Overview

The discussion on the following two pages relates to results before significant items. For a reconciliation to net profit refer to the Divisional Performance Summary

Cash earnings of $4,070 million for the year is a record result and was 5.9% higher than the 2002 year. This is a strong result given that it includes the impact of an appreciating Australian dollar and the absorption of additional pension costs in Europe.

Cash earnings per share (EPS) increased 20.3 cents (8.2%) to 268.5 cents, reflecting both growth in the earnings of the underlying core business and active capital management initiatives.

Cash earnings from ongoing operations increased 8.1%. A key feature of the result was the strong underlying growth in both the Australian and New Zealand retail banking operations, while difficult conditions have been experienced in Europe. Strong housing growth and sound asset quality continued across the Group.

Cash earnings from ongoing operations increased 0.5% from the March 2003 half year. This result largely reflects the impact of a strengthening Australian dollar and additional costs in relation to European defined pension schemes. Prior to the impact of these items, cash earnings from ongoing operations increased 4.7% in the second half.

The September 2002 year included a $98 million contribution (including an $89 million once-off taxation benefit) from HomeSide. This impact has been partly mitigated by the reduction in the Group's funding cost as a result of the sale.

The final dividend has increased by 8 cents to 83 cents per share compared with the prior corresponding period and will be 100% franked. This brings the full year dividend to 163.0 cents 100% franked, which represents an increase of 10.9% compared with the prior year dividend of 147 cents, which was 95% franked. The Group anticipates a 100% franking level for the 2004 financial year.

Banking

Total Banking includes Retail Banking, Corporate & Institutional Banking and Other (including Excess Capital, Group Funding & Corporate Centre). It excludes Wealth Management.

	Year to			Fav/(unfav) change on
	Sep 03 $m	Sep 02 $m		Sep 02 %	Ex FX(1) %
Net interest income	7,302	7,101		2.8	4.5
Other operating income	4,394	3,981		10.4	11.7
Total income	11,696	11,082		5.5	7.1
FSE pension fund expense	(93)	(28)		large	large
Other operating expenses	(5,572)	(5,304)		(5.1)	(6.5)
Underlying profit	6,031	5,750		4.9	6.4
Charge to provide for doubtful debts	(632)	(648)		2.5	(0.2)
Cash earnings before tax	5,399	5,102		5.8	7.2
Income tax expense	(1,512)	(1,460)		(3.6)	(4.2)
Cash earnings before significant items	3,887	3,642		6.7	8.4
Net profit attributable to outside equity interest	(8)	-		large	large
Cash earnings before significant items after outside equity interest	3,879	3,642		6.5	8.2

Banking operations generated $3,879 million of total Group cash earnings, an increase of 6.5% on the prior year. The retail banking operations produced $3,110 million, a growth rate of 4.4%, with the results underpinned by strong volume growth, cost containment and a sound asset quality profile across all regions. Corporate & Institutional Banking had a 3.4% increase in cash earnings built on growth in client-related income.

At an underlying profit level, Total Banking increased 4.9% and Retail Banking increased 5.1% from the 2002 year. Excluding movements in foreign exchange the increase in Total Banking was 6.4% and Retail Banking 5.9%.

	Year to			Fav/(unfav) change on Sep 02
Underlying profit	Sep 03 $m	Sep 02 $m		%	Ex FX(1) %
Financial Services Australia	2,967	2,637		12.5	12.5
Financial Services Europe	1,598	1,784		(10.4)	(6.0)
Financial Services New Zealand	487	388		25.5	16.7
Retail Banking	5,052	4,809		5.1	5.9
Corporate & Institutional Banking	1,143	1,179		(3.1)	(0.3)
Other	(164)	(238)		31.1	45.8
Total Banking	6,031	5,750		4.9	6.4

⁽¹⁾ Change expressed at constant foreign exchange rates.

Sound progress was made towards 2004 efficiency targets established under Positioning for Growth. However, Financial Services Europe has been negatively impacted by additional pension costs and the investment in core infrastructure.

		Half Year to
Cost to income ratio by banking division	2004 Target	Sep 03 %	Mar 03 %	Sept 02 %
Financial Services Australia	46.0	45.8	45.6	47.4
Financial Services Europe (excluding pension costs)	48.0	50.5	47.7	48.7
Financial Services New Zealand	48.0	49.7	50.8	53.4
Corporate & Institutional Banking	36.0	39.7	39.8	40.6
Total Banking (excluding FSE pension costs)		48.7	46.6	48.1

Wealth Management

Wealth Management operating profit of $374 million grew 28.1% from the prior year. Funds under management and administration (FUMA) grew $7.5 billion over the year reflecting improved investment returns in the second half. In addition, the improved equity market performance contributed to higher earnings on shareholders retained profits and capital.

The Group continues to invest for future growth, with $28 million after tax of strategic investment expenditure included within the Wealth Management result.

	2004	Half Year to
Wealth Management efficiency targets	Target %	Sep 03 %	Mar 03 %
Cost to premium income ratio (%)	21.0	20	22.0
Cost to funds under management (basis points) (1)	65	60	67

⁽¹⁾ Excludes the NAFiM investor compensation and associated costs.

RESTRUCTURING PROGRESS

During 2002 the Group recognised restructuring costs of $580 million ($412 million after tax) resulting from its Positioning for Growth (PfG) program and related restructuring activities. The initiative comprised a fundamental reorganisation of the structure of the Group as well as a series of revenue enhancement and cost containment initiatives. Restructuring expenses primarily related to redundancies of $327 million, surplus leased space of $68 million and other restructuring costs of $185 million including technology write-downs of $132 million.

The restructuring expenses were incurred to deliver a significant portion of the announced cost reduction target of $370 million per annum by September 2004. Of these savings, 80% relate to personnel costs. Redundancy payments will have a payback period of approximately one year.

Based primarily on redundancies made to date, annual cost savings of $315 million have been achieved against targeted annualised savings of $370 million per annum by September 2004. The Group is on track to achieve the target.

Restructuring expenses

	Redundancies $m	Occupancy $m	Other $m	Total $m
Total 2002 expenditure/provision	327	68	185	580
Expenditure in 2002 year	(101)	(20)	(177)	(298)
Provision balance as at 30 September 2002	226	48	8	282
Foreign exchange impact	(10)	(2)	-	(12)
Expenditure in March 2003 half year	(64)	(2)	-	(66)
Provision balance as at 31 March 2003	152	44	8	204
Foreign exchange impact	(6)	(1)	(1)	(8)
Expenditure in September 2003 half year	(67)	(16)	(3)	(86)
Provision balance as at 30 September 2003	79	27	4	110
Balance remaining of total restructuring	24%	40%	2%	19%

In the year to September 2003 $152 million of the provision for restructuring costs was utilised primarily in relation to 1,317 redundancies. Staff reductions have resulted from changes to head office, back office, IT, operations and front office areas and the re-engineering of the lending, distribution and transaction processing functions.

Staffing levels – ongoing operations

Increase/decrease	Total FTEs	Year to Sep 03 FTEs	Year to Sep 02 FTEs
Opening balance		43,162	44,231
Acquisitions (1)		357	-
Global projects (2)		169	-
Adjustment to 2002 to exclude joint ventures		-	(184)
Net PfG reductions (Target: 2,040)	(2,033)	(1,148)	(885)
Closing balance		42,540	43,162

⁽¹⁾ Custom Service Leasing (New Zealand) Limited, formerly Hertz Fleetlease Limited (166), Commonwealth Custodial Services Limited (19), Plum Financial Services Limited (152) and an increased interest in Advance MLC Assurance Co. Limited (Thailand) (20).
⁽²⁾ Staff increases relating to ISI, Basel II & IFRS global projects.

The Group has achieved its PfG target of a net reduction in full time equivalent employees (FTEs) of 2,040. During the year to September 2003 FTE reductions of 1,148 were achieved (excluding the impact of acquisitions and global projects). This increases the net reduction over the two years since September 2001 to 2,033.

ASSET QUALITY

Asset quality remained strong. Influencing factors over the year were:

• falling non-accrual loans (NALs);
• ongoing changes in asset composition – as evidenced by an increase in housing's share of the portfolio;
• favourable movement in credit ratings across the business portfolio; and
• improving collateral / security coverage across the business portfolio.

Gross non-accrual loans fell to $1,379 million at September 2003 compared with $1,590 million at September 2002. As a percentage of gross loans and acceptances, NALs fell significantly over the year from 0.62% to 0.51%. This falling trend is also evident for the non-housing portfolio.

The Group is proactive in terms of credit risk management and aims to stay ahead of the credit cycle. Policies and processes at both the transactional and portfolio levels include:

• single large exposure policy - ensures that the Group is not excessively exposed to any single borrower (or group of borrowers);
• effective early identification and management of problem loans for exposures exhibiting signs of weakening credit quality; and
• undertaking targeted credit reviews at both industry and account level. Specific reviews undertaken during the year include:
  -  housing – including inner city apartments. Over 9,000 files were individually reviewed;
  -  unsecured portfolio – including personal loans;
  -  business lending – particularly large exposures over $10 million in Australia; and
  -  industry exposures (eg. automotive, utilities, airlines and tourism)

At the portfolio level, the alignment of risk and return objectives together with EVA ^®performance measures have resulted in an ongoing improvement in credit ratings and security levels. Further, portfolio based limits (industry and country) along with selective stress testing have contributed to those favourable trends.

Asset Composition

Business Portfolio

There have been favourable movements in the credit rating for the Business lending portfolio over the past year.

In addition, the security coverage across the Group's business portfolio improved with fully secured lending comprising 62% of the portfolio, up from 55% at September 2002.

⁽¹⁾ Business lending categories:

Select Industry Exposures	As at September 03
	Exposures $bn	% of total Group exposures	Investment Grade $bn	Non-accrual $bn
Airlines	3.06	0.74	1.83	0.03
Energy	11.36	2.75	9.09	0.18
Technology	0.90	0.22	0.69	0.01
Telecommunications	2.78	0.67	2.21	0.07

Retail Portfolio

Asset quality within the personal lending portfolio is satisfactory. Write-offs expressed as a percentage of outstandings fell during the year. Ninety-plus days delinquency also improved.

Provisioning Coverage

Against the above broad trends in asset quality, the level of provisions for the Group is considered appropriate. The specific provision coverage ratio fell slightly from 34.6% to 33.5% over the year.

The total coverage ratio of gross impaired assets improved from 161% to 164% in September 2003. Excluding housing, it improved from 171% to 173%.

EUROPEAN DEFINED BENEFIT PENSION SCHEMES

As advised earlier this year, the Group commissioned an unscheduled interim actuarial review of its European defined benefit schemes as at 30 June 2003 in response to worldwide equity market falls and reductions in interest rates to historically low levels.

Based on this partial interim review, the actuaries have confirmed that each fund exceeds the minimum funding requirements test set by legislation in the United Kingdom. In addition, the actuaries have advised that based on their best estimate assumptions in relation to investment earnings and discount rates, the funds have an aggregate surplus position of approximately £0.3 billion. This provides comfort that in the long-term the funds are expected to meet their obligations.

Under the relevant accounting standards certain actuarial assumptions are prescribed. The principal difference relates to the use of the yield on high quality corporate bonds as the discount factor for the future liabilities of the fund (notwithstanding that a majority of the funds are invested in equities). Using these conservative assumptions shows an accounting deficit position of approximately £0.5 billion for the funds at 30 June 2003.

From a profit and loss perspective, actuarial gains and losses are taken into account over the average remaining employment period of fund members, generally between 10 and 15 years. A full year pension charge (pre-tax) of £42 million was incurred in 2003 (prior year £16 million), of which £36 million relates to Financial Services Europe and the balance to other businesses. This includes an increase in pension expense in the final quarter of the 2003 financial year reflecting the 30 June review.

As part of the review of pension arrangements these defined benefit pension funds have been closed to new members and new defined contribution schemes have been opened.

SOFTWARE CAPITALISATION

The Group has capitalised the development and purchase of software in accordance with US pronouncements. Total capitalised software as at 30 September 2003 was $955 million ($920 million at 31 March 2003; $884 million at 30 September 2002).

The level of software capitalisation at 30 September 2003 equates to 0.2% of total assets or 2.7% of total equity.

Software is amortised over a period of 3-10 years commencing from date of implementation. The only assets amortised over a period of 10 years are the Integrated Systems Implementation (ISI) program and the Global Data Warehouse. The amortisation period aligns to the expected useful life. The software amortisation charge for the year to 30 September 2003 was $152 million (30 September 2002: $106 million).

The Group has recognised an asset on the balance sheet for costs capitalised in relation to the ISI program. The carrying value of this asset at 30 September 2003 is $315 million (30 September 2002: $294 million), of which $301 million relates to capitalised software.