Capital & Performance Measures

PERFORMANCE MEASURES

Economic Value Added (EVA^®)

	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 %
EVA® net operating profit after tax	2,264	2,260	0.2		4,524	4,157	8.8
Capital charge	(1,432)	(1,424)	(0.6)		(2,856)	(2,873)	(0.6)
EVA®	832	836	(0.5)		1,668	1,284	29.9
EVA® growth over prior year					384	155

EVA^® is a measure designed to recognise the shareholder requirement to generate a satisfactory return on the economic capital invested in the business. If the business produces profit in excess of its cost of capital then value is being created for shareholders. To align management's interests with those of shareholders, senior management is required to place a significant percentage of their total remuneration at risk, dependent upon performance against EVA^® annual growth targets.

In order to encourage longer term management decision making and sustained value creation, the Group sets EVA^® growth targets for 3 year periods. The Group's EVA^® target of 5% compound growth per annum was set in 2000, for the 3 years ending September 2003.

EVA^®'s Net Operating Profit After Tax (NOPAT) is based on pre-tax profit, and includes the calculated benefit of imputation credits earned by paying Australian tax. EVA^®'s capital charge is based on an 11.5% cost of capital, applied to a calculation of economic capital that is based on shareholders equity.

EVA^®'s NOPAT grew by 8.8% and the capital charge was flat compared to the 2002 year. The growth in EVA^® over the year was $384 million or 30%.

The first 3 year EVA^® cycle concluded in September 2003. Following a review by Stern Stewart it is proposed to simplify the EVA^® framework effective 1 October 2003, with adjustments to both NOPAT and capital calculations.

Applying the revised EVA^® methodology, the relevant comparatives that will be used for future reporting are as follows:

	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 %
EVA® net operating profit after tax	2,407	2,389	0.7		4,796	4,401	9.0
Capital charge	(1,315)	(1,298)	(1.3)		(2,613)	(2,607)	(0.3)
EVA®	1,092	1,091	0.1		2,183	1,794	21.7
EVA® growth over prior year					389	178

EVA^® is a registered trademark of Stern Stewart & Co.

CAPITAL POSITION

The Group's capital ratios are strong. Regulatory capital ratios are set out below.

	Target	As at
	Ratio %	Sep03 %	Sep02 %
Core Tier 1 (excluding hybrid equity)	6.0 – 6.5	6.38	6.68
Tier 1	7.0 - 7.5	7.82	7.76
Total Capital	9.0 - 9.5	9.70	10.21

In addition to regulatory capital ratios, the National uses the ratio of adjusted common equity to risk-weighted assets (the ACE ratio) as a key capital target. It measures the capital available to support the banking operations, after deducting the Group's investment in wealth management operations. The Group's target range for the ACE ratio is 4.75% to 5.25%. As at 30 September 2003 the ACE ratio was 4.95%, a reduction from 5.37% as at September 2002. Refer to note 15 regarding the components of the ACE ratio.

Capital has been managed within a framework of:

• maintaining a AA rating with external rating agencies;
• actively managing capital through share buy-backs; and
• opportune issuing of subordinated debt and hybrid securities.

Trust Preferred Securities

On September 29, 2003, the Group raised GBP400 million (A$975 million net of issue costs) through the issue of 400,000 Trust Preferred Securities at GBP1,000 each. Each Trust Preferred Security pays a semi-annual non-cumulative distribution, in arrears equal to 5.62% per annum until 17 December 2018. Each five year period after that date, a non-cumulative distribution will be payable semi-annually in arrears at a rate equal to the five-year benchmark gilt rate at the start of that period plus 1.93%.

SHARE BUY-BACK PROGRAM

Since November 2001, the National has adopted an ongoing policy of buying back all new shares issued under the National's dividend package plans and staff share and option plans. Additionally for the period up to 30 September 2003, the National announced an intention to purchase a further number of shares to the value of $1.75 billion. All buy-backs are subject to appropriate pricing, volume and other parameters, and an assessment of the circumstances facing the Group at the relevant time.

During the year, the National bought back 48.9 million shares at an average price of $31.98, thereby reducing ordinary equity by $1,565 million. The highest price paid was $34.35 and the lowest price paid was $28.40.

	Half year to			Year to
Share buy-back activity	Sep 03	Mar 03		Sep 03	Sep 02
Number of days traded	65 days	70 days		135 days	88 days
Number of shares bought (in millions)	16.5	32.4		48.9	36.2
Average price of buy-back	$32.75	$31.59		$31.98	$34.52
Percentage of market turnover on days traded	5.5%	9.9%		7.8%	8.9%
Percentage of market turnover on all days	3.2%	5.6%		4.5%	3.9%
Volume weighted average share price on days traded
- all shares traded	$32.34	$31.27		$31.78	$34.61
- shares traded excluding buy-back	$32.31	$31.24		$31.77	$34.62

A comparison of the National's buy-back activities relative to the total market in the National's shares, highlights that the National continues to execute the buy-back program in modest volumes, avoiding any market disruptions.

In October 2003 the Group announced its intention to repurchase approximately 25.5 million shares over the year to 30 September 2004. This includes 6.5 million shares carried over from the previous buy-back and an estimate of 19 million shares to be issued under the Group's dividend package plans and staff and option plans.