Financial Services Australia

Performance Summary

	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 interest income	1,809	1,710	5.8		3,519	3,307	6.4
Other operating income	1,000	950	5.3		1,950	1,780	9.6
Total income	2,809	2,660	5.6		5,469	5,087	7.5
Other operating expenses	(1,288)	(1,214)	(6.1)		(2,502)	(2,450)	(2.1)
Underlying profit	1,521	1,446	5.2		2,967	2,637	12.5
Charge to provide for doubtful debts	(142)	(156)	9.0		(298)	(146)	large
Cash earnings before tax	1,379	1,290	6.9		2,669	2,491	7.1
Income tax expense	(412)	(386)	(6.7)		(798)	(734)	(8.7)
Cash earnings before significant items (1)	967	904	7.0		1,871	1,757	6.5

⁽¹⁾ Refer to Note 1 (Performance Summary By Division) for a reconciliation of Financial Services Australia's result to Group net profit.

Key Performance Measures

Performance & profitability
Return on average assets (annualised)	1.39%	1.39%			1.39%	1.51%
Cost to income ratio	45.8%	45.6%			45.7%	48.2%
Cash earnings per average FTE (annualised) ($'000)	108	100			104	96
Net interest income
Net interest margin	3.11%	3.18%			3.14%	3.45%
Net interest spread	2.64%	2.73%			2.68%	2.95%
Average balance sheet ($bn)
Gross loans and acceptances	137.1	127.7	7.4%		132.4	114.8	15.3%
Interest-earning assets	115.3	107.1	7.7%		111.2	94.8	17.3%
Retail deposits	61.5	59.7	3.0%		60.6	54.7	10.8%

	As at
	Sep 03	Mar 03	Sep 02
Asset quality
Gross non-accrual loans ($m)	494	685	634
Gross loans and acceptances ($bn)	140.5	131.3	122.9
Gross non-accrual loans to gross loans and acceptances	0.35%	0.52%	0.52%
Specific provision to gross impaired assets	27.6%	31.3%	25.5%
Full-time equivalent employees (FTE)(2)	17,233	18,149	17,928

⁽²⁾ Comparative information in relation to FTEs has been restated to reflect the transfer of technology FTEs in relation to Group-wide projects from Financial Services Australia to Corporate Centre.

Financial performance

Cash earnings increased 6.5% over the prior year, reflecting strong underlying profit growth and a higher charge for doubtful debts largely related to a single exposure.

Underlying profit increased 12.5%, with the September 2003 half increasing 5.2% compared with the March 2003 half. The cost to income ratio for the year was 45.7% compared to the previous year of 48.2% and is favourable to the target for 2004 of 46.0%.

• Net interest income reflected strong growth in lending and deposits.
• Net interest margin reduced by 7 basis points in the September 2003 half to 3.11%, after a fall of 20 basis points in the first half. This fall is attributable to the continued low interest rate environment impacting return from capital and interest rate insensitive deposits, the higher weighting of housing in the portfolio, and a continued focus on asset quality.
• Other operating income increased as a result of the growth in housing lending, strong growth in bill acceptances (up 11.7% since September 2002) and higher transaction revenue.
• Operating expenses were contained, growing 2.1% over the year. Increase in second half costs represents expenses associated with investment in the Technology platform (network infrastructure costs associated with the roll out of technology and firewall/security costs) and the timing of performance-related bonus and annual leave provisions. The trend of higher costs in the second half is consistent with prior years.

Asset quality has been impacted by one large well-publicised account for which a receiver/manager was appointed in early April 2003. A charge of $104 million has been recognised in the results during the year in relation to this account ($46 million booked in the March 2003 half). The focus on credit quality and capital efficiency continues resulting in gross non-accrual loans as a percentage of gross loans and acceptances of 0.35%, an improvement of 17 basis points on March 2003.

Key achievements

• Strong growth in lending and deposits. Housing lending grew 20.3%. Business lending grew 8.9%. Deposits grew 10.6%.
• Leveraged customer relationship management capability to generate over one million customer contacts
• Invested in 20 new integrated financial service centres to provide convenient customer access and meet all financial needs in one location
• Productivity improvement of 25% in lending processes supported by the roll out of electronic consumer and business lending
• Committed two days per person to volunteer leave and as at 30 September 2003, 1,933 days contributed to local community activities. Included in $7.3 million of community donations/sponsorships, $1,000 was provided to each branch to allocate at the discretion of local staff to an appropriate community charity or activity