Banking and Other Financial Services - Australia

Banking and Other Financial Services comprises Business and Personal Financial Services, Wholesale Financial Services, Specialist and Emerging Businesses, National Shared Services and other lines of business.

Profit & Loss	Half Year to			Favourable / (Unfavourable) Change from
	Mar 01 $m	Sept 00 $m	Mar 00 $m	Sept 00 %	Mar 00 %
Net interest income	1,535	1,497	1,427	2.5	7.6
Other operating income	1,110	1,020	981	8.8	13.1
Total operating income	2,645	2,517	2,408	5.1	9.8
Other operating expenses	1,323	1,286	1,218	(2.9)	(8.6)
Underlying profit	1,322	1,231	1,190	7.4	11.1
Provision for doubtful debts	173	127	77	(36.2)	large
Profit before tax	1,149	1,104	1,113	4.1	3.2
Income tax expense	382	387	422	1.3	9.5
Profit after tax	767	717	691	7.0	11.0

Key Performance Measures

Net interest margin	2.72%	2.75%	2.79%
Other operating income / total income	42.0%	40.5%	40.7%
Cost income ratio	50.0%	51.1%	50.6%
Gross non-accrual loans to gross loans and acceptances	0.79%	0.49%	0.60%

Highlights

Net interest income increased 7.6% from the March 2000 half year to $1,535 million, with solid lending growth and effective margin management reducing the rate of decline in margins. Net interest margin reduced by 7 basis points in comparison with the March 2000 half year. This was driven by an increased proportion of wholesale borrowing costs to fund volume growth.

Other operating income increased 13.1% on the March 2000 half year to $1,110 million, due largely to a strong performance by Wholesale Financial Services (WFS), with growth across all product areas. Increased volatility in foreign exchange and debt markets during the period resulted in strong sales of foreign exchange and interest rate risk management products to clients, and favourable risk management income. The National was ranked the 'Best Bank in the Australian Market for FX Products and Interest Rate Derivatives' (Asia Risk 2000/Asiamoney 2001).

Growth in other operating income, was also attributable to higher lending and account fee income in Business and Personal Financial Services.

The cost to income ratio decreased to 50.0% compared with 50.6% in the March 2000 half year. Operating expenses of $1,323 million, were up 2.9% over the prior period and 8.6% over the previous corresponding period.

The continued growth of WFS has resulted in increased operating costs. This growth reflects the variable nature of these expenses, which have increased as a result of the strong growth in income over the same period.

Also contributing to the increase were higher communication costs reflecting customer transition to non-branch channels and increased fees and commissions, which reflect higher card and electronic transaction volumes. Loyalty program expenditure in the Cards business increased as the volume of outstandings grew over the period. Information technology costs also increased over the half year to March 2001, reflecting higher depreciation and software amortisation charges. Operating expenses were also impacted by market related increases in personnel and occupancy costs in the half year.

The charge for doubtful debts increased to $173 million in the March 2001 half year, reflecting increased statistical provisioning as a result of volume growth and the impact on credit quality of changes in the economic cycle.