Wholesale Financial Services

Principal Activities

Wholesale Financial Services (WFS) is responsible for the Group's 1,500 major corporate and institutional relationships worldwide. WFS operates across four continents and 21 financial centres with a presence in each of the principal markets outside Australia.

Financial Performance

Statement of Financial Performance

	Half Year to		Year to		Favourable / (Unfavourable) Change on Sep 00
	Sep 01 $m	Mar 01 $m	Sep 01 $m	Sep 00 $m	%	excluding fx impact %
Net interest income	460	363	823	507	62.3	53.8
Other operating income	469	490	959	795	20.6	16.2
Total operating income	929	853	1,782	1,302	36.9	30.9
Other operating expenses	331	304	635	497	(27.8)	(20.8)
Underlying profit	598	549	1,147	805	42.5	36.9
Provision for doubtful debts	133	83	216	17	large	large
Profit before tax	465	466	931	788	18.1	13.4
Income tax expense	127	119	246	192	(28.1)	(23.6)
Net profit before significant items	338	347	685	596	14.9	10.2
Significant items - provision for restructure costs, after tax	-	-	-	9	large	large
Net profit	338	347	685	587	16.7	11.9

Key Performance Measures

	Half Year to		Year to
	Sep 01	Mar 01	Sep 01	Sep 00
Net interest margin	0.71%	0.64%	0.67%	0.64%
Profit per average FTE ($'000) (1)	392	417	404	359
Total income to average risk weighted assets (1)	2.6%	2.6%	2.6%	2.3%
Cost income ratio	35.6%	35.6%	35.6%	38.2%
Gross loans and advances (ave) ($billion)	45.6	42.2	44.3	35.8
Total risk weighted assets (ave) ($billion)	70.8	65.1	68.2	55.4

	As at		As at
	Sep 01	Mar 01	Sep 01	Sep 00
Gross non-accrual loans to gross loans and advances	0.57%	0.59%	0.57%	0.22%
Number of FTEs (2)	1,747	1,678	1,747	1,679

1. Prepared on an annualised basis.
2. September 2000 comparatives have been restated to reflect the transfer of Asia Support Services from Other to Wholesale Financial Services on 1 October 2001.

Profit up 15% to $685 million

WFS produced a record profit of $685 million for the year, a 14.9% increase on the prior year net profit before significant items.

Volatility in global interest rates, particularly during the first half, drove strong growth in net interest income from funding and liquidity management activities. Continuing reductions in US interest rates impacted positively on trading income in the US, Europe and Australia. Net interest income increased by $316 million to $823 million, with strong performances in the Markets Division and Corporate Finance businesses, up 73% and 25% respectively on the prior year.

Average gross loans and advances for the year increased 24% to $44.3 billion, primarily as a result of the business' commitment to build solid client relationships. Asset growth has been undertaken with a continued focus on returns on capital invested in the business including assessment of the risk-adjusted return on capital (RAROC) and EVA growth. During the year WFS arranged and underwrote finance for a number of clients including:

• Mandated as one of the joint lead banks underwriting a US$3.4 billion facility to assist with the merger of Brambles Industries Limited and GKN plc.
  
  
• Joint arranger for a US$2.5 billion syndicated credit facility for BHP Billiton. This was the first major financing for the merged BHP Billiton group.
  
  
• Lead arranger for an A$2.1 billion syndicated facility for TXU Australia. The purpose of this facility was to enable TXU Australia to refinance its existing bank debt. WFS provided a range of products and services to this client group including interest rate risk management services, capital markets products and services, transactional banking services and syndication services.
  
  
• Established the Quay 62 securitisation vehicle for AMP's property trust funding needs. National was the arranger, lead manager liquidity provider and working capital facility provider for the first transaction from this vehicle.
  

Continuing innovation in risk management advice and execution

Other operating income increased $164 million to $959 million.

Other operating income in the Markets Division increased 32%. The Division continued to focus on providing clients with innovative risk management advice and execution in foreign exchange, interest rates and commodities. Sustained volatility in foreign exchange and interest rate markets during the year resulted in strong sales of risk management products, especially to business markets clients in Australia, New Zealand, Great Britain and Ireland, as well as solid risk management income. A renewed focus on the short term liquidity, fixed interest and foreign exchange requirements of institutional clients also drove growth in this area. Other operating income declined slightly in the second half of the year, with increased sales of foreign exchange and interest rate risk management products to clients, offset by a reduction in risk management income.

Project and Structured Finance's other operating income increased 10%.

Market leadership in capital market financing

The business retained its leading position in capital market financing and was ranked lead arranger in the Australian domestic corporate bond market with over $2.8 billion of new issues originated this year.

During the year, WFS acted as the sole lead manager for a A$650m 10-year kangaroo bond issue for Scottish Power UK plc. This was the first corporate kangaroo bond issued in Australia and the largest credit wrapped issue for the year.

Helping Australian wheat growers make more of their harvest, WFS contributed to the National Wheat Advance Product in conjunction with B&PFS' Agribusiness division. This product allows Australian wheat growers a limited-recourse advance on deliveries of eligible grades of wheat into the Australian Wheat Board National Pool, under the quarterly pool payment option.

Provisions up following strong portfolio growth and conservative assessment of economy

The charge to provide for doubtful debts increased significantly. Statistical provisioning increased consistent with growth in the loan portfolio and following a conservative assessment of current economic conditions in the major markets in which WFS operates. Gross non-accrual loans increased as a result of the deteriorating economic environment, particularly in Australia.

The quality of the WFS loan portfolio has deteriorated slightly since March 2001 in line with economic conditions, reflecting the impact of a small number of large corporate exposures, predominantly in Australia. However it remains high, with approximately 85% of credit exposures equivalent to investment grade or above. WFS' total doubtful debt provisions represent approximately 190% of gross non-accrual loans.

New structure driving client focus

During the period, WFS implemented a relationship-based organisational model, building on the business' existing product expertise. The benefits of this approach include:

• Integrated distribution of traded and non-traded products to chosen client segments
  
  
• Closer alignment of client needs with skills of relationship management team
  
  
• Continued focus on returns on capital invested in the business including assessment of the risk-adjusted return on capital (RAROC) and EVA growth.
  
  

A number of key appointments have been made to support the new structure. The business is focused on delivering total solutions to clients by effectively combining knowledge of the client and industry sector with the depth of product expertise. Product capability was further enhanced through growth in structured risk management solutions, commodities hedging, loan syndication and securitisation capability.

Costs up in line with growth in business; cost to income ratio down

The continued growth in the business resulted in higher operating expenses. The growth in personnel costs, which represent approximately 60% of WFS total operating expenses, reflects the growth in staffing. Occupancy and equipment expenses increased following the relocation to new premises in London to support the continued growth in this region. However, the division's cost to income ratio improved to 35.6% from 38.2%, with the increase in staffing driving strong income growth.

Focus over the next 12 months on leveraging and building business

Key areas of focus over the next twelve months include:

• Leveraging existing investments in order to develop the skills and capabilities required to increase client penetration.
  
  
• Continuing to focus on asset quality and returns on capital invested in the business as the economic environment becomes more challenging and default rates deteriorate.
  
  
• Selectively building product and relationship management capability, focusing on global relationship management opportunities.
  
  
• Continuing to explore opportunities to further enhance the efficiency of the business platform and the distribution of products and services to customers.