Review of Operations

The National Australia Bank Group's result for the first quarter of the 1997 financial year of $582 million was $69 million (13.5%) higher than the December 1995 quarter ($513 million). Reflecting the strength of the Group's franchise, underlying profit (profit before tax and doubtful debt charge) continued to improve, increasing by over 14% on both the September 1996 quarter and the December 1995 quarter to $960 million.

The Group's effective tax rate of 36.8% for the quarter returned to a level more in line with the Australian Corporate tax rate with income tax expense increasing by 94.8% over the previous quarter which had included a one-off provision adjustment.

Significantly, across the Group, efforts to contain costs in previous periods are being rewarded with a lower cost to income ratio which improved to 53.3%.

Details of the Group's result include:

Net Interest Income
Net interest income rose by 2.4% over the September 1996 quarter, and 5.2% over the corresponding December 1995 quarter.

Loans and receivables increased by 5.6% over the September 1996 quarter through rises across the Group in both personal and business sector volumes. Particular areas of improvement were recorded in leasing and housing loans in Australia, business lending in the United Kingdom and Ireland and term lending in New Zealand. Movements in the exchange rate between the Australian dollar and the English pound, Irish pound and New Zealand dollar also made a positive contribution to loans and receivables outstanding.

Margins came under further pressure in the quarter as a flow-on from previous rate cuts and continued competition in all markets.

Interest expense rose in line with higher deposit volumes, predominantly in New Zealand and Australia.

Other Operating Income
Non interest income increased by a further 5.9% over the September 1996 quarter. This increase was mainly derived from:

• Higher loan fees through increased volumes in Australia
• Increased interchange fees on ATMs and EFTPOS in Australia
• Increased fees from credit cards across the Group
• Improved trading income

Other Operating Expenses
Other operating expenses fell by 3.5% during the quarter, predominantly in the general expense category.

Personnel costs rose when compared to both September 1996 and December 1995 quarters as a result of the enterprise bargaining agreement in Australia. On costs for the December 1996 quarter were comparable to the September 1996 quarter except for a one-off downward adjustment in long service leave provisions in September.

Staff numbers across the Group declined by a further 0.7% from the September 1996 quarter on a full time equivalent basis.

The charge for non lending losses was positively impacted through the settlement of long standing legal actions. Fees and commissions continued to rise due to higher interchange fees in Australia, with advertising and consultants fees falling.

Doubtful Debts
The charge for doubtful debts fell $30 million compared to the September 1996 quarter and $19 million compared to the December 1995 quarter. The specific provision charge fell compared to the September 1996 quarter as a result of higher recoveries, predominantly in Australia and the United Kingdom. Additional provisions were booked in Yorkshire Bank in the December 1996 quarter. In line with the growth in risk weighted assets, the general provision charge rose to $21 million for the December 1996 quarter.

Asset Quality
The Group has continued to work hard at reducing its non performing loans which has been reflected in a 5.7% decline in gross impaired assets over the September 1996 quarter. As a percentage of risk weighted assets gross impaired assets declined from 1.1% at September 1996 to 1.0% at December 1996.

Capital
The Group's Tier 1 ratio remained unchanged over the quarter with growth in Tier 1 capital consistent with the increase in risk weighted assets. Tier 2 capital marginally declined through amortisation of the Group's subordinated debt.