The Group's operating profit increased by 14.1% to $1,139 million for the six months ended 31 March 1997. The result was achieved in a period of declining margins and strong competition. The National's acquisition strategy continues to be successful with the Group's offshore operations providing most of the growth in the period. As a result, 36.7% of the Group's income is sourced from overseas, up from 28.8% the previous corresponding period. Underlying profit (profit before tax and doubtful debt charge) continued to grow, increasing by 10.9% from March 1996 to $1,855 million. The March 1996 period only includes Michigan National for a five month period since its acquisition on 2 November 1995. Net Interest Income
Net interest income increased by 3.6% over the corresponding period with the effect of rising volumes more than offsetting the tighter margins across the Group's banks. Average interest earning assets increased by 7.5% over the September half and are 14.4% higher than a year earlier. Growth in lending was particularly strong in: - housing lending up by 8.2% and 15.6% over September 1996 and March 1996 respectively;
- lease financing up by 8.4% and 30.7% over September 1996 and March 1996 respectively;
- credit cards up by 6.5% and 15.5% over September 1996 and March 1996 respectively.
Margins were under pressure across the Group, declining by 40 basis points through competition in most areas of business. Other Operating Income
Total other operating income increased by 14.6% from $1,407 million for the March 1996 half to $1,613 million for the March 1997 half, with the proportion of other operating income to total net income increasing from 36.0% for the six months ended 31 March 1996 to 38.4% for the March 1997 half. The increase in other operating income was primarily due to: - an increased contribution from the Group's financial services operations;
- money transfer fees which increased by 12.0% reflecting the flow on from changes in fee structures made in the latter half of the 1996 financial year;
- fees and commissions which increased by 23.8% due to the earlier receipt of the personal loan insurance profit share in Yorkshire Bank and the greater use of credit cards;
- increased trading income;
- the improvement in other income arising through the change in accounting treatment of Eden Vehicle Rentals (refer to discussion on other operating expenses) in the March quarter and dividends from strategic investments.
Other Operating Expenses
Total other operating expenses increased by 5.1% over the previous corresponding period and were unchanged over the September 1996 half. Cost control has led to a moderation in the Group's cost to income ratio which has improved to 54.2% compared to 55.5% in March 1996 and 56.0% for the September half 1996. Personnel expenses increased by 3.6% over the March 1996 half, with salary rate increases negating the decline in personnel numbers. Staff numbers fell by 3.4% to 52,736 when compared with March 1996 and by 0.3% from September 1996. Occupancy costs were impacted primarily by higher rental on operating leases due to an additional accounting charge for surplus lease space arising from a change in circumstances applying to two key buildings in Australia. General expenses increased by 6.9% over the previous corresponding period to $821 million. Fees and commissions expense rose by 20.0% to $108 million predominantly as a result of the increased volume of credit card usage and a reduction in interchange fees. The introduction of the Uniform Consumer Credit Code in Australia also necessitated significant changes to existing stationery and increased communication costs. General expenses were also impacted by an increase in depreciation and amortisation reflecting amendment of the accounting treatment applied to Eden Vehicle Rentals, a subsidiary of Yorkshire Bank. In line with Group policy, Eden Vehicle Rentals now accounts for its vehicle leases to customers as operating leases rather than finance leases. Provisions for Bad and Doubtful Debts
The charge for bad and doubtful debts decreased by $57 million to $105 million. The decrease principally reflects an improvement in asset quality across the Group's banks. A 13.5% increase in risk weighted assets from March 1996 to March 1997 led to a $4 million rise in the Group's general provision charge. Capital
The Group's Tier 1 capital rose from 7.4% at March 1996 to 7.8%. The capital buy-back program commenced on 8 April 1997 and will conclude on 7 October 1997. Tier 2 capital rose to 2.5% up from 1.9% as at September 1996 and 2.2% at March 1996. The rise in Tier 2 capital reflects the issue of 40 million Exchangeable Capital Units completed on 19 March 1997. This issue raised US$ 1 billion for general funding. The Exchangeable Capital Units have been classified as debt within the balance sheet. Asset Quality
Asset quality further improved over the period with Gross Non Accrual Loans down to $1,390 million from $1,444 million at September 1996. As a result of this decline, the ratio of gross non-accrual loans to risk weighted assets is now 1.0% compared to 1.1% as at September 1996. The Group's specific provision coverage of non-accrual loans has remained steady from September 1996. | 
