Annual-Report-1998.pdf

8/10/2019 Annual-Report-1998.pdf

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An international financial services group

1998 Annua l Repor t

National Australia Bank Limited ACN 004044937


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United Kingdom

Ireland

Australia

Asia

New Zealand United States

The National’s International Franchise

National Australia Bank 1998 Annual Report


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An international financial services group

27 November 1998 Record date for final dividend

16 December 1998 Final dividend payable

17 December 1998 Annual general meeting

27 January 1999 1998–99 First Quarter Results

29 April 1999 1998–99 Second Quarter Results

2 July 1999 Record date for interim dividend

21 July 1999 Interim 1998–99 dividend paid

22 July 1999 1998–99 Third Quarter Results

4 November 1999 1998–99 Full Year Results announced

December 1999 Final dividend for 1998–99 paid

Our VisionTo be the world’s leading financial services company.

Our MissionWe tailor financial services to help individuals, families,businesses and communities to achieve their goals.

Our ValuesService to our customersQuality in everything we doProfessionalism and ethics in all our actionsCompetitiveness and a will to winGrowth and development of our peopleContinuous productivity improvementGrowing profit for our stakeholders

Financial Calendar

Annual Report 1998

Contents

Dates may be subject to change

Financial Highlights 2

Corporate Highlights 4

The Board of Directors 6

Year in Review by the Chairman

and the Managing Director 8

Group Leadership Team 13

Business and Personal Financial Services 14

Global Products and Services 16

Global Information Technology 18

Key Business Units 20

Financial Information and Analysis 25

Description of Business 26

Financial Review 31

Corporate Governance 66

Report of the Directors 69

Financial Statements 75

Notes to the Financial Statements 80

Directors’ Declaration 159

Auditors’Report 159

Form 20-F Cross Reference Index 160

Shareholder Information 161

Registered Office and Contact Details 166

Principal Establishments 168


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Profitability

• Underlying profit increased 17.7%

• Return on equity 17.9%(before abnormals)

• Return on assets 1.1%(before abnormals)

• Abnormal charges after tax

– $245 million for statistically basedprovisioning

– $252 million for restructuring

Earnings

• Net Interest income up 9.3%

• Group Interest Margin 3.1%,down from 3.5%

• Other operating incomeincreased 35.9%

• Other operating income tototal income 40.3%

Growth

• Assets increased by 24.6%

• Loans, advances and acceptancesincreased by 21.1%

• Deposits up by 23.1%

• Changes in exchange rates addedapproximately 10% to asset growth

2 National Australia Bank 1998 Annual Report

Financial Highlights

1994 1995 1996 1997 1998

74 83 87 94 102Cents

120

100

80

60

40

20

0

130 148 174 202 251.7$b

300

250

200

150

100

50

01994 1995 1996 1997 19981996 1997 1998

2,102 2,223 2,511$m

3,000

2,500

2,000

1,500

1,000

500

0

• Profit after tax and before abnormals increased 13%

to over $2.5 billion

• Earnings per share (before abnormals) increased 15.2%

• Profit after abnormals $2.0 billion

• Dividends per share up 8.5% or 8 cents to 102 centsper share

• Increased contributions from all the Group’s major

operating regions

Operating profit (before abnormals) Dividends per share Total assets

Asia

United States

New Zealand

Europe

Australia


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--

Productivity

• Before exchange rate movements, andexcluding HomeSide and County,operating expenses increased by 6.0%

• Cost to income ratio virtually unchanged at 54.4%

• Staff numbers decreased by 0.3%.Excluding the purchase of HomeSideand County, staff numbers decreasedby 7.0%

Capital

• Shareholders’ funds increased 25.3%

• Regulatory capital ratio 9.2%,up from 8.7%

• Total tier 1 capital 6.4%

• Successful issue of US$450 millionpreference shares

Asset quality

• Ratio of non-accrual loans to risk weighted assets declined from 0.8%to 0.7%

• Introduced a statistically basedprovisioning methodology fordetermining the doubtful debt charge

• Total specific and general provisioncoverage of non-accrual loans equalto 148.6%

An international financial services group 3

1994 1995 1996 1997 1998

11.5 11.6 9.3 8.7 9.2%

12

10

8

6

4

2

01994 1995 1996 1997 1998

2.33 1.49 1.08 0.83 0.74%

3.00

2.50

2.00

1.50

1.00

0.50

0.00

Wealth Index*

Total shareholder returns haveincreased on average by 19.2%per annum over the last 10 years.

The wealth index measuresshareholders’ total accumulatedvalue including share priceappreciation and dividends.

The chart shows that $1,000

invested in National AustraliaBank 10 years ago would now be worth over $5,800.

7000

6000

5000

4000

3000

2000

1000

0

9/88 9/89 9/90 9/91 9/92 9/93 9/94 9/95 9/96 9/97 9/98

National Australia Bank Accumulation IndexBanking and Finance Accumulation IndexAll Ordinaries Accumulation Index

Total regulatory capital ratio Non accrual loans to risk-weighted assets

1994 1995 1996 1997 1998

%

3

1.5

0

%

58

56

54

52

50

Cost ratios

* Data has been indexed to a common base of 1000

- Costs to Assets (LHS)- Costs to Income (RHS)


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The National further strengthened itsstrategic position through the year inall its core markets.

International Spread

The National has operations spanningfour continents and 15 countries offeringa broad range of financial services. TheNational is now truly ‘international’ inthe spread of its operations and thesources of its income.• 54.8% of revenues generated;• 50.7% of total assets; and• 54.4% of employeesare outside Australia.

Financial Services Activities

The National offers a broad range of financial services across its customerbase. These activities were strengthenedduring the year with the purchase of County Investment Management and

HomeSide, Inc.

The National now has over $400 billionin assets under administration globally:• $27 billion in funds under management• $174 billion in assets under custody • $195 billion in mortgage loans serviced• $20 billion in assets under trusteeship.

New Business Structure

In March 1998, the Group announced anew operating structure to support the

transformation of the business fromseparate regional operations to globallines of business.Establishing a globalstructure will provide a sharper customerfocus, improve economies of scale andreduce duplication of effort.

Key appointments supporting thisstructure have now been made andinitiatives to create global businesses areunder way.

Global Consolidation

Through the year the Group finalised theconsolidation of the Group’s technology centres in the United Kingdom andIreland into a single centre in Glasgow.In the Asia/Pacific region, the technology operations of the Bank of New Zealandand some of the Group’s Asian operationswere consolidated into Australia.

Centralising the Group’s technology operations into regional centres is an

important step in globalising the Group’soperations and improving efficiency.

Acquired County InvestmentManagement

On October 1, 1997, the National acquiredCounty Investment Management. Withtotal funds under management of $10.5 billion County has enhanced theGroup’s funds management capabilities.

Acquired HomeSide, Inc.HomeSide, Inc. is the ninth largestoriginator and sixth largest servicerof mortgage loans in the United Statesand was purchased by the Groupon February 10, 1998 for a totalconsideration of US$1.2 billion.

HomeSide brings to the Group worldbest practice in mortgage servicing andwill become the first of the globalproduct specialists under the National’sbusiness model.

Distribution Network

• In Europe, the network has beensegmented to deal separately withconsumer and business customers.New business banking centres wereestablished while traditional branchesare focusing on serving personalcustomers.

• Michigan National closed three outlets,opened one financial centre and fivesupermarket branches as part of amajor reconfiguration of its network.Michigan National continues tooriginate more than 50% of consumerloans through its direct bankingcentre.

• After completing a detailed pilot,Australia began introducing a new streamlined branch and distributionstructure across its network.

• The Bank of New Zealand closed 23outlets in the year and established anew sales-only outlet in Auckland.

Electronic Distribution

The Group has developed a strongcapability in the electronic delivery of financial services.• Telephone banking services are

available in all regions.• The number of ATMs increased by

3% while Eftpos terminals increasedby 17%.• Direct banking operations are now

in place in Michigan, Yorkshire andNew Zealand.

• Internet services available includetraditional banking and transactionservices, funds management, mortgageorigination and fleet leasing data.

Tailored Financial Solutions

New products and services introduced

through the year to meet customers’changing needs included:• A Gold Card in Australia linked to a

new range of premium awards.• A flexible payment, fixed-rate

mortgage in Yorkshire Bank.• A new deposit product targeted at high

net worth clients in Clydesdale Bank.


Corporate Highlights


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• A new mortgage secured credit cardand a relaunch of its successfulRatePLUS product in MichiganNational.

Robust Risk Management

One of the foundations of the Group’ssuccess has been the rigour applied tomanaging risk. This was furtherreinforced during the year.• Total exposure in Asia is only 5.6% of

assets with facilities classed as non-accrual equalling less than 0.2% of shareholders’ equity.

• The Group has no Russian debt.• The National has no exposure to

highly leveraged speculative investmentfunds or so-called ‘Hedge Funds’.

• A common credit analysis and scoringsystem for customer lending wassubstantially completed across theGroup.

Year 2000

The National continues to progresssatisfactorily with its Year 2000 program.In June 1998, the Group submitted areport to the Australian Stock Exchangeexplaining its Year 2000 program. Sincethat date, the program has continued totrack broadly in line with plan. As atSeptember 30, 1998 the cost of theGroup’s Year 2000 program wasestimated at $284 million of which$153 million had been spent.

As at the end of September 1998, theGroup’s core systems had been updatedfor the year 2000 changeover,and wereentering the final stages of testing.

Group credit ratings

At the date of this Annual Report,the Group had the following credit ratings.

Short term Long term

Standard & Poor’s A1+ AA

Fitch IBCA A1+ AA

Moody’s Investor Services P-1 Aa3

BankWatch TBW-1 AA

The National’s global and Australian head office in Melbourne, Australia


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MR Rayner(Mark)

BSc (Hons) Chem Eng

FTSE FAusIMM FAICD

FIE Aust

Chairman and

Independent Non-

Executive Director

Age 60

Appointed 1985

Elected Chairman

September 1997

Experience

35 years with Comalco

Limited including

11 years as Chief

Executive, 20 years asa Director and 6 years

as Deputy Chairman

until June 1997.

A Group Executive

and Director of CRA

Limited until 1995.

Member Principal

Board Audit

Committee.

Directorships

Director of Bank of

New Zealand.

Chairman of Pasminco

Limited and Mayne

Nickless Limited.

Director of Boral

Limited.

DR Argus AO(Don)

FAIBF FCPA FAICD

Managing Director

and Chief Executive

Officer

Age 60

Appointed 1989

Experience

43 years in banking,

appointed Managing

Director and Chief

Executive Officer in1990. Previous

executive positions

include Head of

Credit Bureau,

General Manager

Group Strategic

Development and Chief

Operating Officer.

Directorships

Chairman of National

Australia Group

Europe Limited.

Director of Clydesdale

Bank PLC, National

Irish Bank Limited,

Northern Bank

Limited, Yorkshire

Bank PLC, Michigan

National Corporation

and Bank of

New Zealand.

Director The Broken

Hill Proprietary

Company Limited.

BT Loton AC(Brian)

BMetE FAusIMM

FAICD

Vice Chairman and

Independent Non-

Executive Director

Age 69

Appointed 1988

Elected Vice Chairman

1992

Experience

43 years with The

Broken Hill Proprietary

Company Limited,

9 years as ManagingDirector and 5 years

as Chairman until May

1997.

Directorships

Chairman of Atlas

Copco Australia Pty

Limited.

Director of Amcor

Limited and Australian

Foundation

Investment Co

Limited.

DK Macfarlane(David)

Vice Chairman and

Independent Non-

Executive Director

Age 68

Appointed 1985

Elected Vice Chairman

1992

Experience

33 years with James

Hardie Industries

Limited,12 years as

Managing Directoruntil 1990.

Chairman Principal

Board Audit

Committee.

Directorships

National Australia

Asset Management

Limited.

Chairman of Spicers

Paper Limited and

DEM Limited.

Director of Schroder

Australia Holdings

Limited, Pasminco

Limited and Australian

Foundation

Investment Co

Limited.

DCK Allen AO(Charles)

MA MSc DIC FA

Independent Non

Executive Directo

Age 62

Appointed 1992

Experience

21 years with Sh

International.

Appointed Execu

Director of WoodPetroleum Limite

1980 and Manag

Director from 198

to 1996. Membe

Principal Board A

Committee.

Directorships

Chairman of Nati

Australia Investm

Capital Limited.

Chairman of

Commonwealth

Scientific and

Industrial Resear

Organisation (CS

Director of Amco

Limited, Australia

Gas Light Compa

and Air Liquide

Australia Limited

CM Deeley(Michael)

MA DPhil (Oxon)

Independent Non-

Executive Director

Age 68

Appointed 1992

Experience

27 years with ICI

Australia Limited,

5 years as Managing

Director and ChiefExecutive until 1992.

Member Principal

Board Audit

Committee.

Directorships

Chairman of North

Limited and of Air

Liquide Australia

Limited.

National President of

Greening Australia

Limited.

Deputy Chairman

of Parks Victoria.

The Board of Directors


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FJ Cicutto(Frank)

BCom FAIBF FCIBS

Executive Director

and Chief Operating

Officer

Age 47

Appointed 1998

Experience

30 years in banking

and finance both in

Australia and

internationally.Previous executive

positions include

Head of Credit

Bureau, State

Manager New South

Wales, Chief

Executive Clydesdale

Bank and Chief

General Manager,

Australian Financial

Services. Appointed

Executive Director

and Chief Operating

Officer in July 1998.

GJ Kraehe(Graham)

BEc

Independent Non-

Executive Director

Age 56

Appointed 1997

Experience

33 years in the wine,

automotive and

diversified

manufacturingindustries before

being appointed

Managing Director

and Chief Executive

Officer of Southcorp

Limited in 1994.

TP Park(Tom)

BSc MBA

Independent Non-

Executive Director

Age 51

Appointed 1996

Experience

24 years in the food

industry, 11 years as

Managing Director of

Kraft Foods Limitedand current Executive

Vice President Japan

and Korea and Area

Director – Australia

and New Zealand.

CM Walter(Catherine)

LLB (Hons) LLM MBA

FAICD

Independent Non-

Executive Director

Age 46

Appointed 1995

Experience

20 years as a solicitor,

8 years as a partner in

the firm Clayton Utz,

including a period asManaging Partner

until 1994.

Member Principal

Board Audit

Committee.

Directorships

Director National

Australia Financial

Management Limited.

Director of the

Australian Stock

Exchange Limited,

Transport Accident

Commission,

Melbourne Business

School Limited, Orica

Limited and Victorian

WorkCover Authority.

ED Tweddell(Ed)

BSc MBBS (Hons)

FRACGP FAICD

Independent Non-

Executive Director

Age 57

Appointed 1998

Experience

22 years in the

pharmaceutical and

health care fields

before beingappointed Group

Managing

Director/Chief

Executive Officer of

FH Faulding & Co

Limited in 1993.

Directorships

Chairman of Faulding

Inc.


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by the Chairman and the Managing Director Year in Review

It is with great pleasure that we report tothe Group’s owners that 1997/98 wasanother successful year for NationalAustralia Bank.

While producing another year of recordprofits in a demanding environment, theGroup made significant progress increating an international financialservices organisation of world standing.

The Group’s return on equity of 17.9%(before abnormals) is significantly higherthan our cost of capital and furtherdemonstrates the superior value that hasbeen delivered to shareholders.

Profit after tax and before abnormals

increased by 13.0% over the year to$2,511 million with improved results inall of the Group’s major operating regions.

The last six consecutive years have eachproduced record increases in net profitafter tax and before abnormals and overthe last 10 years net profit has increasedon average by 16% annually.

Through the year, the Group incurredabnormal costs totalling $497 millionafter tax, relating to the globalrestructuring of the organisation ($252

million after tax) and a change to astatistically based provisioningmethodology for determining thedoubtful debt charge ($245 million aftertax). Given their size and nature, bothcharges have been classified as abnormaland will assist the Group in its transitionto a global organisation.

Profit after abnormal items was$2,014 million, 9.4% lower than theprevious year.

A key feature of this year’s results hasbeen the success the Group has achievedin diversifying its income streams acrossgeographic and product lines.

Following the purchase of HomeSide inthe United States in February this year,the Group now generates 54.8% of itsrevenues outside Australia and earned40.3% of its operating income fromnon-interest sources in the year endedSeptember 30, 1998.

This diversification has provided

significant value for shareholders by reducing the Group’s reliance on any single market or business. This attributeis particularly relevant in the currentvolatile economic environment whereour spread of operations providesinsurance against a deterioration inany one market, currency or business.

The Board has continued its policy of ensuring shareholders receive a strongreturn on their investment while theGroup retains adequate funds for future

growth.For the full year, the dividendpayout ratio on pre-abnormal profits was58.4%, translating to 102 cents per sharefully franked, an 8.5% increase on theprevious year’s dividend of 94 cents.

While offshore expansion has beenextremely successful in deliveringshareholder wealth, it has increased theproportion of earnings outside Australiaand reduced the capacity of the Group to

maintain fully franked dividends in thefuture. As a result, in the year ahead, theBoard expects that any interim dividenddeclared will be fully franked while thefinal dividend may be partially franked.

The level of franking for future dividendswill depend on a number of factorsincluding the proportion of profits inAustralia and potential changes to thecurrent dividend imputation system.

The Operating Environment

The financial services sector continues toundergo significant change through theglobalisation of world economies.Countries are no longer insulated fromworld events,businesses must competewith a wide range of internationalcompanies and individuals are thinkingand acting globally.

The financial services sector is at theforefront of these trends and successful

companies must have a strategy thatrecognises and responds to thesechallenges.

Various financial services institutionsalready operate globally in products asdiverse as credit cards, rural lending andmutual funds. Many more are on theverge of international expansion.

In this environment, scale will be a driverof future returns, a fact that has already been recognised by many internationalfinancial institutions.

In the last year, financial servicesrationalisation continued in the UnitedStates, Switzerland, Canada andGermany, while the financial crisis inAsia could accelerate consolidation there.Australia has also experienced a furtherround of mergers within the financialservices sector, whilst competition hasincreased dramatically.


55% of operating revenue is generated outside Australia The National’s strategy of international diversification has delivered significant value toshareholders.


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In a global marketplace, the National has a proven global strategyAchieving local reach with international scale has been key to the National’s success, particularly in an environment where customers are looking for superior service and internationally competitive products.

Pictured is David Cathie, Divisional Manager England, outside Clydesdale Bank’s Piccadilly Circus branch and business banking centre.


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All of the Group’s markets also experiencedsignificant uncertainty over the year, adirect result of the Asian financialmeltdown, bad debt burdens in Japanese

banks, debt moratoriums in Russia andthe weaker financial position of otheremerging markets. These events haveplaced pressure on world economicgrowth and have impacted the earnings of many financial institutions.

While the National is not immune fromthese forces, its rigorous and conservativerisk management approach anddiversified income streams place theGroup in a strong position to deal withthese uncertainties.

The National’s total exposure to Asia ismodest, representing 5.6% of total assets.Exposures are predominantly interbank lending, trade finance and lending to theGroup’s relationship customers operatingin the region.

As a result, the Group’s Asian portfoliocontinues to perform satisfactorily.Withregard to other emergingmarkets,theNational has no direct exposure to Russiaand small exposures to Latin Americaand Eastern Europe, all of which are

performing.

The National’s Strategy

The National’s vision is to become theworld’s leading financial services company.

Achieving this vision will require strategiesthat deliver:• Returns for shareholders

commensurate with the best financialservices companies in the world;

• Superior tailored financial solutionsfor customers; and

• A preferred working environment forstaff.

The National is positioned to achieve thisvision with a clear and focused strategy for the markets, products and capabilitiesin which the Group needs to excel.

The National’s core markets are Australia,New Zealand, the United Kingdom,Ireland, the United States and Asia.Within each, the Group is actively building its financial services capabilitieswhile strengthening its position intraditional banking.

As an example, in the year the Groupacquired County InvestmentManagement in Australia and HomeSide,Inc. in the United States. Theseacquisitions have expanded theNational’s operations in Australia andthe United States while enhancing itscapabilities in funds management andmortgage servicing, respectively.

In order to better align the Group’sservices to customer needs, furtherchanges in the Group’s distributionnetwork were made over the year.

Changed customer preferences haveshifted the balance of customertransactions from branch-based activity towards electronic mediums such as thetelephone and the Internet. Accordingly,the Group is investing to improveelectronic delivery while ensuring thebranch network remains efficient andcost effective.

There were several advancements inelectronic banking across the Group:• Active Internet sites now operate in

Australia, Bank of New Zealand,Michigan National, HomeSide, County Investment Management and Asia.

• Online banking has been widely accepted in Australia with over 20,000businesses using National Online.

• Over one million customers usetelephone banking in Australia.

• A direct banking operation selling

personal loans and mortgages overthe phone was launched in theUnited Kingdom.

• Michigan National launched WebBanking to complement its advancedtelephone banking service.

Changes in the Group’s physical outletsalso progressed in the year.

In Australia, traditional branches are beingreconfigured to focus on processingpaper-based transactions and assist

customers utilise new, more convenientand efficient distribution channels fortransactions such as payments and cashwithdrawals.

Branches will continue to write standardproducts but will be up-skilled toidentify and refer customers to personalbankers or other financial servicespecialists for more complex products.As part of this change, the majority of administrative functions will betransferred from branches to centralisedprocessing offices.

A similar reconfiguration has already taken place in New Zealand and thebenefits in terms of productivity andcustomer service are now being realised.

The National’s Business Model

In 1996/97 the National introduced anew business operating model to furtherenhance its customer focus and improve

Year in ReviewYear in Review

Diversification reduces risk With 40% of operating income generated from non-interest sources, the National’s broadincome base provides greater consistency in shareholder returns.



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efficiency through international scale.Substantial progress has been made inimplementing this model with a new organisational structure and key transition plans in place.

Implementing this model involvesfundamental changes in the way theNational is managed, moving away froma traditional business unit and country orientation to a global structure.

Operating across international boundaries

realises economies of scale not possiblefrom the Group’s current structure whilethe removal of duplication andstreamlining of processes will lead togreater efficiency.

HomeSide

On February 10, 1998, the Nationalacquired HomeSide, Inc., one of thelargest mortgage servicers in the UnitedStates. Given 35% of the Group’s totallending portfolio is in housing lending,

considerable value has been identifiedfrom the application of HomeSide’sproven capabilities and systems.

HomeSide will continue to build itsprofitable business in the United Stateswhile introducing its proprietary software and management practicesacross the Group – starting withAustralia. In the process, HomeSide willcreate the first of the National’s globalproduct specialists.

The Board

The Directors were pleased to announcethe appointment of Dr Ed Tweddell andMr Frank Cicutto to the Board this year.

Dr Tweddell is the Managing Director of FH Faulding & Co Limited and brings awealth of international experience to theNational from an industry that hassimilar global influences to the financialservices industry.

Frank Cicutto has worked with theNational since 1967. Mr Cicutto’s depthof banking experience, working in someof the world’s major financial centres,will add further to your Board’s strength.

Consistent with the Group’s Constitution,Mr Peter Cottrell and Sir Bruce Watsonretired from the Board during the year,both having reached the age of 70. BothMr Cottrell and Sir Bruce have beenhighly active Board members and havemade outstanding contributions overmany years. On behalf of all shareholders

we would like to thank them sincerely fortheir efforts.

To ensure your Board maintains thehighest possible standards, a performancemeasurement framework was introducedduring the year.

The framework maps the Board’s key functions and goals and establishescriteria to evaluate the Board’sperformance. Your Board sees thisinitiative adding to the Group’s high

corporate governance standards.

The Bank of New Zealand is the major banker to Skyline Enterprises Limited, owner of the Skyline Gondola Restaurant and Luge overlooking Queenstown and Lake Wakatipu in the South Island of New Zealand.

Over $400 billion in assets under administration The National has been steadily building its financial services activities and these now account for a significant proportion of the Group’s business.



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The Leadership Team

One of the National’s strengths is itsexecutive leadership team. The team hasa strong financial services backgroundand broad international experienceconsistent with the needs of aninternational financial services group.

On average, members of the leadershipteam have:• Over 16 years experience working with

National Australia Bank;• Over 22 years experience in the

financial services industry; and• Almost 10 years experience working

outside Australia.

The Group’s executives are supported by a highly skilled senior management team,sourced from both within and outsidethe organisation. This balance furtherensures the Group is well placed for thechanging financial services environment.

Development of the Group’s skill base isunderpinned by a succession planningmodel which identifies talent early andensures individuals have the necessary skills and experience to progress to theGroup’s senior ranks.

As part of the succession planningprocess, Frank Cicutto was elevated tothe position of Chief Operating Officerin July this year.

People

Staff have responded to the need forchange across the organisation whilemaintaining their focus on growing thebusiness, and this has to be admired.This support from our people has beenfundamental to the ongoing success of the National.

The National places a high priority onimproving the competency and skill of

its employees.Through the year, theGroup extended its team-basedleadership model to encourageownership, involvement and creativecontribution of all staff. This model isnow widely used across the Group andwill be an important tool as wetransition to a global operating model.

Performance feedback, involving theappraisal of individuals by their peersand subordinates in addition to theirmanagers,was also extended through the

year, with 3,000 employees now evaluated under this model.

The Year Ahead

The Group’s operating environment isexpected to be heavily influenced by theextent and timing of a slowdown inworld growth in the next year.

Prospects for non-Japan Asia continue todeteriorate and a strong recovery is not

expected across the region in the yearahead. The Asian slowdown has also hada global impact with world growthexpected to moderate.

In this environment, credit growth islikely to slow and competition will remainintense across all of the Group’s markets.

Despite these trends, earnings growth inthe year ahead will be supported by:• Proven risk management capabilities,

strong cash generation and soundcapitalisation.

• International diversification, whichwill minimise the earnings impactfrom a deterioration in any one of theGroup’s markets.

• Restructuring programs commencedin 1997/98, which will improve efficiency.

• Over $400 billion in assets underadministration, providing substantialopportunities to grow the National’snon-interest income streams.

Accordingly,your Board is confident theNational will continue to deliver sound

returns to its owners in the year ahead.

MR Rayner

Chairman

DR Argus

Managing Director

Year in Review


Human Resources (full-time equivalents)As at As at Change

September 30, 1998 September 30, 1997 %

Australia 21,124 22,323 (5.4)

Europe 13,755 14,926 (7.8)

New Zealand 4,461 5,124 (12.9)

United States 6,669 3,775 76.7

Asia 291 274 6.2

Total 46,300 46,422 (0.3)

A strong management team is at the heart of the Group’s success


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Group Leadership Team


Chief InformationOfficer

Michael Coomer

Executive GeneralManagerWholesale FinancialServices

Michael Soden

Executive GeneralManagerBusiness and PersonalFinancial Services

Glenn Barnes

Executive Directorand Chief OperatingOfficer

Frank Cicutto

Managing Directorand Chief ExecutiveOfficer

Don Argus AO

Executive GeneralManagerProducts andServices

Ross Pinney

Chief ExecutiveOfficerNational AustraliaGroup Europe

Grahame Savage

Chief ExecutiveOfficerAsia/Pacific

Gordon Wheaton

Chief ExecutiveOfficer

Michigan NationalCorporation

Doug Ebert

Executive GeneralManagerGroup StrategicDevelopment

Roland Matrenza

Executive GeneralManagerRisk Management

Bob Miller

Chief FinancialOfficer

Bob Prowse

Executive GeneralManager

Group HumanResources

Grant Steel

Chairman and ChiefExecutive OfficerHomeSide, Inc.

Joe Pickett


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Business and Personal Financial Servicesrepresents the National’s retailing functions,the core of the Group’s operations andprimary interface with its customers.

Under the National’s business model,Business and Personal Financial Serviceshas embraced the concept of retailingproviding an integrated solution forcustomers’ total financial services needs.

Twelve months’ research in majoroperating regions of the Group has led tothe decision to deliver integrated retailingthrough six new business units aimed atmeeting the needs of each segment. Ithas also produced a new global directbusiness which will be progressively built

and targeted to the specific needs of theprimary customer segments.

These businesses will develop competitivepackages of products, service, and channelofferings, highly attractive to segmentcustomers. Packages will be deliveredthrough segment-specific global businesssystems, tailored to the distinctive needsof the customers, and the competitiveand strategic forces of individualmarkets.

This model provides a more focusedinvestment strategy that delivers optimalreturns to all stakeholders.

As Business and Personal Financial

Services implements the retailing conceptacross the Group, it will further developthe regional banking and financialservices brands that have been thebuilding blocks of the National’s success.The Group is confident that theinnovations introduced will enhanceour ability to satisfy customer andcommunity financial services needsthrough the ‘tailoring’ skills of our teamsin our regional businesses.

The businesses include:

Custom Business Financial ServicesThis is the Group’s largest revenuecontributor.This business unit providestailored solutions to meet the financialneeds of sophisticated medium to largebusiness customers. Significantopportunities exist to expand thisbusiness, particularly in our Europeanand US franchises.

Packaged Business Financial Services

This business unit will service businesscustomers with non-complex needs.

It will provide competitive packagedsolutions to these customers with an

emphasis on speed and simplicity of process.

Rural Financial Services

Our successful model of servicing ruralbusinesses via teams of specialists will becontinued and extended through thisbusiness segment.

Private Financial Services

Private Financial Services has responsibility for satisfying the sophisticated financialneeds of high net worth clients. While

the Group has a large number of theseclients, it has until recently lacked adedicated sales and service platform.

Premium Financial Services

Premium Financial Services representsconsumers witha strong interest andcapacity to build wealth. This businessunit will provide tailored financial servicesolutions to assist clients accumulate,protect and manage their wealth.

Retail Financial Services

This business unit will specialise inproviding efficient and effective financialservices to segments requiringstraightforward solutions.

In addition to these segments, Businessand Personal Financial Services alsoincludes Direct Retailing and ChannelManagement. This unit hasresponsibility for developing the Group’son line business and optimising thenetwork around a new operating design:a distribution model that combines bothphysical and electronic delivery.

Business and Personal Financial Services


The National has a retail customer base of 7.4 million

Distribution Network as at September 30, 1998Australia Clydesdale Northern Yorkshire National Irish Michigan BNZ Total

Branches* 903 274 98 255 61 193 197 1,981

Business Centres** 219 42 11 68 6 0 22 368

Eftpos Terminals 71,828 4,500 1,500 2,000 350 13,065 15,000 108,243

ATMs 1,065 384 181 412 39 294 203 2,578

*Including: Customer service centres, agencies and premium banking suites. **Including: Business banking centres and stand-alone business banking suites.


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Business banking is a core strength The National’s business banking platform has been extremely successful in building the Group’sportfolio of small and medium business customers.

Pictured in front of the Tyne Bridge are Yorkshire Bank’s Gary Lumby (right) and customer Joe DaraghMandale Properties in Newcastle upon Tyne, England. Newcastle is an important business centre for boYorkshire and Clydesdale Banks.


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Global Products and Services managesthe development and manufacture of theNational’s products and services as wellas providing the supporting infrastructure

to serve the Group’s customer base.The creation of this division wasmotivated by the need to achieve greaterfocus and specialisation across theGroup’s key support functions. To realisethis goal, Global Products and Serviceshas been charged with the task of significantly improving the overallefficiency of the Group through processimprovement, reduction of duplicationand the realisation of economies of scale.

In the process, Global Products and

Services will make globalisation at theNational a reality.

Teams of product specialists have now been established to manage the end toend processing of particular productsand product groups on a global basis.Teams for cards, payments, asset finance,and international trade finance are now

in place and plans are under way tofurther develop these businesses.

Other products not covered by thespecialists, such as personal lending, will

also be managed globally.

Payment services is a key functionconducted by Global Products andServices and is already experiencingsignificant growth. In Australia, theNational is the leading merchant acquirerwith 65,000 merchant terminalsacquiring 40% of all debit and credittransactions.

During the year, the Group pushedahead with a number of electronicpayment initiatives in Australia, eachcreating new sources of income for theGroup. Initiatives included:• Launch of an on line system for

processing private health insuranceclaims at point of service calledHICAPS.Health funds representingalmost 80 per cent of all Australianswith private health cover have now joined HICAPS, and there has beenstrong take-up by doctors and otherservice providers.

• Creation of the BPay electronic bill

payment service along with eight otherbanks. By October 1998 over 400utilities and other organisations hadbecome BPay billers.About 300million household bills are issued inAustralia annually,giving BPay considerable growth potential.

• Introduction of mobile Eftposterminals in taxis.

Cards are regarded as a core product by customers, with card-based transactionsrapidly overtaking cheques as theprincipal payments mechanism. Globally,the Group has issued over 3.4 millioncredit cards and nearly 3.9 million debitcards. Customers appreciate theconvenience, security and low cost of cardtransactions, and further strong growth incard-based transactions is expected.

The National’s asset financing activities

were particularly strong over the year.In the Group’s core markets, around twothirds of businesses use lease financingto conserve capital and improve liquidity.The National has a proven capability inasset financing, including the leasing of equipment and motor vehicles. Atbalance date the Group’s leasing assetsamounted to $9.1 billion. The Groupalso managed 60,000 vehicles on behalf of lessees.

Global Products and Services is also

responsible for a number of the Group’skey support functions, including:• Specialist processing centres which

operate across the Group. Initially established to centralise back-officeactivities, the challenge for thesecentres will be to further improveefficiency through new technologiesand process improvement.

• Dedicated teams to handle thecollection and recovery of delinquentloans across the Group. A state of theart collections and recovery centre in

Leeds is being used by all of theGroup’s European operations.A similar centre based on this modelwill be established in Australia.

• Strategic sourcing (or purchasing) andcorporate real estate are two areas wheresignificant savings can be achievedfrom a more integrated approach.

Global Products and Services


Products and Services will make globalisation at the National a reality


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A proven risk management capability The consistency of the National’s earnings in part reflects the strong management of credit,market and operational risks.

Pictured are Ann Rice, Client Relationship Manager at National Irish Bank, with Frank O’Kane (left) and Joe Morgan who are directors of Mercury Engineering Ltd. Mercury Engineering is Ireland’s largest engineering services construction company and the sole provider of mechanical,electrical and fire protection services for the Intel wafer fabrication plant in Leixlip, near Dublin.



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Under the National’s business model,Global Information Technology createsshareholder value by enhancing the

return from the Group’s informationtechnology resources. It does this inthree main ways.• Exploiting economies of global scale

by consolidating data processingoperations into larger regional centres.The Melbourne and Glasgow datacentres are examples of this process.

• Achieving faster, lower cost innovationby building on the knowledge andexperience among the 2,000 informationtechnology specialists working withinthe Group. The Group-wide diffusionof the proprietary systems developedby HomeSide, Inc. is a case in point.

• Managing strategic partnerships withexternal organisations, enabling theoutsourcing of non-core IT operations

and directing resources to value-addingactivities. The outsourcing of theGroup’s United Kingdomcommunications infrastructure toBritish Telecom is a good example.The result has been improvedmanagement information,betterservice and lower costs.

The scale of the Group’s informationtechnology function means that evensmall gains in per-unit processingefficiency translate into large benefits.As

the Group processes over 10.8 milliontransactions per day globally – including1.4 million ATM transactions, 1.8 millionEftpos transactions, and 250,000telephone transactions – scope forimprovement is significant.

External benchmarking shows that ourAsia/Pacific and European data centresare among the most cost effective in theworld.All of the Group’s data centresmatch or surpass industry benchmarks for unit cost

improvements.During the year, data centreconsolidation continued. In August,the Bank of New Zealand migratedits live production systems to theAsia/Pacific data centre inMelbourne. The Group now conducts all of its processing inMelbourne, from where it also

monitors and supports its ATM network.In the same month, Seoul and Taipeibranches transferred their accountprocessing to Melbourne.

Processing loads in the Belfast andDublin data centres were shifted toGlasgow without disruption to thebusiness.

Upgrading the Group’s informationtechnology capacity is a never-endingtask. However, high productivity in

systems development makes the task more manageable. For example,ourEuropean applications developmentproductivity has increased 30% overthe past three years.

Other major IT initiatives developed inthe year:• A comprehensive data warehouse was

substantially completed for theAsia/Pacific region. The data warehousestores and analyses vast volumes of customer and related data, generating

high quality management informationfor purposes such as behaviouralmonitoring,risk management, portfolioanalysis, and competitor responses.

• Australian Financial Services began anInternet banking pilot. Based on a Javaplatform and using state of the artsecurity, the system will enable customersto review their accounts, pay bills andtransfer funds from home.

• The European business units introducedtelephone banking, utilising interactivevoice response systems and traditionaloperator calls.

• Michigan National converted itsoperating system to a new version of the Alltell operating platform withintime and budget.

• HomeSide accessed new marketsthrough the Internet via links to theMicrosoft Home Advisor and QuickenMortgage web sites.

The National’s data centres are among the most efficient in the world External benchmarking has demonstrated that our European and Asia/Pacific data centres areamong the most cost effective in the world.

Global Information Technology



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The Internet is now an important distribution medium for the Group The Internet is a distribution medium now widely used throughout the Group.In the United States, customers can access a variety of home loan information fromHomeSide’s extensive web site.



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Australian Financial Services

Australian Financial Services is thelargest of the National’s business unitscovering activities such as traditionalbanking, funds management, trustee,custody and leasing services.

Economic conditions in Australia weregenerally favourable through the yearalthough competition across the financialservices industry further intensified.As a result, profit increased 8.2% (beforeabnormals) over the previous year.Underlying profit (before tax anddoubtful debt provisions) increased10.6% to $2,326 million.

The result included an increase in theamount charged to provide for doubtfuldebts to $207 million. The increasereflects the pro-active approach theGroup has taken to writing off bad debtsand strong asset growth.

In its mainstream banking operations,

the National maintained or improved itsmarket share in most key sectors.

Total loans and acceptances increased12.7% to $99.3 billion over the year.Housing lending was up 13.0% to$37.8 billion. Credit card outstandingsgrew by 14.1% to $2.1 billion.TheNational reinforced its position as thecountry’s leading business lender,withparticularly strong growth in themedium/emerging business sector. Goodgains were also made in debtor finance(factoring), lease finance, andinternational trade.

The 22.2% increase in non-interestincome reflected strong growth in theGroup’s other financial services activitiesand higher income from lending andtransaction fees.All of the Group’s financialservice activities continue to expand at

double digit growth rates, increasing theproduct penetration of the customer base.

A number of initiatives were commencedand/or completed through the year tobuild on the Group’s strong position inAustralia. These included:• Establishment of a private banking

division.Twelve private banking suitesare now operating.

• Development of a sophisticatedinformation-based system that

identifies customers with specificfinancial service needs. Called National Leads , the system provides high quality data and strong customer callingopportunities.

• Establishment of agribusinessdevelopment units in five Australiancapital cities to provide specialist supportfor the Group’s rural finance teams.

Further customer education initiativesand changes in fee structures wereintroduced during the year to assist

customers utilise low-cost electronicbanking facilities where appropriate.These programs have reduced theproportion of branch-based transactionsfrom 19% to 14% of all transactions andincreased the number of subscribersusing telephone banking to over onemillion. These developments will yieldongoing savings.

A new distribution framework is beingintroduced across the Australian retailnetwork. Called the Area IntegratedMarket (AIM) this initiative involvesreconfiguring the branch network toimprove efficiency and ensure it is betteraligned to customer needs.

National Financial Management

enjoyed a strong year, lifting its after-tax profit by 29% to $53 million. Highersales and well contained expenses werethe main factors in this result. Total sales

grew by 69% to $1.2 billion. Total retailfunds under management were up from$4.4 billion to $5.6 billion over the year.

National Asset Management recorded astrong year, attracting over $600 millionin new wholesale funds. Performance of funds has also been sound in a highly volatile market. The business wasrecognised as the top Fixed InterestManager over the last one and two yearswhile the Balanced, Australian Equity

and Property funds also performedwithin the top two quartiles.

In October 1997 County InvestmentManagement was acquired. Theacquisition was well received by County clients and staff with the businesscontinuing to expand. At September 30,1998 County’s funds under managementamounted to $10.5 billion comparedwith $9.2 billion a year earlier.

County’s asset management style, andinnovative approach to product

development and marketing haveboosted the National’s capabilities in animportant and growing market.

National Australia Custodian Services

achieved further sound growth continuingto pick up important mandates throughthe year. At balance date, CustodianServices had $100 billion in assets undercustody, making it the largest securitiesprocessor in Australia.

Healthy asset growth and improvedprofitability characterised the year forNational Australia Trustees. Strongperformances by the Common Fund andCorporate Trusts were key factors in thisresult.


Key Business Units


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Clydesdale Bank

Although the Scottish economy began toslow, Clydesdale achieved a good result,lifting after-tax profit before abnormalsfor the year by 36% to $286 million. Inlocal currency profit increased 13% to£112 million. The result reflected a 36.8%gain in lending volumes, a 38.6%improvement in other operating income,and firm cost control.

Gains were made across most areas of the Bank’s operations.

Business banking grew strongly over the year,helped by a new seasonal loanproduct that proved popular withcustomers. Three new business bankingcentres were opened during the year andnew sites were identified in a number of English cities. The Bank’s asset financesubsidiary also performed well,continuing to increase market share.

On the personal banking side, new fixed

rate and investment housing loanproducts were introduced with bothproving very successful in picking upnew customers. Deposit growth was alsorobust with the instant access savingsaccount attracting over £700 million innew deposits. The Bank also offered aspecial ‘principal account’ to winsubstantial new high net worth business.

Reconfiguration of the branch network continued through the year, some of theinitiatives including:• Introduction of full Saturday trading

in selected locations.• Further removal of administrative

processes from branches intocentralised processing offices.

• Extension and upgrade of Clydesdale’sATM network.

Northern Bank

Northern Bank increased after-tax profitbefore abnormals by 42% to $169million this year. In local currency theresult was up 18% to £66 million,arecord profit for the Bank.

Generally favourable business conditionsin Northern Ireland assisted the Bank’sstrong performance. The Good Friday Agreement designed to bring peace inNorthern Ireland along with a proposed£315 million Government spendingpackage has buoyed business confidence.

Home loan volumes increased 15%,making a major contribution to revenuegrowth. The Bank became the fastestgrowing mortgage finance provider inthe Province, leveraging off the ‘tailoredhome loan’concept first developed inAustralia.

Northern’s financial service activities wereparticularly successful during the year:

• Insurance and executor and trusteesubsidiaries grew profits in excess of19%.• Northern Bank Offshore Financial

Services won the 1998 Financial Times‘Best Offshore Co’and ‘Best OffshoreProduct’ awards.

• A significant increase in NationalAustralia Life products sold.

Progress continued on developingbusiness banking centres, with 20% of the Bank’s larger business now managedthrough these centres. Mobile bankerswere extended to agricultural customersover the period with six teams now covering the province. Further changes inretail distribution were also completedincluding the appointment of area salesand service managers.

Yorkshire Bank

With after-tax profit up 52% to $344million (before abnormals), YorkshireBank experienced a strong year. Theresult was helped by a 42% reduction inthe charge for doubtful debts. In localcurrency, the Bank’s operating profitincreased 26% to £135 million.

Yorkshire completed a major restructuringprogram splitting branches betweenpersonal and business customersegments. In the personal network,19 branches were merged or closed, threewere reconfigured, and two sites wereopened in retail centres. Network changeswere also supported by the removal of many back office tasks from branches,enabling staff to focus on customer service.

Promotion of more efficient delivery channels continued in the year with thenumber of customers using telephonebanking growing by over 10,000 permonth.A new direct sales operation also

commenced selling personal loans andmortgages. Over 90% of business wasgenerated from new customers. Mortgagelending grew 50.6%,assisted by a new flexible payment, fixed-rate mortgageand the introduction of mobile managersin the Midlands area.

Business financialservices hasseen strongimprovement with asset finance delivering40% growth, the fifth successive year of significant growth. Business banking isnow managed from 15 business banking

centres, including a new office inBirmingham,one of the most importantfinancial centres outside London.

The Bank’s contract hire subsidiary,EdenVehicle Rentals, also enjoyed another yearof strong growth with the businessincreasing by 11.5% over the year.


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National Australia Life

National Australia Life made considerableprogress in the year improving theproduct penetration of the Group’sUnited Kingdom customer base. Profitafter tax was $5 million for the year, asound result in only its third year of operation.

Overall sales were up 8% in the year,with premium income increasing by 36%. This strong result was driven by increased sales from the personal bankernetwork (up 20%) as well as aconcentration on higher value sales. Salesof personal equity plans were particularly strong as were resales to existingcustomers, demonstrating the strength of providing customers with a morecomplete package of financial solutions.

At the end of the year, funds undermanagement stood at £336 million, a70% increase on the prior year despitethe increased volatility in financial

markets.

In the customer service centreproductivity per employee increased by 26.6%, continuing the focus on processimprovement.

National Irish Bank

National Irish Bank earned an after-tax profit (before abnormals) of $33 millionfor the year,unchanged over the previous year. In local currency, the Bank’s profitdecreased 9% to IR£15 million.

The decline in profit in local currency reflects an unusually low level of provisionsin the previous year and increased expenses.

Assisted by the strong Irish economy,

National Irish made solid progress overthe year.Mortgage volumes grew by 42.6%while business lending increased 41%.The opening of a business banking centrein Limerick brought the number of thesespecialised centres to six. The Bank’sTreasury also enjoyed a record year.

Continuing to focus on customer needs,the Bank expanded its mobile bankernetwork, increased the number of ATMs,increased the usage of its 24 hourtelephone banking service and opened a

branch at Blackrock, Co. Dublin.During the year, National Irish was thesubject of investigations arising fromallegations against certain parts of itsoperations.While involving unfavourablepublicity, none of these investigationsdemonstrated widespread or systematicmisconduct, and the Bank will continueto work constructively with the authoritiesin order to resolve these matters.

National Irish is well prepared to operatewithin the European economic and

monetary union and is prepared to offerall its customers the option of transacting in either Euros or Irishpounds on January 1, 1999.

Michigan National

Michigan National reported an after-tax profit of $226million (beforeabnormals) for the year to September,an increase of 1.8% on the previous year’s figure. In local currency, after-tax profit decreased 14% to US$146 million(before abnormals).

The Bank increased its share of totallending from 6.0% to 6.4% over the yearto June 30,1998, reflecting growth incommercial real estate and small businesssectors. It also experienced a healthy increase in deposits, growing market sharefrom 5.7% to 6.1% over the same period.

Over the year, Michigan Nationalintroduced a program to strengthen itsposition into the next millennium. Thisprogram included:• Focusing effort and resources on the

most valuable elements of thebusiness.

• Realigning the business to selected

customer segments in high growthareas.

• Reviewing the product and servicesmix.

• Exiting non-core businesses.

Michigan National introduced aRelationship Rewards program, launchedEqui:Money VISA (a secured creditcard), expanded the distribution of itsCapital Advantage product, increased itsinsurance product offerings,andlaunched Web Banking and Web bill

payment facilities.

Through the year, the Bank upgraded itscore computing platform providing a moreefficient system with higher functionality.

Key Business Units



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HomeSide, Inc.

The acquisition of the Florida-basedHomeSide was completed on February 10,1998. In the period since acquisition,HomeSide earned an after-tax profit of $92 million, or US$58 million.

HomeSide is the sixth largest mortgageservicer and ninth largest mortgageoriginator in the United States. It servicesmore than 1.4 million households in aUS$115.8 billion loan portfolio as of September 30, 1998.

During the year, HomeSide acquired themortgage servicing operations andUS$16.6 billion loan servicing portfolio of Banc One Mortgage Corporation, andconcluded a five-year preferred partnerarrangement to purchase the majorproportion of its new mortgages.

Low long-term interest rates in the UnitedStates have encouraged borrowers torefinance their mortgage loans, increasing

the run-off in the servicing portfolio.However, HomeSide’s ability to quickly up-scale its operations and its provenhedging techniques have ensured thatthese developments have not adversely impacted profitability.

HomeSide’s value to the Group is in itssuperior systems and management whichhave ranked it as one of the most efficientmortgage servicers in the US. With amortgage portfolio of $57.9 billion, theNational believes substantial benefits canbe obtained by applying HomeSide’sexpertise across the Group.

Considerable progress has already beenmade in identifying how HomeSide’ssystems can be applied in Australia.

Bank of New Zealand

During the year, the New Zealandeconomy slowed, and by year’s end was inrecession.

The Bank of New Zealand’s results wereaffected by these conditions, with profitbefore abnormals decreasing 5.7% to$280 million. In local currency, the Bank reported a profit of NZ$324 million, a3.0% decrease. Comparisons with the1996/97 result were also distorted by anumber of one-off factors. Excludingthese, underlying profit (before providingfor doubtful debts and income tax)increased by 8%.

The area of greatest growth continued tobe the Bank’s financial services group.Funds under management rose by 17.6%to $1.4 billion,mainly as a result of increasesin wholesale funds under management.

In line with the new business model, theBank was able to gain greater leverage

from the Group’s scale through theintegration of some of its customerservice activities into Australia. As part of this program, Bank of New Zealand’smain data processing functions weretransferred to Melbourne during the year.

The Bank continued to modify itsdistribution network to ensure it is betteraligned to customer needs. A goodexample of this change was the openingof a new sales-only outlet in Aucklandfeaturing lounge style chairs, music, coffeeand Internet access.

The Bank of New Zealand also moved tostrengthen its position in Auckland withthe relocation of the Bank’s head office tothat centre.

National Australia Bank Asia

A measured and prudent approach hasenabled National Australia Bank Asia tomake sound returns in Asia despite thefinancial instability gripping the region.

The profit contribution before abnormalsfrom the Group’s Asian business increasedby 64% to $46 million. Underlying profitwas up sharply with revenue growingapproximately three times faster thancosts.Wider margins and an increaseddemand for debt were important factorsin this improvement, as were the Group’sforeign exchange and money markettrading activities.

The prevailing conditions were used toestablish business relationships withmajor, creditworthy Asian corporations,and with a number of leading financialinstitutions in the region. As a result, ourGroup became increasingly involved indebt origination and structuring.

On the consumer side,development of themortgage business has been slow. Inresponse to prevailing conditions, theemphasis shifted to deposit building,utilisingthe Group’s wealth management strategy.

Specific provisions for lending losses inAsia remain low, being almost totally confined to corporate lending in Thailandand Indonesia. Losses in consumerlending have been negligible.

The Group will continue to actively manage its position within Asia with a

focus on quality and customerrelationships. Reduced credit limits willlimit business volumes and revenuegrowth in Asia in the immediate future,but this is considered a prudent approachin the current environment.



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Global Wholesale FinancialServices

Global Wholesale Financial Services isresponsible for the Group’s 1,500 majorinstitutional relationships worldwide,incorporating all of our capital markets,corporate finance, foreign exchange,money market, financial risk management, and project and structuredfinance activities. It operates across fiveregions and 21 financial centres.

Its financial performance is included inthe reported results of the Group’sregional business units.

After its establishment in October 1997,Global Wholesale Financial Servicesconcentrated on enhancing its return onequity, upgrading the overall efficiency of its operations, and deepeningrelationships with corporate andinstitutional clients. The introduction of a global market risk system resulted in amore dynamic approach to apportioning

capital between the Group’s variousmarket activities. A model to determinethe return on equity and risk-adjustedreturn on capital for each client was alsodeveloped.

Global Wholesale completed globalproject and structured financingstotalling $10 billion during the year.

Over the year, various industry surveysfound our Group to be pre-eminent in:• Project and structured finance in

Australia.

• A$ trading in the United Kingdom.• A$ swaps globally.• Interest rate and currency risk

management products in Australia.• Foreign exchange in Australia.• Relationship management in Australia

and New Zealand.


Global scale will be a key driver of future shareholder returns

Creating economies of scale from our international operations will provide a competadvantage in the years ahead.

Pictured are National Irish Bank’s Martin Mulligan (right) with Gerry Purcell from PurcelBrothers Ltd, one of the world’s leading livestock exporters to the Middle East. In the backgis Dublin’s International Financial Services Centre on the bank of the River Liffey.

Key Business Units


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National Australia Bank Limited and Controlled Entities 25

Table of Contents Page Description of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Financial Review

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31

Selected Financial Data for Five Years Ended September 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

Net Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34

Bad and Doubtful Debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37

Other Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38

Other Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40

Abnormal Items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41

Operating Profit After Income Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42Operating Profit by Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43

Assets and Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45

Return on Average Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46

Dividends and Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46

Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46

Changes in Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47

Capital Adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47

Gross Loans and Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50

Impaired Assets, Provisions and Allowance for Loan Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51

Deposits and Other Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54

Risk Elements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54

Human Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56

European Economic Monetary Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59

Year 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59

Accounting Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62

Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

Report of the Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Statements of Profit and Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .76

Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77

Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .78

Notes to and Forming Part of the Financial Statements

Principal Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80Profit and Loss Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85

Asset Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .89

Liability Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105

Capital Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .113

Other Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .115

Directors’ Declaration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

Auditors’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

Form 20-F Cross Reference Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160

Shareholder Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161

Financial Information and AnalysisFor the Year Ended September 30, 1998


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Introduction

National Australia Bank Limited (the Group) ranks among the

world’s 40 largest banks in terms of shareholders’ equity.At

September 30, 1998 the Group had total assets of $251.7 billion.

The Group began in Melbourne in 1858 as The National Bank of

Australasia. In its current form,the Group is the result of a merger in1981 of The National Bank of Australasia Limited and The

Commercial Banking Company of Sydney Limited (established in

Sydney in 1834).

From its Australian base, the Group has expanded overseas during

the past decade and it now conducts full banking and financial

service operations in five countries.The overseas expansion has

diversified the Group’s income streams and asset base.

At September 30, 1998 49.3% of the Group’s total assets weredomiciled in Australia. The balance was located in Europe (25.4%),

United States (12.1%), New Zealand (9.2%) and Asia (4.0%).

At September 30, 1998 the Group had 50,973 full time and part time

employees worldwide (equivalent to 46,300 full time positions).

The National’s Business Model

The Group introduced a new business structure in April 1998,

consisting of a number of initiatives, which are designed to increase

the Group’s progression towards realising its goal of becoming a

leading international financial services group.

The Group’s new business operating structure has four key elements:

1. A series of customer focused retailers, dedicated to meetingcustomers’ needs with a range of products sourced from both inside

and outside the organisation.

2. Shared customer service operations centralising the common

business unit functions such as technology, operations, processing

and telephone banking.

3. Product specialists manufacturing products at the lowest possiblecost. HomeSide, Inc., based in Florida and acquired in February

1998, is an example of an international product specialist.

4. A streamlined corporate office focused on Group strategy, policy

and corporate governance.

Introduction of the National’s Business Model has resulted in the

need to restructure existing operations across the Group. Anabnormal charge of $380 million ($252 million after tax) relating to

restructuring costs was taken to account in the Group’s 1998 results.

Implementation of the model will continue over the next 12 to 18months.

Australia

The Australian financial system principally consists of four major

banks, each with national operations and large branch networks. Anumber of smaller regional banks also operate in Australia, which

are primarily focused on State markets. Most Australian banks

including the regional banks are publicly listed and owned by large

numbers of private shareholders.

Mutual societies were also a major force in the financial system,many of whom have now demutualised and have widened their

range of products and services from insurance, investments and

superannuation to compete in the banking industry’s traditional

markets.

Competition also comes from numerous other non-bank financial

intermediaries, including investment/merchant banks, specialistretail fund managers, building societies, credit unions, mortgage

originators and finance companies.

In recent years the Group’s performance in Australia has seen it

emerge as Australia’s largest bank in terms of assets. At August, 1998it held 19.1% of all commercial banking assets in Australia,

according to the Reserve Bank of Australia Bulletin.

The Group’s Australian business (the National) offers a full banking

service and selected financial services across personal, business, ruraland wholesale markets.

It provides service through 1,122 outlets with a staff of 23,532 (or

21,124 full time equivalent positions). The National is reconfiguring

its distribution network as part of a steady shift in transactional

activity from branches to alternative distribution channels.Customer demand for these alternatives has led to growth in the

number of Automatic Teller Machines (ATMs) and terminals

providing electronic funds transfer at point of sale (EFTPOS).The

supply of information and services over the telephone has alsogrown dramatically in the past four years.

The National has a large retail customer base, with around

three million customers.

It has direct access to the Australian payments system, allowing it to

clear cheques and other instruments for its customers. The National

also acts as an agent for other licensed banks and non-bank financial

institutions.

Core retail banking services include savings and cheque accounts,passbook accounts, term deposits, credit cards, personal loans,

housing loans (for owner occupiers and investors) and lines of

credit.

Competition between banks and non-banks is strong, particularly in

the housing finance market with a number of product specialistsentering the market and competing on price.

Competition from non-banks is also increasing in the credit card

market. The National issues MasterCard and Visa card. It also issues

Bankcard in conjunction with other major Australian banks for use

in Australia and New Zealand.All credit cards can be used to accessthe National’s electronic banking network.

Financial services have become an integral feature of the National’sretail market activity. The shift towards financial services began over

a decade ago with the establishment of a wholly owned subsidiary,

National Australia Financial Management Limited (NFM), toprovide personal financial planning, life and disability insurance,

superannuation and a range of managed investment funds. The

range of financial services was widened in 1989 with the

establishment of National Australia Trustees Limited to provide

personal trustee services, including wills, power of attorney, andpersonal asset care and management services.

The sale and distribution of financial services has been progressively

integrated with the National’s distribution network. Customers are

National Australia Bank Limited and Controlled Entities26

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now managed on the basis of segments rather than which product

they select or their geographic location.

NFM supports this focus by specialising on the manufacture and

service of financial products. It functions alongside NationalAustralia Asset Management Limited (NAAM), which is a wholly

owned funds management subsidiary.At September 30, 1998

NAAM’s funds under management totalled $6.6 billion.

On October 1, 1997, the National acquired the investment

management company County Investment Management Limited(CIM). At September 30, 1998, CIM had $10.5 billion of funds

under management. The investment activities of NAAM and CIM

remain largely unchanged and operate independently.

The National is a substantial provider of business and rural financialservices in Australia. The National’s strong position in business

markets is the result of carefully targeted initiatives over a number of

years. These have included the development of a specialised network

of 219 business centres – known as Business Banking Centres and

Business Banking Suites.

Services to business customers include interest bearing chequeaccounts,deposit accounts, payment facilities and the provision of

finance in the form of loans, advances, bill facilities, invoice

discounting and leasing. Business banking customers can also select

from treasury services, such as foreign exchange and interest rate risk management products.

Other business banking facilities include fleet vehicle leasing, equity

finance, nominee and custodian services, corporate trustee services

(through National Australia Trustees Limited), life insurance and

investment products.

International banking services have been a core part of theNational’s service to business customers for many decades.

The National has an international presence through offshorebranches and representative offices in London, New York and

11 major cities in Asia. The primary function of these offices is to

provide trade finance and treasury services to the Group’scustomers.

The National also maintains correspondent banking relationships

with approximately 3,000 banks. International services include

lending, trade finance, foreign exchange dealing, the provision of

credit and liquidity enhancement facilities to bond issuers and otherthird party borrowers, acceptance of foreign currency deposits, and

guarantee and documentary credit business.

Domestic and international money market and foreign exchange

operations are conducted through Treasury Divisions, which alsomanage the National’s day to day funding. A global, 24 hour a day dealing capability is maintained through dealing centres in

Melbourne, Sydney, Wellington,Tokyo,Hong Kong,Singapore,

London and New York. In Australia, the National is a market maker

in all major currencies.

The National trades Eurocurrency securities, underwrites and

arranges facilities for major corporate clients, and engages in interestrate and cross currency swap transactions. In the Australian money

market, the National is a major trader of bill acceptances. It also

operates in the financial futures market as a principal and trader.

The National undertakes a number of specialised business activities

through other subsidiaries and business units. These include a

property company (NBA Properties Limited) which, with itsproperty owning subsidiary companies, is primarily an owner of the

National’s business related properties and custodian services.

Europe

The Group’s operations in Europe are comprised of four regionalbanks,

Documents

Annual-Report-1998.pdf