Review of Operations
| A fourth quarter profit of $783 million, the highest quarterly profit ever recorded by the Group, lifted the National's full year profit after tax before abnormals to $2,511 million. Underlying profit was also very strong, increasing by 17.7%, reflecting the strength of the Group's underlying core franchise. Strong earnings combined with a focus on generating maximum value from the Group's capital resources is reflected in the return on equity before abnormal items and goodwill amortisation of 19.2%, up from 17.8% last year. The fourth quarter result was particularly strong with 8.3% growth in other operating income and a 6.1% increase in net interest income over the quarter. In addition to these, the quarter was boosted by a reduction in the income tax expense due to the write-back of provisions no longer required and a doubtful debts charge which was $100 million less than the previous quarter. During the year to 30 September 1998, abnormal charges were booked relating to:
Both of these charges were classified as abnormal due to their one-off nature and their size and effect on the Group's results. After abnormal items, profit after tax was $2,014 million for the year to September 1998. The profit after abnormal items for the year included $164 million from exchange rate movements. Net Interest Income Net interest income increased by $500 million or 9.3% over the previous year. Of this increase, $380 million was attributable to exchange rate movements. Volume growth was particularly strong, rising 22.1% over the year a combination of strong organic growth and favourable movements in exchange rates. The Group was particularly successful in increasing its outstandings in the business sector with overdrafts up by 24.7% and lease financing increasing by 37.0% over September 1997. Increases in personal lending were also strong with housing lending up 17.0% and credit cards increasing by 17.6%. Excluding exchange rate movements, loans and advances increased by 9.0% over September 1997. Margins for the year declined from 3.5% to 3.1% with virtually all of the decline occurring in the first half of the year. The decline in margins can be traced back to stronger competition particularly in Australia, higher wholesale funding costs and a reduction in earnings on free funds offshore. For the September 1998 quarter, net interest income increased by $90 million or 6.1% over the previous quarter. Margins remained relatively flat over the quarter allowing asset growth to flow directly into income. Other Operating Income The National had further success in diversifying its income streams over the year with a $1,044 million or 35.9% increase in other operating income. Excluding exchange rate movements and the inclusion of HomeSide, other operating income increased 14.1%. As a proportion of total income other operating income represents 42.3% for the September 1998 quarter, up from 36.5% a year earlier. This change in income mix significantly reduces the Group's reliance on interest income providing greater stability in income streams. The main contributors to the increase in other operating income were:
Other Operating Expenses Other operating expenses increased by $858 million over the year or by 19.2%. Excluding exchange rate movements and the inclusion of County and HomeSide, operating expenses increased by a more moderate 6.0%. Exchange rate movements contributed $335 million to expenses through the year or 39.0% of the total increase. The Group's efficiency ratios were little changed over the period with the cost to income ratio increasing marginally from 54.2% to 54.4%. The cost to assets ratio on the other hand declined from 2.2% to 2.1%. Personnel costs for the September year increased by 15.6% or $409 million. Exchange rate movements contributed $193 million to this increase. The underlying rise reflects the impact of the Australian enterprise bargaining increases in October and April and the inclusion of HomeSide and County. Staff numbers decreased by 0.3% over September 1997, although when the impact of HomeSide and County is excluded, staff numbers decreased by 7.0%. Occupancy costs increased by 10.3% over the September 1997 year. This increase is largely attributable to the inclusion of HomeSide and higher rental costs on properties sold and leased back during the current year. General expenses increased by 28.6% over the previous year or by 13.1% excluding the impact of exchange rate movements and the inclusion of HomeSide. The Group incurred an increased non lending loss provision charge in the current year while the previous year was positively impacted by a one-off writeback in the Bank of New Zealand. Expenditure on information technology including new and upgraded software increased over the previous year. Communication, stationery and postage increases were experienced largely in Europe. Fee and commission expense increased in line with higher credit card activity, predominantly in Australia. Apart from business growth, expenditure increases relate to a number of projects currently being undertaken by the Group including Year 2000 costs. The 10.4% rise in operating expenses for the September quarter relates primarily to an increase in general expenses including a rise in non-lending losses. Provisions for Doubtful Debts With economic activity easing in all of the Group's markets, the Group recorded a $240 million increase in the provisions for doubtful debts to $572 million for the year to 30 September 1998. Exchange rate movements contributed $47 million to this increase. Of the charge, $422 million was against specific provisions while $150 million was against general provisions. Higher specific provisions were recorded in all of the Group's markets. As at 30 September the Group has adopted a statistically based provisioning methodology for determining its general provision for doubtful debts. With the adoption of this methodology, the total provisioning coverage of the Group's impaired assets now equals 148.6%. The doubtful debt charge for September 1998 was $100 million lower than the June quarter but was consistent with charges incurred in previous quarters. Capital The Group strengthened its total capital position over the year despite a reduction in its reserves following the acquisition of County and HomeSide. Total regulatory capital as a percent of risk weighted assets increased from 8.7% at September 1997 to 9.2% at September 1998. Strong internal capital generation and the successful issue of US$450 million in preference shares increased the Group's Tier 1 ratio to 6.4% from 5.9% at June 1998 following the acquisition of HomeSide. Additional subordinated debt was raised through the year, and combined with the adoption of a statistically based provisioning methodology the Tier 2 ratio increased from 2.2% at September 1997 to 3.1% at September 1998. Asset Quality Total gross impaired assets increased by $190 million during the September year. Increases were recorded across all regions of the Group. The Group's impaired asset portfolio remains modest, with the ratio of gross non-accrual loans to risk weighted assets falling to 0.7% at September 1998 from 0.8% at September 1997. Asian Exposures The Group's aggregate exposure to Asia amounted to $14.2 billion at 30 September 1998, a 4.4% decline from 30 June 1998. Gross impaired assets in Asia decreased by $14 million between June 1998 and September 1998 to $27 million representing less than 0.2% of the Group's total shareholders equity. | Results Highlights Review of Operations Download Results Announcement |