Review of Operations

The Group's operating profit after tax and goodwill amortisation increased by 9.3% from $1,503 million to $1,643 million for the nine months ended 30 June 1997. The result reflects an increasing contribution from the Group's overseas operations with a particularly strong contribution from the UK/Irish operations. Contribution from overseas franchises grew from 31.9% for the 9 months to June 1996 to 38.3% for the 9 months to June 1997.

Underlying profit (profit before tax and doubtful debt charge) continued to grow year on year, increasing by 7.9% from June 1996 to $2,755 million. Significantly, underlying profit also grew when compared to the March 1997 quarter, despite the fall in quarterly operating profit.

Net Interest Income
Net interest income increased by 3.5% over the corresponding period, and 3.0% over the previous quarter. Loans and other receivables increased by 7.1% from March 1997 while the decline in margins was again evident during the quarter, however the rate of decline has eased particularly in the United Kingdom. Key increases in lending were experienced in housing loans and credit cards with the growth of overdraft and other term lending noticeable, particularly in the overseas units.

Interest expense rose due to higher deposit volumes, with the average rate below that of the previous quarter. Higher bonds, notes and subordinated debt interest expenses were experienced as the Group utilised these sources of global funding. The June quarter interest expense also reflected the first full quarter impact effect of the successful Exchangeable Capital Units issue.

Other Operating Income
Total other operating income increased by 12.7% from $2,155 million for June 1996 to $2,428 million for June 1997.

The increase in other operating income was primarily due to:

• higher loan fees recorded in Australia, reflecting increased lending volumes particularly in bill acceptances, together with higher volumes of business and corporate lending in the United Kingdom;
• improved securities and interest trading income in the Australian operations;
• fees and commissions which increased by 17.6% with significant growth in EFTPOS fees, higher structured finance fees through volume growth;
• higher money transfer fees in Yorkshire, Australia and New Zealand reflecting changes in fee structure and automated fee collection;
• increased National Australia Life sales and a higher contribution by National Australia Financial Management particularly in the area of Protection Insurance.

Other Operating Expenses
Non interest expenses rose by 6.0% over the previous corresponding June period. Despite the rise in expenses, the Group's cost to income ratio of 54.8% improved from the June 1996 ratio of 55.3%.

The Group's staff numbers declined by 2.7% on a full time employee basis when compared to June 1996 (1.1% since September 1996). However, the impact of the Australian enterprise bargaining increases continues to negate the effect of the declining staff numbers.

General expenses increased by 9.4% year on year. Communication costs increased reflecting the trend towards the use of electronic channels and the growth in telephone banking. Postage and stationery expenses for nine months to June 1997 include increased stationery expenses associated with the Uniform Consumer Credit Code in Australia.

The depreciation and amortisation charge rose by 19.8% primarily reflecting the accounting change in Yorkshire Bank, as reported in March 1997, together with increased leasing business in the Australian operations and the investment made by the Australian Branch Revitalisation program. The increase in fees and commissions is volume related, reflecting an increase in credit cards and EFTPOS transactions in the period.

Provisions for Bad and Doubtful Debts
Despite the rise of the charge for doubtful debts during the June 1997 quarter, the doubtful debts charge decreased by $37 million to $227 million when compared to the nine months to June 1996. The increase during the quarter was attributable in part to higher overdraft provisioning in Australia. A general provision charge of $21 million was incurred during the quarter in line with the increase in the Group's risk weighted assets.

Capital
The Group's Tier 1 capital fell from 7.8% at March 1997 to 7.0%. The fall reflects the impact of the Group's share buy-back program which commenced on 8 April 1997. As at 30 June 1997, the program has purchased on market 55,806,858 ordinary shares at a cost of $994 million dollars. It is anticipated that the buy-back program will conclude on 7 October 1997.

Tier 2 capital ratio also declined to 2.4%. The fall in the Tier 2 ratio is attributable to the amortisation of term subordinated debt.

Asset Quality
The Group's specific ratio of non-accrual loans coverage has increased to 47.8% compared to 44.4% as at September 1996, reflecting the Group's prudent provisioning approach.

Gross non-accrual loans continued to decline, falling by 5.9% to $1,308 million when compared to March 1997 ($1,390 million March 1997, $1,444 million September 1996).