Australian Shareholders' Association Address - 2 September 2003

The National Australia Bank today confirmed that it was on track to deliver its earnings forecast for the current financial year.

The Managing Director and Chief Executive Officer of the National, Mr Frank Cicutto, told the Australian Shareholders Association in Melbourne: "We are still on track to deliver full year cash earnings per share growth at the bottom of our 8-11 percent range despite adverse exchange rate impacts."

Mr Cicutto also told the ASA that the National had delivered significant shareholder value through several key acquisitions that had transformed the company from a regional bank in the early 1980s into a broader financial services institution.

The three transformational acquisitions were the Commercial Banking Company of Sydney, the acquisition of several banks in the UK and New Zealand, and finally the acquisition of MLC in 2000.

Mr Cicutto focused on the following key aspects of the MLC acquisition:

• the distinctive wealth management culture of MLC has been retained
• the independence of the advisory network has been protected and secured
• employees have been given increased career opportunities to work in an international financial institution;
• investors have been given greater choice as a result of the Manager-of- Managers model
• the National is investing $200 million in tools and platforms to improve the standard of service to advisers and the quality of advice to investors.

Strategic framework for future growth

Mr Cicutto also discussed a new set of principles to guide future growth at the National to fulfill its purpose of Growth through Excellent Relationships.

These are:

• Deliver solutions that meet customers complete financial needs.
• To build and maintain a high performance culture.
• Building trusted relationships with all stakeholders.
• Create and leverage strategic assets and capabilities for competitive advantage.
• Building and managing our portfolio of businesses for strong and sustainable Total Shareholder Return.
• Mr Cicutto said, "Our strategy is biased towards revenue growth because companies with strong revenue growth create the most shareholder value."

Address by Mr Frank Cicutto, Managing Director and Chief Executive Officer, National Australia Bank

The National Story - Growth Through Excellent Relationships

Good morning, it is a pleasure to be here and talk to so many individual shareholders.

It is important that individual shareholders are not neglected by management of major companies.

The National has more than 300,000 shareholders and just over 90 per cent of them hold less than 5,000 shares (which represent 17.7% of value).

There are many more individual investors who are not yet shareholders of the National, and I would like to encourage you to consider the value we offer.

It is therefore very important that I make sure individual shareholders are well informed about our recent progress and future plans.

My intention today is to talk about the big picture.
The last couple of years have been very uncertain and challenging for individual shareholders.

I was in the United States when the terrorist attacks struck the World Trade Centre.

Like everyone else I was shocked by the events of 11 September 2001.

It was impossible not to be deeply affected by the situation.

Subsequent terrorist attacks and other events like the war in Iraq have fundamentally changed the mindset of investors all over the world.

People became extremely security conscious and investors became more risk averse.

We have subsequently witnessed a down turn in equity markets and a global housing boom.

Now, nearly two years after September 11, I am cautiously optimistic that global economic growth is returning and investors are regaining their confidence.

However, my team and I have been putting in place significant changes at the National over the last couple of years to secure a strong platform for future growth.

The National is Australia's largest and most profitable financial institution.

We have delivered a decade of strong dividend growth to our shareholders.

We have achieved this success by being prudent and investing for the future.

The National has been through several growth phases over the last twenty years.

In the 1980s, the National acquired the Commercial Banking Company of Sydney.

This was an acquisition that commenced the transformation of the National.

We now have more than 23,000 staff in Australia in over 900 branches, and 1,700 ATMs, servicing more than 3 million banking customers and about 2 million wealth management customers.

We have also extended our national network with access 
points in 2,970 giroPost outlets around the country.

However, in a small domestic market with restrictions on bank mergers, we also need to look offshore to sensibly grow our business.

We purchased Clydesdale Bank, Northern Bank, National Irish Bank and Yorkshire Bank in the UK in the late 80s and early 90s.

We subsequently purchased the Bank of New Zealand in 1992, and Michigan National and HomeSide in the US in the late 90s.

Our aim was to diversify our revenue base across geographic regions and leverage best practices and capabilities to create value for shareholders.
 
In 2000, after an extensive review, we decided to exit the United States because we could not acquire sufficient scale or leverage our banking capabilities there.

We sold Michigan National for a handsome profit and sold HomeSide in a very difficult market after a short and painful lesson.

The decision to leave the United States was strategically sound.

It was clear that our assets in the UK offered better opportunities to export our capabilities and generate organic growth.

Our banks in the UK are traditional commercial banks with the full suite of capabilities and spread of business, including wealth management and corporate banking.

In the UK, we have total assets of approximately A$92 billion (₤37 billion) and last year we earned A$1,350 million (₤541 million).

A valuation based on this profit and using market-based multiples would place our combined UK banks at approximately 40 in the FTSE 100.

Our banks in the United Kingdom and Ireland are substantial, high quality and competitive banking businesses.

They are valuable assets, earning an attractive return on capital.

We are implementing a change program that will transform them into a more nimble, competitive force.
 
We have just appointed John Stewart, a senior British banking executive from Barclays, to head our UK operations.

John has a strong track record in leading the transformation of banking businesses covering everything from structure, process, people and customers.

His experience will help unite our efforts in the United Kingdom and Ireland so that we maximise our combined size in that market.

John is in Australia this week to participate in his first regular monthly board meeting of the National.

On balance, I believe the National can be proud of its international strategy and the benefits it has created for shareholders.

Our international expansion clearly differentiates us from our Australian peers.

Some people are surprised to learn that the National ranks in the top 20 global banks by market capitalisation.

The National is similar in size to many well known international banks such as Standard and Chartered, ABN Amro, Societe Generale and Deutsche Bank.

Following our international expansion in banking, the National turned its attention to wealth management.

Our major investment in this sector was the acquisition of MLC in June 2000.

Following the recent downturn in equity markets, some people questioned this investment.

However, MLC has provided an opportunity to combine banking and wealth management capabilities throughout the National.

It also represents a capability and presence that is important for long term growth.

Our analysis shows that from about the age of 45, people's needs reduce in the areas of traditional banking, such as home loans, and increase in the areas of wealth creation for retirement.

As the baby boom generation gets older, the National is now well placed to tap into this long term savings pool.

With the acquisition of MLC, we are increasingly turning to a business model based on distribution of advice, services and products.

In our view, distribution, and the right combination of advice and services, is a key to long term growth.

In Australia, our wealth management operation distributes roughly one-third through self employed planners in dealer groups, one-third through external financial advisers and one-third through our branch network planners.

We have extensive experience in providing research, practice development and business services to financial planners to allow them to better serve their customer and increase their own productivity.

We are investing over $200 million in tools and platform solutions to improve our standard of service to advisers and the quality of advice to investors.
 
MLC is one of the biggest Manager-of-fund Managers in the world.

To strengthen our business, we have recently transferred private banking into National Wealth Management.

And we have strategically placed wealth management advisers in our business banking centres.

However, our wealth management business is much more than managing investment funds.

For example, insurance now comprises over 40 per cent of the earnings of our wealth management business.

Before we look ahead, I would like to highlight several points about our MLC acquisition:

1. we have managed cultural integration satisfactorily  - adding distinctive wealth management cultural traits to the business;

2. MLC employees have been given increased career opportunities to work in a global financial institution;

3. the independence of the advisory networks has been protected and secured;

4. and, investors have been given greater choice.

We will continue to build on these strengths in the future.
 
More broadly, I believe the investment community is starting to recognise the substantial achievements of the past few years.

These are:

• Consistent dividend growth and a large buy-back
• Strong capital ratios and a AA credit rating -  indeed, we are the only AA rated bank in the Asia Pacific region
• An increased focus on lower risk, high return relationship driven business lines † this has improved loan collateral, lowered default rates and reinforced our position in credit risk management
• And finally, we have the best set of growth 
• opportunities among the major Australian banks

I am able to confirm today that we are still on track to deliver full year cash EPS growth at the bottom of our 8-11 percent range despite adverse exchange rate impacts.

The underlying resilience of our core business operations provides the National with the flexibility to consider a wide range of strategic options.

Our recent history demonstrates how we have used our financial strength to transform the National.

To recap:

• The CBC acquisition transformed the National from a small regional player to a truly national franchise
• Our acquisition of banks in the UK and NZ transformed the National from an Australian bank into one of the world's top 20 banks;
• And, the acquisition of MLC has transformed the National from a bank into a broader financial services company.

We will continue to actively pursue all opportunities to build on this strong platform.

I would now like to change focus and look ahead to our future growth plans.

During the last eighteen months, the leadership team at the National has completed a substantial review of our strategies.

We wanted to develop:

• a strategy that gives clarity about what we stand for
• a strategy that is based on deep customer insight
• a strategy that has a strong economic engine
• a strategy that differentiates the National from our competitors; and
• a strategy that allows every-one the opportunity to make a contribution day in, day out.

This work has been supported by extensive research on the future landscape of the Australian financial system that highlights the opportunities for future growth.

Today, I will mention the fundamental principles and strategic pillars that come out of this work and will guide our future growth plans and actions at the National.

We have set down a clear purpose statement.

It is: "Growth through excellent relationships".

It is a simple yet powerful proposition.

It encapsulates all stakeholders - customers, employees, shareholders, suppliers, communities and regulators.

It transcends national boundaries.

It is a platform for creating real change.

In many ways, it returns us to what brought us success in the past.
For many people, growth is measured by profits or return on assets.

These are important measures, especially for many of you in the audience today.

However, to be a truly great business, growth is much more than that.

• It means personal growth for our employees
• It means providing leading service and products to
  our customers; and
• It means making our communities a better place to live.

Excellent stakeholder relationships must generate growth for all stakeholders in our business. An important question we asked during the review was:

"What do we truly want to be known for wherever we choose to do business?"

We have agreed that our future vision is:

"To be a leading international financial services company which is trusted by you and renowned for getting it right."

This vision maintains our focus on integrated financial services and a strong international presence.

It also emphasises the twin challenges of building trust with all of our stakeholders and getting the basics right.

This is a lofty aspiration and I acknowledge that the National has some way to go to achieve it - but we are focused on doing so.

I now want to talk about the five pillars of our strategic framework.

The first is to:

"Deliver solutions that meet customers complete financial needs."

Aligning our understanding of customer needs with our capabilities is the glue that links all parts of our strategy.

Getting the basics right, both in terms of customer service and compliance, is the foundation.

We have made a commitment to lift the bar in this area.

Our businesses and the range of products we sell are increasingly complex and we have to observe the highest standards of compliance.

This will not mean we do not occasionally face problems but we will deal with them openly and quickly.

We have already taken firm steps to adopt best practice compliance across the National.

We have invested $30 million in systems and processes across the National to achieve this aim so far this year.

We will invest more to achieve our aim in future years.
 
Failing to get the basics right undermines our ability to build long term relationships.

If we can't deliver the essentials, then customers won't trust us to meet more complex needs.

We should be under no illusion - the winners in financial services will be those that win at the customer end.

What does it take to win at the customer end?

It takes:

The right products and services…
Delivered simply and efficiently…
At the right time for the customer...
By people with confidence and enthusiasm.

This is not something we are just talking about. This is a journey that we started more than two years ago.

The key to our approach is integrated financial services.
Integrated financial services is the delivery of products and services to customers where the actual delivery may be done by different parts of the organization over an extended period of time.

Many of MLC's 1200 aligned financial planners have leveraged the National's lending experience to offer Debt Management advice as part of their holistic financial planning offering.

We have sold over $1 billion of personal banking products through our wealth management advisory channels in the last 12 months.

Integrated financial services allows the National to add significantly more value to our business customers, providing advice and solutions around key business risks, employee superannuation and specialists employee remuneration programs.

We have also become the first large financial institution to fully evolve our salaried financial planners from being investment and insurance providers to providers of lifestyle based financial planning.

Our branch network now has 43 Financial Services Centres that co-locate some or all of our business and personal banking operations with wealth management and private banking.

We have plans to open approximately 20 more over the next one to two years.

This is a significant investment in a new age branch network.

Our approach to integrated financial solutions will be a key platform in the transformation of our UK businesses under John Stewart.

Customer satisfaction will be one of the most important success measures of our strategy.

We are actively freeing our people from processes, to allow them to spend more time with customers, so that they have the freedom, the desire and the confidence to make the right decision.

As a result, we have embarked on a major cultural change program to free the business from unproductive bureaucracy.

In line with this focus on people, the second key pillar of our strategy is:

"To build and maintain a high performance culture."

The right people are critical for business success.

We all know that relationships start with people and we are investing a range of cultural change programs.

Combining a better environment that fosters team-based and customer-centric behaviour with our investment in enhanced systems is a crucial part of our strategy.

A range of internal programs has challenged all levels of the organisation to rethink the way we do business.
This has led to extensive breakthroughs that have directly benefited our bottom line.

For example, we have developed an executive coaching program to improve leadership across the National.

This has been recognised as a world class program by the International Consortium for Executive Development Research.

It has also featured in international professional journals alongside organisations such as Shell, Pfizer and Bristol-Myers Squibb.

Our cultural change programs have run hand-in-hand with the introduction of EVA, or economic value added, to ensure we are rewarding managers for using your capital efficiently.

I now want to talk about the third key pillar of our strategy which is:

"Building trusted relationships with all stakeholders."

The quality of our relationships with stakeholders is critical to our business success.

The increasing re-regulation of financial services is a direct result of diminishing trust in the industry.

Our reputation directly affects customer satisfaction.

Stakeholder management is therefore a hard-nosed business strategy.

We are developing a group-wide framework that will help us understand how we are building trust with all stakeholders.
This year, the National stepped up its commitment to corporate social responsibility.

We have committed to a multi-stakeholder engagement process in line with the Global Reporting Initiative.

We have also committed to a United National initiative to ensure best practice environmental outcomes.

Apart from these sensible business initiatives, the National has also made significant investments in the Australian community.

Our Community Forum, chaired by the Reverend Tim Costello, has helped the National to develop initiatives to support low income and disadvantaged Australians.

For example, the National now has a concession card account that gives access to a full range of transactional services without having to pay monthly account service or transaction fees.

To be eligible for the account, Australians must have a current pensioner concession card, Commonwealth Health Care Card or Commonwealth Seniors Health Card.

The fourth pillar of our strategy is to:

"Create and leverage strategic assets and capabilities for competitive advantage."

Transporting our capabilities across the Group is at the heart of our international strategy.

We have world class capabilities that can be taken from one business unit or region to drive profit growth in another area.

A good example of this is our customer relationship management technology now in use in Australia, the UK and NZ.

The last, and perhaps most important pillar of our strategy for our shareholders, is:

"Building and managing our portfolio of businesses for strong and sustainable Total Shareholder Return."

Our strategy is biased towards revenue growth because companies with strong revenue growth create the most shareholder value.

This recognises that cost efficiency is finite.
Increasingly, the choice we have to make will be to exit certain businesses and activities rather than screw down costs across the board.

In summary:

Our purpose is clear:

We will grow through excellent relationships.

Our vision is clear:

We will be a leading international financial services company which is trusted by you and renowned for getting it right.

Most importantly, our people are excited by the opportunities this new strategy presents.

We all believe this strategy is both sensible and do-able.

Thank you. I would now be happy to answer any questions.

For further information:

Brandon Phillips
Group Corporate Affairs
03 8641 3857
0419 369 058