Review of Operations

The Group's operating profit before abnormals of $619 million for the June 1998 quarter was 7.5% higher than the March 1998 quarter and 22.8% higher than the previous corresponding period. Over the quarter the Group continued to post significant gains in its core income streams while keeping cost increases to a modest 1.5%.

For the nine months to 30 June 1998, operating profit before abnormals increased by 5.2% from $1,643 million to $1,728 million.

Underlying profit increased by 12.5% per cent from $2,755 million in 1997 to $3,099 million for the nine months to 30 June 1998.

The result reflects the Group's continued efforts to diversify its income streams across geographies and business lines. The acquisition of HomeSide on 10 February has particularly assisted in this regard. As a result, for the June 1998 quarter, 41.8% of net income was derived from non interest sources while 49.1% of the Group's operating profit after tax was generated outside Australia.

During the nine months to 30 June 1998, the Group booked restructuring costs of $241 million ($159 million after tax). Over the past year, the Group has focussed on improving its distribution network and has identified the need to restructure this network and its workforce. The restructuring charge has been classified as an abnormal item due to its size and effect on the Group's results.

For the June 1998 quarter, operating profit after tax and abnormal items was $611 million representing a $175 million or 40.1% increase over the March 1998 quarter. Profit after tax and abnormal items was $1,569 million for the nine months to June 1998.

Net Interest Income

Net interest income increased by 4.9% over the quarter reflecting a 6.4% increase in loans and advances and a relatively flat margin performance. Strong lending growth was evident in:

• housing lending, up by 4.8% over March 1998;
• lease financing, up by 8.5% over March 1998;
• credit cards, up by 6.2% over March 1998.

Movements in exchange rates between the Australian dollar and the British pound, Irish pound and United States dollar also increased the balance of loans and advances outstanding. Excluding exchange rate movements, loans and advances increased by 3.5% over March 1998.

For the nine months to June 1998, net interest income increased by $314 million or 7.9%. Of this increase, $256 million was attributable to exchange rate movements.

Other Operating Income

Other operating income increased by 12.5% over the June 1998 quarter from $942 million to $1,060 million. This increase reflects the inclusion of HomeSide for a full quarter (compared to a 7 week contribution in the March 1998 quarter), increases in banking fees, and a further increase from the Group's financial services activities.

The increase in other operating income was primarily due to:

• the inclusion of an additional $29 million in mortgage servicing fees by HomeSide;
• loan fees from banking which increased by 8.5%;
• money transfer fees which increased by 8.8% reflecting changes in fee structures in New Zealand;
• A 47.9% rise in trading income the result of increased financial market volatility and turnover. The largest contributions originated from Australia, New Zealand and New York;
• other income which increased by 6.1% largely due to $45 million in mortgage origination and other income collected by HomeSide.

In the nine months to June 1998, other operating income increased by a substantial 32.6%. Excluding exchange rate movements and HomeSide, other operating income still increased by 14.5% demonstrating the success the Group has achieved in reducing its reliance on interest income.

Other Operating Expenses

Other operating expenses increased by 1.5% over the quarter from $1,310 million to $1,329 million. The tight control of costs reflects a rigorous approach to expenses since the beginning of the calendar year and the benefits of the Group's restructuring program which are just beginning to be realised.

The Group's cost to income ratio for the June 1998 quarter was 52.4%, well below the 55.8% for the March 1998 quarter and 54.3% for the previous corresponding period.

Personnel costs for the June 1998 quarter increased by 2.3% or $17 million. This increase reflects the impact of the Australian enterprise bargaining increase in April, the inclusion of HomeSide for a full quarter and exchange rate movements. Staff numbers declined by 0.9% between March and June.

Occupancy costs increased by 8.6% over the June 1998 quarter. This increase is largely attributable to higher rental costs on properties sold and leased back late in the March quarter and the inclusion of HomeSide for a full quarter.

General expenses declined by 1.8% over the quarter. Most expense lines within this category were little changed over the quarter except for exchange rate movements and the inclusion of HomeSide.

Total other operating expenses increased by 19.6% from $3,234 million to $3,868 million for the nine months ended 30 June 1998. Of this increase, $396 million was attributable to exchange rate movements over the period, and the inclusion of HomeSide and County Investment Management. Excluding these impacts, other operating expenses increased by 7.4%.

Provisions for Doubtful Debts

The doubtful debt charge for the June 1998 quarter was $202 million, $54 million higher than the March 1998 quarter. The charge represented a $155 million specific provision charge and a $47 million general provision charge.

Higher specific provisions were recorded in Australia, Europe and the United States while the absence of significant write backs in the Bank of New Zealand caused an increase in the New Zealand charge. Additional specific provisions, albeit modest, were also required in Asia.

The general provision charge of $47 million for the quarter to June 1998 was $26 million higher than the previous corresponding period and partly reflects the strong growth in loan volumes. The general provision balance as a percent of risk weighted assets is now 0.51%.

Specific provision coverage of non-accrual loans increased from 46.4% at September 1997 to 48.4% with the total provisioning coverage (including both specific and general provisions) exceeding 100%.

The doubtful debts charge for the nine months to June 1998 was $243 million higher than the previous corresponding period.

Capital

The Group's Tier 1 capital ratio increased from 5.8% at March 1998 to 5.9% at June 1998. Tier 2 capital declined marginally over the June quarter to 2.9% reflecting the reduction in the asset revaluation reserve from the further sale of properties and the growth in risk weighted assets.

Asset Quality

Total gross impaired assets increased by $191 million during the June 1998 quarter. Increases were recorded in Australia, New Zealand, the United States and Asia.

The Group's impaired asset portfolio remains modest, with the ratio of gross non-accrual loans to risk weighted assets increasing to 0.81% at June 1998 from 0.76% at March 1998.

Asian Exposures

The National's aggregate exposure to Asia amounted to $14.8 billion at 30 June 1998, a 10.2% decline from 31 March 1998. Gross impaired assets in Asia increased by $8 million between March 1998 and June 1998 to $41 million representing 0.3% of shareholders equity.