Profitability

References in this section to the Group only refer to the ongoing operations of the Group.

NET OPERATING INCOME

	Year to			Fav/(unfav) change on Sep 02
	Sep 03 $m	Sep 02 $m		%	Ex FX %
Financial Services Australia	5,469	5,087		7.5	7.5
Financial Services Europe	3,318	3,461		(4.1)	0.6
Financial Services New Zealand	980	832		17.8	9.6
Retail Banking	9,767	9,380		4.1	5.1
Corporate & Institutional Banking	1,897	1,938		(2.1)	1.0
Other	32	(236)		large	large
Total Banking	11,696	11,082		5.5	7.1
Wealth Management	1,294	890		45.4	46.9
Eliminations	(117)	(132)		11.4	11.4
Total Group (ongoing operations)	12,873	11,840		8.7	10.3

Group net operating income increased 8.7% from the prior year, with a 5.7% increase in the September 2003 half compared to the March 2003 half. Banking other operating income (primarily fee income) growth of 10.4% (6.9% in the second half) was strong, benefiting from housing lending growth and the pick up in investment markets.

Fee income growth offset subdued growth in Banking net interest income. The latter rose 2.8% from the prior year reflecting loan growth, a 34% fall in Corporate & Institutional Banking's Markets division net interest income and 1.7 % points adverse currency effect from offshore operations.

Net interest income grew strongly within the Australian and New Zealand retail banking operations, with net interest income growth of 6.4% (5.8% in the second half) in Australia and 10.4% (0.8% in the second half) in New Zealand in local currency terms.

NET INTEREST INCOME

	Year to			Fav/(unfav) change on Sep 02
	Sep 03 $m	Sep 02 $m		%	Ex FX %
Financial Services Australia	3,519	3,307		6.4	6.4
Financial Services Europe	2,368	2,433		(2.7)	2.0
Financial Services New Zealand	651	549		18.6	10.4
Retail Banking	6,538	6,289		4.0	5.0
Corporate & Institutional Banking	807	1,051		(23.2)	(20.3)
Other	(43)	(239)		82.0	91.6
Total Banking	7,302	7,101		2.8	4.5
Wealth Management	117	101		15.8	15.8
Total Group (ongoing operations)	7,419	7,202		3.0	4.7

Volumes by Division

	Year to			Fav/(unfav) change on Sep 02
Average interest-earning assets (1)	Sep 03 $bn	Sep 02 $bn		%	Ex FX %
Financial Services Australia	110.9	95.6		16.0	16.0
Financial Services Europe	51.4	51.7		(0.6)	4.0
Financial Services New Zealand	20.7	17.5		18.3	9.8
Retail Banking	183.0	164.8		11.0	11.6
Corporate & Institutional Banking	104.6	98.7		6.0	9.8
Other	5.7	7.0		(18.6)	(5.7)
Group average interest-earning assets	293.3	270.5		8.4	10.5

⁽¹⁾ Interest-earning assets exclude intercompany balances.

Net Interest Margin

Group net interest margin declined 14 basis points during the year from 2.67% to 2.53%, with 11 basis points of the reduction occuring in the first half.

Margin decline in:

• Retail Banking is primarily due to the mix effect of strong growth in mortgages; and
• Corporate & Institutional Banking is primarily due to the impact of lower trading income and an increase in a structured lending product called "reverse repo" loans. These are low risk short-term loans to high quality counterparties fully secured against government, semi-government or prime corporate security. These loans attract the risk weighting of the security and are priced to reflect their low risk nature. Margin on core lending remained stable over the period.

At the Group level, the funding benefit from the proceeds of the sale of HomeSide and the lower cost of debt added 5 basis points.

Within Retail Banking the 8 basis point decline in contribution to the Group margin is due to a decline in margin for Australia and Europe, partly offset by an increase in New Zealand.

The decline in Financial Services Australia's margin of 31 basis points is due to the:

• Change in asset portfolio with strong growth in home loans and subdued business lending;
• Better asset quality in the business loan book; and
• Reduced contribution from free funds, due to lower longer term interest rates.

The impact of high growth in housing lending relative to higher margin non-housing lending is illustrated in the chart below.

Financial Services New Zealand's margin improved 10 basis points resulting from an increased  contribution from retail deposits. Financial Services Europe's margin decreased slightly on the prior year.

NET LIFE INSURANCE INCOME

The Group reports its results in accordance with Australian Accounting Standard AASB 1038 "Life Insurance Business" (AASB 1038). AASB 1038 requires that the interests of policyholders in the statutory funds of the life insurance business be reported in the consolidated results.

Net life insurance income is the profit before tax excluding net interest income of the statutory funds of the life insurance companies of the Group. As the tax expense/benefit is attributable primarily to the policyholders, the movement in net life insurance income should be viewed on an after tax basis. The statutory funds of the life insurance companies conduct superannuation, investment and insurance-related businesses (ie. Protection business including Term & Accident, Critical Illness and Disability insurance and Traditional Whole of Life and Endowment).

	Half year to		Fav/ (unfav) change on		Year to		Fav/ (unfav) change on
	Sep 03 $m	Mar 03 $m	Mar 03 %		Sep 03 $m	Sep 02 $m	Sep 02 %
Net life insurance income/(loss)	363	81	large		444	(10)	large
Income tax (expense)/ benefit	(196)	70	large		(126)	248	large
Net life insurance income after tax	167	151	10.6		318	238	33.6

Net life insurance income after tax has improved 33.6% on the September 2002 year. This is primarily due to increased investment revenue, partially offset by an increase in change in policy liabilities reflecting the performance of global equity markets as compared to the September 2002 year.

For detailed discussion on the results of Wealth Management, including the results of the life businesses (above), as well as the results from non-life businesses, refer to the Wealth Management - Management Discussion & Analysis.

OTHER OPERATING INCOME

	Year to			Fav/(unfav) change on Sep 02
	Sep 03 $m	Sep 02 $m		%	Ex FX %
Financial Services Australia	1,950	1,780		9.6	9.6
Financial Services Europe	950	1,028		(7.6)	(2.7)
Financial Services New Zealand	329	283		16.3	8.1
Retail Banking	3,229	3,091		4.5	5.2
Corporate & Institutional Banking	1,090	887		22.9	26.3
Other	75	3		large	large
Total Banking	4,394	3,981		10.4	11.7
Wealth Management	733	799		(8.3)	(6.6)
Eliminations	(117)	(132)		11.4	11.4
Total Group (ongoing operations)	5,010	4,648		7.8	9.2

Total Banking other operating income increased by 10.4% from the prior year to $4,394 million.

Retail Banking contributed solidly to the result, with other operating income increasing 4.5% driven by growth in housing loans and higher transaction volumes in Australia and New Zealand, offset by lower income in Europe due to reductions in creditor insurance income as a result of limited growth in personal loans, lower account fee income and an appreciation of the Australian dollar.

Growth of 22.9% within Corporate & Institutional Banking was largely from improved customer-related activity, including strong deal flows in structured transactions.

Other includes a one-off benefit on the restructure of the hedging swaps on the TrUEPrS^SM preference shares.

Wealth Management other operating income decreased by 8.3% from the prior year, resulting from uncertain investor sentiment, with weaker equity markets reducing fee income in the investments business.

TrUEPrS^SM is a service mark of Merrill Lynch & Co., Inc.

OPERATING EXPENSES

	Year to			Fav/(unfav) change on Sep 02
	Sep 03 $m	Sep 02 $m		%	Ex FX %
Financial Services Australia	2,502	2,450		(2.1)	(2.1)
Financial Services Europe (excluding FSE pension fund)	1,627	1,649		1.3	(3.5)
Financial Services New Zealand	493	444		(11.0)	(3.4)
Retail Banking	4,622	4,543		(1.7)	(2.7)
Corporate & Institutional Banking	754	759		0.7	(3.0)
Other	196	2		large	large
Total Banking (excluding FSE pension fund)	5,572	5,304		(5.1)	(6.5)
FSE pension fund expense	93	28		large	large
Total Banking	5,665	5,332		(6.2)	(7.8)
Wealth Management	806	813		0.9	(0.3)
Eliminations	(117)	(132)		(11.4)	(11.4)
Total Group (ongoing operations)	6,354	6,013		(5.7)	(7.2)

Total Banking expenses (excluding the FSE pension fund expense) increased 5.1% from the prior year to $5,572 million.

Retail Banking expenses (excluding the FSE pension fund expense) rose 1.7%, due to:

• Personnel expenses due to salary increases, offset by a 1,177 reduction in staff (net of acquisitions);
• Higher occupancy costs partly due to the sale and lease back of properties in Australia and New Zealand; and
• Higher costs associated with continued significant investment, eg. Customer Relationship Management system capability in Australia.

Corporate & Institutional Banking expenses are in line with the prior year.

Other (including Corporate Centre) includes expenses associated with four key areas:

• an ongoing major review of regulatory compliance and associated quality improvements;
• operating costs (including amortisation) of the Integrated Systems Implementation (ISI) program, which is the Group's strategic infrastructure program;
• impact of Basel II and IFRS on the ISI program; and
• expenses associated with corporate structure, funding and acquisition-related strategic initiatives.

Wealth Management operating expenses decreased 0.9% from the prior year to $806 million, after absorbing increased investment costs.

Major global regulatory and compliance projects

The Group's strategy around integrated financial services, customer service and distribution leads to a strong focus on compliance and quality.

Regulatory issues include:

• Basel II Capital Accord;
• Financial Services Reform Act;
• International Financial Reporting Standards;
• Sarbanes-Oxley Act;
• Code of Banking Practice; and
• Mortgage selling regulations in the United Kingdom.

INCOME TAX EXPENSE

Total Banking's effective tax rate has decreased from 28.6% in prior year to 28.0%. This is impacted by structured finance transactions, to which a wide range of tax rates are applied.

The September 2002 year included an $89 million tax benefit in relation to HomeSide.

A reconciliation of the total Group income tax expense is incorporated in note 12.