The National's Five Strategies for Growth - Address by Mr Frank Cicutto to Australian Insititute of Company Directors - 27 November 2003

It is a pleasure to be here in Sydney today as it is a significant personal anniversary. Today marks my 36th year of service with the National.

My employment with the Group started in 1967 only a short walk from here.

I reported for my first day of work at the branch at the corner of Pitt and Hunter Streets and was assigned mail distribution and other general office duties.

Such a long track record with an organisation like the National naturally makes you think about the long term.

 In my view, and I'm sure in the view of most in this room, the role of Directors is to grow shareholder returns over the longer term and balance that with the short term needs of stakeholders.

The role of a chief executive is to improve the long term positioning of the company to grow shareholder value and meet the short term needs of all stakeholders.

The focus of my presentation today therefore will be on the long term investments we have made to make the National, the biggest and best Australian financial services company, and our strategies for future success.

We have achieved this success by being prudent, by having a deep understanding of where the banking and financial services industry is headed, and sensibly investing for the future.

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

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

This was the deal that commenced the transformation of the National from a small regional bank to a national, and then, an international financial services company.

In a relatively small domestic market like Australia with restrictions on bank mergers, we have looked offshore to sensibly grow our business over the past 16 years.

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 mid 90s.

Our aim was to diversify our revenue base across geographic regions and leverage best practices and capabilities to create value for shareholders.

That is one of the aims that remain an important part of our overall strategic thinking.

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 exited our HomeSide operation in very difficult market conditions.

In today's world, we believe our banks in the UK offer better opportunities to export our capabilities and generate organic growth, in a regulatory and market environment similar to Australia.

I would now like to outline our present position.

We now have more than 23,000 staff in Australia in over 1200 branches, and 1,700 ATMs. We provide services to more than 3 million banking customers and about 2 million wealth management customers.

Our international presence clearly differentiates us from our Australian peers.

Some people are surprised to learn that the National ranks in the top 30 financial services organisations globally by profit.

The National has a similar market capitalisation to many well-known international banks such as Standard and Chartered, ABN Amro, Societe Generale and Deutsche Bank.

Our UK profit, at just more than $1 billion after tax, makes up approximately 25 per cent of Group profit.

Including our offshore earnings from New Zealand, Asia and the United States increases the total of after tax profit to more than $1.7 billion that we repatriate back to Australia.

This makes the National one of Australia's larger export earners.

Our Australian and New Zealand businesses are in great shape.

In the United Kingdom we have embarked on a broad-based transformation of our operations.

There has been a lot of "noise" and debate about our UK operations. Regardless of this their worth is considerable.

In the year just passed, our businesses there produced an attractive return on investment of approximately 19 per cent and return on equity of over 20 per cent.

That's quite an attractive return in anyone's book.

However, they can become even better businesses.

I don't believe there is a wide appreciation of the extent of our presence in the United Kingdom.

Some facts are:

• We have 3.4 million customers, which is equivalent to our banking customer base in Australia.
  
• We have a network of 756 branches and 1250 ATMs.  (Australia 1225 outlets and 1700 ATMs)
  
• After tax earnings from all of our European  operations was more than $1 billion.
  
• If these businesses were independently listed in Australia, based on a typical banking price to earnings ratio, they would be around a top ten company in Australia.

 These are substantial businesses – although our market share is just 2 per cent in the UK.

Therein lies the opportunity.

Our organic growth strategy in the United Kingdom can produce greater leverage because relatively small gains in market share should produce substantial gains in our overall business.

We have the right people and well-developed plans to step up our growth rate in the United Kingdom.

We intend to integrate our UK banks into one with standardised products and processes.

We will also invest in them to provide them with the same capabilities we have in Australia and New Zealand.

At the same time we are expanding from our heartland in the North of England and Scotland into the South.

Our expansion into the South will not be a "me too" approach.

We will not look like a traditional bank. We will have few branches and will focus on relationship banking and integrated financial services.

We are fortunate to have recruited John Stewart to lead the United Kingdom and Ireland. He was previously Deputy Chief Executive of Barclays, a position he took up when he merged Woolwich with Barclays.

He built Woolwich into a nimble and successful bank.

John is bringing together a leadership team combining highly talented local executives with great people from our Australian and New Zealand businesses.

Transforming and growing our already substantial businesses in the United Kingdom and Ireland provides us with a growth avenue not available to our domestic peers.

We are prepared to ride out the present adverse short-term currency fluctuations and invest to build our presence in the United Kingdom and Ireland.

Another area where we have a strong and long-term view is wealth management.

Our major investment in this sector was the acquisition of MLC in June 2000 for $4.6 billion.

Following the recent downturn in equity markets, some people were quick to question this investment.

On financial terms the facts are that MLC is worth more today than when we bought it.

The value of our wealth management business at the end of September was $6.6 billion. The business has returned almost $1 billion in cash earnings since acquisition.

Strategically it 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.

Our wealth management model is different and unique in this market.

We are organised around distribution not manufacturing.

Our strengths in wealth management are:

• Diversity of income with a great balance between investments and insurance. We are number one in the important platform market of wraps and master funds and number two in retail funds under management. In insurance we are now number 1 for in-force premiums in the retail risk area.
  
• Diversity of distribution is also a strength with an even balance of sales through bank, aligned and independent financial adviser channels.
  
• Our manager of managers process is unique. We are the fourth largest manager of managers in the world and we remain committed to that process.

 Also, I am pleased with the way we have integrated MLC into the group. Culturally they have added to the Group.

The independence of their advisory networks has been protected and developed.

Our commitment to wealth management was demonstrated by the fact that, notwithstanding the downturn in equity markets and fall in investor sentiment, we chose to invest over $200 million in the Australian Wealth Management operations and also have invested $100 million to take that capability to the United Kingdom.

This was done at a time when the industry in general was cutting back.

Our investment over the last two years has improved adviser tools and platform solutions to raise our standard of service to advisers and the quality of advice to investors.

I believe this demonstrates our commitment to this business and our view of its importance. We will continue to build on these strengths in the future.

Before I move on to our future strategies I would like to recognise the contribution made by my predecessors.

Courageous decisions about the long-term, based on careful analysis, were made by previous Directors and Chief Executives of the National.

It is interesting to note that all the major acquisitions and investments over the past 25 years were subject to sceptical and negative commentary at the time.

Yet they were fundamental to constructing the National as it is today.

The most significant acquisition during my tenure is undoubtedly MLC.

Some of these acquisitions are still questioned by analysts and the media despite their substantial contributions to creating value.

In some cases, the operating environment has changed and we needed to alter our strategies accordingly – such as the decision to exit the US.

However, in all cases, those decisions were made with one objective – to grow shareholder returns.

And there is no doubt that on this measure, we have achieved our objective.

Over the last ten years, total returns to shareholders of the National have increased by over 450 per cent.

We have increased dividends 11 years in a row. There are not many companies that can boast of that record.

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.

I have recently committed to at least another three years at the head of the National and I expect this to continue to be a transformational period due to our investment programs and our cultural change agenda.

I would now like to outline what will underpin our future actions.

Over the last two years the leadership team at the National has completed a substantial review of our strategies.

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

Today, I would like to 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 for the National.

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 reinforces 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.

Over the past four years we have invested many hundreds of millions to improve the ability of our front line bankers to better serve the customer.

Our Customer Relationship Management is acknowledged as the best in the industry and we will continue to sensibly invest in all of our distribution platforms, be they in banking or wealth management.

In the area of compliance, in the last 12 months alone we have made a significant investment in our journey toward best practice.

 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.

The key to our approach towards the customer 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.

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

Integrated financial services is our term for melding together our banking and wealth management capabilities into one seamless customer experience.

Our branch network now has more than 80 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 financial year.

This is a significant investment in a modern and efficient branch network.

Our approach to integrated financial solutions will be a key platform in the transformation of our businesses in the United Kingdom and Ireland.

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.

Over the past two years new talent and leadership has been added to the top four levels of management. Many of these have come from outside the National.

Internal programs have commenced to revitalise and challenge all levels of the organisation to rethink the way we do business.

Over ten thousand employees have participated in programs that empower people at all levels of the organisation to identify initiatives at the work place and take control of those changes.

Our new executive coaching program has been recognised as a world class program by the International Consortium for Executive Development Research.

These initiatives have led to a rise in employee satisfaction.

 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 and employee morale.

Accordingly, stakeholder management is 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 and have included our first stakeholders' scorecard in this year's concise annual report.

Another significant advance in this area was the inclusion of the National in the Dow Jones Sustainability Index.

To be included, a company must be in the top 10 per cent of companies rated on a range of sustainability criteria.

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

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

An example is our bank in Northern Ireland, which is the largest in that market. It now purchases green energy for the majority of its branch network. The energy is generated by wind turbines.

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

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

Another example of blending our customer and community aspirations is that we now have 60 audio enabled ATMs for the visually impaired.

We plan to enable half of our National ATMs during the next year. This will make us the leader in providing service to this section of the community.

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 conclusion…

I am sure it will be a challenging few years ahead. However we have a great portfolio of businesses; we have the right opportunities, the right people and the right strategy.

We will grow through excellent relationships.

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

I know people at the National are excited by the opportunities this new strategy presents.

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