Business & Personal Financial Services

Principal Activities

Business & Personal Financial Services (B&PFS) is the retailing arm of the Group. The division develops long term relationships through the provision of a range of financial products and services that are tailored to the needs of its business and personal customers across four regions: Australia, Great Britain, New Zealand and Ireland.

Financial Performance

Statement of Financial Performance ⁽¹⁾

	Half Year to		Year to		Favourable / (Unfavourable) Change on Sep 00
	Sep 01 $m	Sep 01 $m	Sep 01 $m	Adjusted Sep 00(2) $m	%	excluding fx impact %
Net interest income	2,638	2,538	5,176	4,683	10.5	7.6
Other operating income	1,190	1,135	2,325	2,228	4.4	1.3
Total operating income	3,828	3,673	7,501	6,911	8.5	5.6
Other operating expenses	1,891	1,788	3,679	3,408	(8.0)	(4.7)
Underlying profit	1,937	1,885	3,822	3,503	9.1	6.4
Provision for doubtful debts	289	192	481	443	(8.6)	(4.7)
Profit before tax	1,648	1,693	3,341	3,060	9.2	6.7
Income tax expense	546	565	1,111	1,046	(6.2)	(3.8)
Net profit before significant items	1,102	1,128	2,230	2,014	10.7	8.1
Significant items - provision for restructure costs, after tax	-	-	-	58	large	large
Net profit	1,102	1,128	2,230	1,956	14.0	11.3

1. Comparatives have been restated to reflect the current organisation structure, such that HomeSide Australia activities are now classified within Banking & Other Financial Services (Business & Personal Financial Services, National Shared Services and Other).
2. September 2000 numbers have been adjusted for $60 million creditor insurance activities ($40 million net of income tax) of Great Britain that were transferred to Wealth Management during the period.

Key Performance Measures

	As at		As at
	Sep 01	Mar 01	Sep 01	Sep 00
Net interest margin	3.61%	3.72%	3.67%	3.78%
Other operating income / total income	31.1%	30.9%	31.1%	32.2%
Cost income ratio	49.4%	48.7%	49.0%	49.3%
Profit / per average FTE ($'000)	88	91	90	82

	As at		As at
	Sep 01	Mar 01	Sep 01	Sep 00
Gross non-accrual loans and gross loans acceptances	0.83%	0.88%	0.83%	0.84%
Number of FTEs	24,990	24,596	24,990	25,046

Solid profit result in challenging conditions

The B&PFS result was underpinned by strong housing growth, particularly in Australia and New Zealand.

• Net profit before significant items was up 10.7% to $2,230 million.

• Total income increased 8.5% to $7,501 million while net interest income rose 10.5% on the back of strong mortgage lending in the second half.
  
  
• Net interest margins declined by 11bps to 3.67%, largely owing to the unfavourable product mix impact in Great Britain and Ireland.
  
  
• Other operating income increased by 4.4% (1.3% in local currency terms) after adjusting for the creditor insurance activities of Great Britain that were transferred to Wealth Management during the period. Before cost recharges, other operating income grew by 8.8% (5.7% in local currency terms) driven by increased fee income resulting from higher sales volumes of wealth management and home lending products and new revenue sharing arrangements with Cards. Other fee income increased moderately mainly due to increased customer migration to lower fee electronic channels.
  
  
• Other operating expenses increased 4.7% in local currency terms. This was due mainly to wage increases, a refined cost allocation methodology and other initiatives including additional resources applied to non accrual loan management in Australia, substantial investment in the delivery of the Siebel customer relationship management platform in Australia and the second call centre in Europe.
  
  
• Asset quality management remained a key priority during the year. The Group's two pronged strategy of aggressively tackling existing problem loans while adopting a prudent approach to future lending saw the proportion of gross non-accrual loans to gross loans and acceptances contained at 0.83%, marginally down from 0.84% at September 2000. The charge for bad and doubtful debts increased by 4.7% in local currency terms to $481 million.
  
  

Sustained home lending performance

Market share has increased in all regions.

• Housing loan outstandings increased 14.3% to $81 billion during the year.
  
  
• In Australia the National grew its share of home loans from 16.8% in August 2000 to 17.8% in August 2001 and currently has a 15.8% share of retail deposits, up almost 1% in the second half year.
  
  
• A number of initiatives contributed to the strong overall result including tactical marketing campaigns, international product transfers and a renewed focus on the introducer and broker channels within Australia. Monthly average drawdowns from mortgage brokers and introducer channels in Australia increased 75% from $72 million per month in 1999/2000 to $126 million per month in 2000/2001.
  
  
• In Great Britain the Group continued to increase its market share in a challenging environment due in part to the successful transfer of the Rapid Repay and Flexiplus mortgage products from New Zealand and Australia respectively. These products now represent 40% of all mortgages sold through Yorkshire Bank. A number of sales and marketing campaigns, such as "Spring Home Loan" in Great Britain and "4.99% Doorbuster" in Australia, successfully drove customer activity during key periods throughout the year. Clydesdale and Yorkshire Banks achieved an 8.5% increase in their share of the mortgage market in Scotland, and the midlands and north of England.
  
  
• BNZ share remained steady at approximately 15% of the mortgage market.
  
  
• National Irish Bank maintained its 2% market share and Northern grew its markets share from 7% to 8% of the mortgage market in their respective natural marketing areas.

Continued innovation through new business product offerings

Business banking performed well.

• The Group's business customer franchises were strengthened in all regions through innovative product and service offerings. In Australia a key priority was to leverage MLC's superior superannuation capabilities into B&PFS' large customer base. The 'Tailored Business Loan', a package of treasury risk management tools and debt sold through the Group's Risk Management Specialists, proved successful in all regions.

• As part of the drive to increase customer choice and improve service, the Group introduced the 'National Wheat Advance' loan, effectively bringing competition into the monopolistic Australian wheat industry and reducing industry costs by $18 million. Agri-business specialists across the Group continued to offer specialist advice to the rural sector, driving increases in market share. The Group is the largest agri-business banker in Australia, New Zealand and Northern Ireland, and has a significant share of the market in Scotland.

Continuing expansion of distribution network to increase customer choice

The Group's channel management strategy is aimed at offering customers a wider range of services and an enhanced experience. It involves providing customers with a hierarchy of contact points ranging from branches and other 'bricks and mortar' facilities, to automatic teller machines and telephone and internet banking.

• The Australian Bank distribution network underwent a significant transformation during the year in order to meet rapidly changing customer preferences for accessing financial services.
  
  
• The program entailed 92 branch closures, 29 business banking centre closures and 34 relocations/ reconfigurations.
  
  
• To date $30 million has been charged against the $84 million restructuring provision established during 2000. This includes $8 million in personnel costs relating to savings of 136 Head Office and support roles. The charges against the provision are consistent with expectations. Utilisation of the surplus lease space provision will accelerate as network transformation progresses and thereafter will be utilised in line with the lease expiry profile of the outlets. Productivity improvements and revenue enhancements are in line with expectations and the majority of the restructuring costs will be recovered by the end of 2003.
  
  
• The network reconfiguration was supported by the Australia Post network initiative launched in March, which offers transactional banking to personal customers in 2,800 post offices nationwide. This agreement has given the Group substantial new coverage and is generating more than 130,000 transactions per month. In the second half the Group piloted 62 Australia Post locations for business customers' transactions.
  
  
• A new HTML browser based internet banking service is scheduled to be launched in Australia and Great Britain in the December 2001 quarter. This will replace the existing Java-based service and improve accessibility for customers logging on from behind corporate firewalls and using non-Windows operating systems.
  
  
• The Group has established a second Great Britain telephone contact centre in Kilmarnock, Scotland. The centre is now fully operational, and will progressively handle calls from all of the Group's customers throughout Great Britain and Ireland.
  
  
• 254 automatic teller machines (ATM) and 14 automatic deposits machines were added to the Australian ATM network during the year and a number of alliances with retailers were forged, which will provide an expanding source of fee income. The functionality of the network continued to improve with the machines in Ireland now connected to LINK (an ATM sharing scheme) in the United Kingdom and the piloting of machines with personalisation features in New Zealand.
  
  
• The Group continued to undertake migration initiatives in all regions to educate and encourage customers to use non-branch channels such as contact centres and the internet for transactions. The total of branch transactions in Australia fell by 17% during the year. Over the counter transactions now represent 8% of total transactions. Over 10% of customers in Australia and New Zealand are now registered internet banking users and 16% of total Australian transactions are now conducted on-line, exceeding the level of over the counter transactions. The number of branch transactions is progressively reducing in Great Britain and Ireland as alternative channels in these regions are expanded.

Customer Relationship Management providing significant competitive advantage

Over the past decade, the National has developed Customer Relationship Management (CRM) strategies, consistently refining its view of relationship management and adopting processes and technologies to identify and address customer needs.

• To this capability, the National is adding Siebel CRM, a market-leading technology to enhance customer management and support revenue growth, customer retention and marketing activities. During the second half, deployment of the Siebel CRM platform commenced and was successfully deployed to more than 1,500 bankers in Australia. The rollout will extend to more than 9,000 bankers during 2002.
  
  
• The rollout is being supported by Project Foundation, a program to network all National locations and upgrade the Group's desktop technology. The Program has taken 12 months to complete in Australia with a cash investment of $40 million, and involved 1,200 Telstra staff in one of the largest infrastructure projects Telstra has undertaken. Along with Siebel CRM, the program supports the deployment of other browser - based tools including a corporate intranet and a straight-through consumer loan processing application.
  
  
• "National Leads", the predictive sales leads generation tool used in Australia, is being rolled out in other regions. It has also been expanded within Australia to provide some products and services from our MLC business, and to make offers directly to customers through e-mail and National Internet sites. Since its launch, attrition rates for customers contacted through National Leads system are about half those of non-contacted customers. In the last financial year, more than $10 billion worth of drawdowns have been generated from 60 National Leads marketing programs.

Leveraging wealth management expertise to provide integrated financial solutions

Providing wealth management solutions to customers continues to be a key focus.

• During the year, the National's financial planning capability in Australia was expanded to include specialists working with the Group's business customers, and a new adviser channel (Personal Client Services) focussed on the retail segment using a specialist call centre and National Leads. This is a direct replication of a successful model operating within MLC prior to the acquisition.
  
  
• With Personal Client Services Advisers, the National has over 350 planners servicing its customer base. Each financial planner on the National platform generates on average between $8 million and $12 million of sales of National wealth management products and an additional $3 million of sales of banking products. Additional revenues arise from sales of non-National products.
  
  
• The MLC acquisition has enhanced the product range, servicing resources and technical skills available to these financial planners, particularly within Australia where the integration is complete and is delivering productivity improvements.
  
  
• In Great Britain and Ireland, the personal financial services segments were restructured in preparation for the impending launch of the MLC-based wealth management offering.
  
  
• A number of equity-based income bond issues were sold to the Group's personal customers in Great Britain, Ireland and New Zealand. This instrument, providing exposure to high growth equity markets with a limited downside risk, has proved very successful in each of these regions and will be trialled in Australia.