Review of Operations

Operating Performance

Percentage movements quoted are as compared with the September 1999 quarter.

Profits

• Operating profit after tax up 5% to $771 million.
• Operating profit attributable to ordinary shareholders up 3.1% to $726 million.
• Underlying profit up 20% (16.1% per cent excluding the impact of the new life insurance accounting standard).
• International franchises contributed 50.6% of the Group's December 1999 quarter earnings.
• Other operating income grew by 6.1% (1.3% excluding the impact of the new life insurance accounting standard).

Costs

• Cost to income ratio reduced to 51.1%. Excluding the impact of adopting the new life insurance accounting standard, and interest income from National Income Securities and Preference Shares from all periods, the cost to income ratio for December 1999 quarter was 52.7% compared with September 1999 quarter of 58.3% and December 1998 quarter of 53.2%.
• Costs to total assets reduced from 2.43% to 2.09% due to lower operating costs and asset growth.

• Personnel costs reduced by 2.9%.
• Occupancy costs were steady.
• General expenses reduced by 15.6%.

Productivity

• Return on Assets was 1.08% compared with 1.14% for the previous quarter and 1.09% for the December 1998 quarter.
• Employee numbers, measured on a full time equivalent (FTE) basis, decreased 1.5% during the December 1999 quarter and were 3.2% lower than a year earlier.
• Underlying profit per FTE for the December 1999 quarter is 21.9% higher than the September 1999 quarter and is 11.8% higher than the December 1998 quarter.

Asset Quality

• Total provisioning coverage of impaired assets at December 1999 was 164.9% compared with 158.4% at September 1999 and 170.8% at December 1998.
• Specific provision coverage ratio is 32.6% compared with September 1999 of 28.8%.
• Net non-accrual loans represented 0.5% of risk weighted assets.

Shareholder Value

Economic Profit

Economic profit for the December 1999 quarter increased by 8% from $414 million for the September 1999 quarter to $447 million.

Growth in cash earnings and imputed franking credits, due to higher Australian profits, was partially offset by an increase in the level of capital employed.

Economic profit represents the excess of cash earnings over the cost of capital employed in the business plus the value to shareholders of franking credits generated.

Earnings per Share

Basic earnings per share (attributable to ordinary shareholders) rose from 47.5 cents in the September 1999 quarter to 48.8 cents, an increase of 2.7%.

December 1999 earnings per share were steady with the December 1998 quarter of 48.9 cents.

Cash earnings per share (earnings attributable to ordinary shareholders before goodwill amortisation) rose by 1.8% to 52.1 cents compared with the September 1999 quarter.

Capital Structure

Tier 1 ratio of 7.78% was steady compared with September 1999 and increased from 6.46% a year earlier. The increase was due to the issue of National Income Securities in June 1999, retained earnings and dividend reinvestment.

Core Tier 1 (excluding the impact of preference shares and National Income Securities) was 6.46% compared with 6.43% for the previous quarter and 6.09% for December 1998.

The total capital ratio at December 1999 was 10.22% compared with 10.35% at September 1999 and 9.20% at December 1998.

Return on Equity

The Group's return on average ordinary shareholders' funds increased from 17.80% to 17.84% during the quarter and compares with 18.51% a year earlier.

The current return was achieved on an increase in average ordinary shareholders' funds of 6.5% from $15.3 billion for December 1998 to $16.3 billion.

The return on equity reflects the retention of earnings to provide maximum strategic flexibility for expansion through acquisition. In the event that a suitable acquisition opportunity does not crystallise by the middle of the year, a share buyback will be initiated.