ASX Announcement - National Australia Bank Increases Cash Earnings by 11.4%

Financial Highlights*

Cash earnings before significant items ($m)

Net profit included large significant items in each half year.  These included income from the sale of the Irish banks (Mar 05), the cost of restructuring provisions (Mar 05 and Sep 05) and income arising from United Kingdom pensions reforms (Mar 06).

Net profit before significant items of $1.76 billion was 3.6% higher than the March 2005 half year and 9.2% above the September 2005 half year.

Dividend

The interim dividend is steady at 83 cents and will be 80% franked.

Diluted cash earnings per share (before significant items)

114.5 cents compared with 105.0 cents in the March 2005 half year.

Cash earnings on average equity (before significant items)

17.4% compared with 16.0% in the March 2005 half year.

Total capital ratio

10.73% compared with 11.37% at 31 March 2005.

Net interest margin

2.31% compared with 2.12% in the March 2005 half year.

Cost to income ratio (banking)

55.6% compared with 58.6% in the March 2005 half year.

*Prior period numbers have been adjusted for Australian International Financial Reporting Standards.


ASX Announcement

National Australia Bank Increases Cash Earnings by 11.4%

National Australia Bank Group Chief Executive Officer, John Stewart, said the March 2006 half year results shows the National Australia Bank is delivering on its promises.

Cash earnings before significant items were 11.4% higher than the March 2005 half year and 14.9% above the September 2005 half year.

Reflecting the large one-off items in each half year, net profit after significant items fell by 27.7% to $1.99 billion compared with the March 2005 half year.  Net profit increased by 61.6% compared with the September 2005 half year.

"The improvement in cash earnings in the United Kingdom by Clydesdale and Yorkshire banks was the highlight of an across-the-board improvement in cash earnings compared with the September 2005 half year," he said.

"The progress in the last six months shows our businesses are building momentum but much still remains to be done.

"We continue to be focussed on the four areas of culture change, compliance and risk, business efficiency and revenue growth," he said.

Key Performance Measures

Net operating income increased by 10.9% to $7.69 billion compared with the March 2005 half year and was 1.5% higher than the September 2005 half year.

Operating expenses, excluding the charge to provide for doubtful debts and significant items, showed a marginal increase to $3.93 billion from $3.90 billion in the March 2005 half year and fell 3.9% compared with the September 2005 half year.

Total lending increased by 17.1% to $322 billion compared with the March 2005 half year and was up 8.2% on the September 2005 half year (excluding foreign exchange impacts).

The overall net interest margin improved 0.19% to 2.31% compared with 2.12% in the March half year. The net interest margin was up 0.17% on the September 2005 half year.

Non-accrual loans as a proportion of the portfolio fell to 0.30%, down from 0.40% in the March 2005 half year and 0.34% in the September 2005 half year.

"We continue to monitor asset quality closely but the overall improvement demonstrates no serious credit issues have emerged," Mr Stewart said.

 Regional Business Commentary

Australia

"Cash earnings increased 8.5% compared with the September 2005 half year reflecting strong expense management and revenue growth, in both banking and wealth management.

"The solid overall performance by the Australian region was underpinned by volume growth balanced with careful margin management.  Total banking expenses declined by 0.7% compared with the September 2005 half year. 

"Banking revenue increased by 8.2% compared with the March 2005 half year.

"Asset quality remains strong with the ratio of gross non-accrual loans to gross loans and acceptances steady at 0.22%.

 "The iSaver and Business Cash Maximiser products were central to better than industry growth rate in deposits.

"Business lending growth was also ahead of the industry growth rate.

"The Australian bank business created a new brand which received extensive exposure as part of the sponsorship of the recent Melbourne 2006 Commonwealth Games.

"The National Australia Bank won the Money Magazine/Cannex Bank of the Year for 2006 award and achieved the largest improvement in customer satisfaction ratings among the major banks according to March 2006 Roy Morgan Research.

"Cash earnings in wealth management, excluding the loss of transitional tax relief and the introduction of AIFRS, increased by 14.5% on the September 2005 half, with operating expenses falling 3.7%.

"One of the key strategies for wealth management is cross-selling of wealth products within the bank customer base. The sale of insurance and wealth products increased by 27% during the March 2006 half year, on top of last year's 25% increase.

"In recent months our focus on risk and return and the growth potential of our businesses resulted in the sales of the MLC Hong Kong and Indonesian life insurance operations and the Custom Fleet business.

United Kingdom

"Cash earnings in UK pounds were 13.7% up (up 12.2% in A$) on the September 2005 half year as income increased reflecting growing business momentum.

"This is a strong result for the United Kingdom businesses that demonstrates Clydesdale and Yorkshire banks are starting to deliver sustainable profit growth.

"The management team has delivered on the objectives of increased revenue, ongoing margin management and improved efficiency.

"Asset quality remained strong with the ratio of gross non-accrual loans declining to 0.27% compared with 0.37% in the March 2005 half year.

"The charge to provide for doubtful debts increased as a result of volume growth and the industry-wide issue of increased write-offs for credit card and personal lending.

"The UK operations also gained employee and trustee support for pension reforms designed to put UK pension arrangements on a secure and sustainable footing for the future.

"Integrated Financial Solutions Centres increased lending and deposit growth. During the March half year four new integrated Financial Solutions Centres were opened in the south of England making a total of 36 new centres in this region and in addition five centres were relocated and one was upgraded bringing the total to 46.

"The Clydesdale and Yorkshire bank branch network showed improved performance in a number of areas with good growth in deposits, improvement in cross-sell and mortgage sales over the same period in the previous year.

"The third party distribution channel now has approximately 440 broker relationships and contributed £822 million in mortgages in the half year.  (A$1.94 billion based on A$1 equals £0.4237).

"The separation of back office processing for Northern Bank and National Irish Bank following their sale was successfully completed in line with the original schedule.

New Zealand

"The New Zealand business increased cash earnings in New Zealand dollars by 1.7% compared with the September half year (in Australian dollars 1.8% compared with the September 2005 half year).

"Delivering profitable growth in the competitive New Zealand market is a pleasing outcome and reflected good volume growth, effective margin management and strong expense control.

"Asset quality improved with the ratio of gross non-accrual loans to gross loans and acceptances falling to 0.22% compared with 0.32% in the March 2005 half year due to the settlement of a large single exposure.

"The Bank of New Zealand investment management business was disposed of during the half year.

"Balance sheet funding options were diversified with the establishment of BNZ International Funding.

"The Bank of New Zealand was awarded the best contact centre in New Zealand for the second year in a row and online banking services were expanded to include text and email account alerts for customers.

Institutional Markets & Services

"Cash earnings improved by 2.5% compared with the September 2005 half year.

"The improvement in cash earnings was achieved while reducing risk weighted assets in the business.  During the last six months capital deployed in the business reduced by 15% compared to the September 2005 half year.

"Management delivered against its stated objectives for the March 2006 half year in relation to the ongoing transformation program.  The focus is to develop the business to provide increasing return on equity, greater efficiency and improving sustainable cash earnings, recognising that the nature of the IMS business contains elements which may cause volatility in cash earnings in any period.

"The underlying financial performance in the March 2006 half for IMS has been favourably impacted by the accelerated execution of new business initiatives, together with a strong demand for client sales of risk management products arising from the recent interest and exchange rate volatility, and the low level of doubtful debts.

"After considerable work to stabilise and re-base the business, IMS is rebuilding capability to create a stronger, more sustainable business based on a broader product offering, better client service, and investment opportunities for the Group's diverse client base.  This will require continued investment to support the rebuilding program."
 
Outlook

"We remain comfortable with the global economic outlook but we are not complacent about the risks to growth and inflation in the regions in which we operate.

"Global economic indicators show strengthening activity levels.  Solid economic growth in the United States is creating employment growth and gains in household incomes.  The important economies of Europe and Japan are regaining momentum and China's economy remains strong.

"In the United Kingdom economic growth is improving and is expected to be maintained at current levels and underlying inflation remains moderate.  However manufacturing remains flat and credit growth is expected to slow.

"The New Zealand economy is expected to recover due to the lower currency and the Government's package to boost household incomes but concerns remain about low business confidence and lower business credit growth.

"In Australia the recent interest rate rise highlights concern about inflation risks.  Economic growth is forecast to improve but credit growth is expected to moderate in line with slower domestic demand."

For further information:

Brandon Phillips
Group Manager, External Relations
T  03 8641 3857
M  0419 369 058

Hany Messieh
Head of Investor Relations
T  03 8641 2312
M  0414 446 876

Kim Lovely
External Relations Manager
T  03 8641 4982
M  0406 035 243
 
Disclaimer

This announcement contains certain "forward-looking statements" within the meaning of Section 21E of the US Securities Exchange Act of 1934 and the US Private Securities Litigation Reform Act of 1995.  The words "anticipate", "believe", "expect", "project", "estimate", "likely", "intend", "should", "could", "may", "target", "plan" and other similar expressions are intended to identify forward-looking statements.  Indications of, and guidance on, future earnings and financial position and performance are also forward-looking statements.  Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors, many of which are beyond the control of the Group, that may cause actual results to differ materially from those expressed or implied in such statements.  There can be no assurance that actual outcomes will not differ materially from these statements.  For further information relating to the identification of forward-looking statements and important factors that could cause actual results to differ materially from those projected in such statements, see "Presentation of Information - Forward-Looking Statements" and "Risk Factors" in the Group's Annual Report on Form 20-F filed with the US Securities & Exchange Commission.