous quarter and $576 million for the March 1998 quarter.

Underlying profit (before tax, doubtful debts and abnormals) rose 23.2 per cent from $1,943 million in the March 1998 half to $2,393 million in the 1999 first half.

Directors have declared a higher interim dividend of 54 cents per share. This compares with 49 cents per share in the previous corresponding period and 53 cents per share for the final dividend for the 1998 year.

The interim dividend for 1999 is fully franked. The National's international expansion strategy to diversify the Group's income stream has significantly increased shareholder value, however it has affected the Group's capacity to continue to pay fully franked dividends in the future.

Based on current estimates, the National expects the final dividend to be franked to approximately 65 per cent. This would represent an average franking level of approximately 83 per cent for the full year.

The National has detailed its concerns about Australia's current dividend imputation system in a submission to the current Review of Australia's Business Tax System (the Ralph Committee).

The latest result has seen return on average ordinary shareholders funds (before abnormal items) increase from 16.6 per cent in March 1998 to 17.5 per cent in the 1999 first half.

On a cash earnings basis (i.e before goodwill and related amortisation expense), return on average tangible ordinary shareholders funds has increased from 21.2 per cent in March 1998 to 23.4 per cent in the 1999 first half.

There was also a significant improvement in the Group's cost income ratio. This fell from 55.6 per cent in March 1998 to 52.9 per cent in March 1999.

The Group's Chief Operating Officer, Frank Cicutto said the Group continued to benefit from a broad spread of income sources and a consistent focus on efficiency improvement and cost control.

"While there is considerable change underway throughout the global banking and financial services sector, the prerequisites for profit and shareholder value creation remain unchanged," Mr Cicutto said.

"You need to have consistent growth in income, tight control of costs and an ability to manage margins in fiercely competitive markets and low inflation economies.

"The pleasing aspect of the latest result is that we are making progress with each of these areas.

"We have also made progress in the implementation of our global business model which we believe will provide a long term competitive advantage," Mr Cicutto said.

The Group continued to diversify its income streams.

Other operating income for the March 1999 half jumped 29.2 per cent to $2,255 million compared with $1,745 million in the previous corresponding period.

The acquisition of HomeSide boosted income from mortgage servicing and origination fees and accounted for nearly 13 per cent of the overall increase in other operating income.

Another important revenue source was income from treasury operations across the Group. This was 59.6 per cent higher in the latest half than in the previous corresponding period.

Other operating income now represents 42.6 per cent of total income compared with 38.2 per cent in the 1998 first half.

Group net interest income in the March 1999 half year increased $220 million or 7.8 per cent over the previous corresponding period. This was underpinned by an 11.2 per cent increase in loans and advances.

Margins for the latest half year were 3.01 per cent compared with 3.14 per cent in the first half of 1998. Margins have stabilised in the current quarter.

Australia

Australian Financial Services recorded a 15.9 per cent growth in profit to $728 million in the March half compared with $628 million for the March 1998 half.

The 4.6 per cent increase in net interest income resulted from growth in lending volumes, particularly housing, term business lending and leasing. Improved management of interest rate spreads curtailed the decline in net interest margins experienced in the previous year.

Volumes for products such as variable rate and term deposits continued to grow with total deposits up 12.6 per cent in the latest half compared with the previous corresponding period.

Other operating income for the latest half was up 13.8 per cent to $996 million. The major contributors to this growth included treasury trading and strong performances from the National's various "non bank" subsidiaries in Australia.

National Australia Financial Management's profit of $28 million was double that of the previous corresponding period. Protection sales increased 45 per cent to $20 million and investment and trust sales were up 8 per cent to $305 million.

Global Securities Services (formerly Custodian Services) increased market share in all of its custodian, trustee and funds management administration activities during the latest half.

The National continued to increase the range and share of its various funds under management.

The total funds under management of National Australia Financial Management, National Australia Asset Management and County Investment Management grew to $17.7 billion at March 31 1999 from $15.3 billion at March 31 1998.

The cost income ratio of Australian Financial Services improved from 51.7 per cent for the 1998 first half to 49.6 per cent for the latest period.

International

The Group earned $662 million from its international operations which represents 47.6% of its profit after tax.

Profit before abnormal items of the European Group was up 28.0 per cent from $318 million to $407 million.

Clydesdale Bank increased profit before abnormal items 35.0 per cent to $162 million as a result of growth in personal and business lending. It also recorded a solid improvement in its cost income ratio from 52.1 per cent to 48.5 per cent.

Profit before abnormal items of Yorkshire Bank rose 5.3 per cent to $180 million; Northern 5.3 per cent to $79 million; and National Irish Bank 4.8 per cent to $22 million.

In the United States, Michigan National increased its half year profit before abnormal items 26.3 per cent from $99 million to $125 million.

HomeSide Inc. contributed $75 million to Group profit for the half year to March 31. Since being acquired by the National last year, HomeSide has continued to increase its business activities.

Other operating income earned by HomeSide for the latest six months was $287 million reflecting increases in loan production volume.

The after tax profit of Bank of New Zealand was up marginally at $141 million. Interest income was down 12.7 per cent to $261 million due to lower interest margins and wholesale interest income. Other operating income rose 27.8 per cent to $170 million.

The operations in Asia recorded a loss of $7 million compared with a profit of $21 million for the 1998 first half. This was broadly in line with expectations and was caused by the reduced capacity to generate new business due to the difficult trading conditions prevailing in the Asian region, coupled with increases in specific provisions.

General

The charge for doubtful debts for the March 1999 half was up by $22 million or 8.2 per cent over the previous corresponding period. Higher provision charges were recorded in Asia, New Zealand, Europe and the United States. Charges were reduced in Australia.

The Group's impaired asset portfolio remains modest with the ratio of non accrual loans to risk weighted assets at March 1999 remaining at 0.7 per cent.

Looking ahead, Mr Cicutto said that the overall economic environment in our key markets should continue to be favourable at least in the short term. However, prospects for continued economic growth were mixed, particularly in Australia and the United States.

"We are forecasting reductions in economic growth in Australia and the United States over the next year, with mild recoveries in the United Kingdom and New Zealand," Mr Cicutto said.

"The competitive intensity in our principal markets will continue to increase.

"In such a mixed environment, we will focus on getting the maximum benefit from the global spread of our businesses.

"The real gains in future will come from extracting full value from existing franchises on both a global and local scale through the implementation of the National's business model.

"This will need to be matched by the building of stronger positions in areas such as wealth management products and electronic commerce services.

"The National is well placed to gain from both current and emerging businesses," Mr Cicutto said.

Melbourne, 6 May 1999.

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