The National recorded a first quarter profit of $724 million, up 35.8% over the previous corresponding period, continuing the strong underlying performance recorded in the second half of 1997/98. Underlying profit (profit before tax and doubtful debts charge) increased by 1.4% over the September 1998 quarter and by 27.8% over the December 1997 quarter to $1,213 million reflecting the continuing strength of the Group's core franchise.
Despite the improved underlying result, net profit after tax for the December 1998 quarter declined by 7.5% over the September 1998 quarter. The decline is attributable to higher income tax expense due to the write back of tax provisions during the September 1998 quarter, and a higher doubtful debt charge in the current quarter. Basic earnings per ordinary share were 48.9 cents for the current quarter, down from 53.8 cents in the September 1998 quarter and up from 37.7 cents in the previous corresponding quarter. The result clearly demonstrates the success of the National's strategy and reflects: - further diversification of the Group's income streams with the ratio of non interest income to net interest and other operating income increasing to 43.4% in the December 1998 quarter from 42.3% in the September 1998 quarter and 36.3% in the December 1997 quarter indicating the on-going success of the National's initiatives to reduce reliance on interest income;
- non interest expenses falling by 3.0% from the September 1998 quarter partly due to benefits associated with the Group's restructuring program. The fall in costs has led to a solid reduction in the cost to income ratio, improving to 53.0% for the December 1998 quarter from 54.1% for the September 1998 quarter; and
- margins declining slightly over the quarter following a significant reduction in 1998.
Net Interest Income
Net interest income decreased by 2.9% over the September 1998 quarter, and increased by 7.6% over the December 1997 quarter. Loans and advances increased by 2.0% over September 1998. After excluding exchange rate impacts, loans and advances increased by 3.7% over the quarter. Other Operating Income
The National further increased other operating income by 1.7% over the September 1998 quarter and by 45.3% over the December 1997 quarter, partly reflecting the acquisition of HomeSide during the early part of 1998. The increase in other operating income over the September 1998 quarter was primarily due to: Other Operating Expenses
Total other operating expenses (excluding goodwill amortisation) decreased by $44 million or 3.0% over the September 1998 quarter and increased by 15.8% over the December 1997 quarter. After excluding the impact of the acquisition of HomeSide and exchange rate impacts, there was an underlying increase in other operating expenses from the December 1997 quarter of 2.2%. Personnel costs rose by 5.1% over the September 1998 quarter primarily due to higher on-costs following a one-off actuarial adjustment to long service leave provisions and an ending of the superannuation contribution holiday in Australia. Salaries remained flat across most business units. Staff numbers remained steady with September 1998. Occupancy costs increased by 0.8% from the September 1998 quarter reflecting higher rental costs on properties resulting from sale and leaseback activities in Australia and Europe largely offset by lower other occupancy costs which have returned to a more normalised level in the current quarter following a writeoff of fixtures and fittings in the September 1998 quarter. General expenses decreased by 15.4% from the September 1998 quarter. The main contributor to this reduction was reduced computer equipment and software expenditure, down 21.2%. This was predominantly due to a change in the Group's accounting policy, effective 1 October 1998, from expensing to capitalising and amortising the costs of developing, acquiring and enhancing software. The revised policy, which is consistent with new accounting requirements in the United States had a positive impact of $19 million before tax. Other expenses reduced by 22.5% partly reflecting lower consulting and travelling expenses predominantly in Australia. Provisions for Doubtful Debts
The charge for doubtful debts was up by $26 million or 25.5% over the September 1998 quarter and up by $8 million over the December 1997 quarter. Higher provision charges were recorded in Australia, due largely to recoveries booked during the previous quarter. Increases were also recorded in Asia and the New York branch. Reduced charges were recorded in Europe and New Zealand. Total provisioning coverage of the Group's impaired assets grew to 163.8% at December 1998 from 148.6% at September 1998. Capital
The Group's total capital position was steady with total regulatory capital as a percentage of risk weighted assets remaining at 9.2% at December 1998, the same as September 1998. Tier 1 capital increased from 6.4% at September 1998 to 6.5% at December 1998, consistent with the Group's preferred range for Tier 1 capital. On 30 September 1998, the Group issued fully paid preference shares which, initially, have no entitlement to dividends. However, the investors have entitlements to non-cumulative distributions at an annual rate of 8% payable quarterly in arrears, via a holding of Trust Units Exchangeable for Preference Shares. A distribution to the Trust Unit holders of $15 million was made by the Group in the December 1998 quarter. Asset Quality
Asset quality improved over the period with gross non-accrual loans declining by $11 million from September 1998 to $1,459 million. The Group's impaired assets portfolio remains modest with a ratio of gross non-accrual loans to risk weighted assets at December remaining at 0.7 per cent. Asian Exposures
The Group continued to actively manage its Asian portfolio, reducing its total exposure by 21.1% from September 1998. Gross impaired assets in Asia increased by $22 million between September 1998 and December 1998 to $49 million representing less than 0.3% of the Group's total shareholders equity. | 
