1、Annual Financial Report 2004the Yearthe Factsthe FAnnual Financial Report 2004Cover+spineFullFinance2004 21/12/04,5:12:56 PMNational Australia Bank LimitedABN 12 004 044 937This annual financial report 2004 is lodged with the Australian Securities and Investments Commission and Australian Stock Exch
2、ange Limited.Nothing in this annual financial report 2004 is,or should be taken as,an offer of securities in National Australia Bank Limited for issue or sale,or an invitation to apply for the issue or for the purchase of such securities.All figures in this document are in Australian dollars unless
3、otherwise stated.inside_Cover_FullFinance2004 21/12/04,5:15:24 PMTable of contents1Presentation of information2Notes to the financial statements103Financial summary31 Principal accounting policies103Selected financial data42 Transition to Australian equivalents to InternationalBusiness overview9 Fin
4、ancial Reporting Standards112Introduction93 Segment information114Strategy94 Revenue from ordinary activities117Business operating model95 Profit from ordinary activities before income tax expense118Changes to the business operating model96 Income tax expense121Introduction to Financial Services107
5、Dividends and distributions122Financial Services Australia108 Earnings per share123Financial Services Europe119 Cash and liquid assets124Financial Services New Zealand1210 Due from other financial institutions124Corporate&Institutional Banking1211 Due from customers on acceptances124Wealth Managemen
6、t1312 Trading securities125Other1413 Available for sale securities125Competition1514 Investment securities127 Regulation of the financial services system1515 Investments relating to life insurance business130Changing regulatory environment1616 Loans and advances131Organisational structure1817 Provis
7、ions for doubtful debts133Description of property1818 Asset quality disclosures137Certain legal proceedings1819 Shares in controlled entities,joint venture Certain services provided by the external auditor and SEC entities and other securities140 investigation matters related to independence1920 Reg
8、ulatory deposits141Financial review2121 Property,plant and equipment141Summary2122 Income tax assets143Economic outlook2223 Goodwill143Net interest income2324 Other assets143Net life insurance income2625 Due to other financial institutions145Other banking and financial services income2626 Deposits a
9、nd other borrowings145Mortgage servicing and origination revenue2827 Life insurance policy liabilities146Movement in the excess of net market value over net assets28 Income tax liabilities147 of life insurance controlled entities2829 Provisions147Significant revenue3030 Bonds,notes and subordinated
10、debt148Operating expenses3031 Other debt issues150Charge to provide for doubtful debts3132 Other liabilities150Significant expenses3233 Contributed equity151Income tax expense3334 Reserves154Net profit by segment3435 Retained profits154Employees4236 Outside equity interest155Assets and equity4337 To
11、tal equity reconciliation155Return on average equity 4338 Shares,performance options and performance rights156Earnings and dividends per share4439 Average balance sheets and related interest164Shareholder value4540 Maturity analysis166Liquidity and funding4541 Interest rate risk168Capital resources4
12、942 Notes to the statement of cash flows173Gross loans and advances5243 Particulars in relation to controlled entities175Asset quality disclosures,charge to provide and provisions44 Contingent liabilities and credit commitments176 for doubtful debts5345 Derivative financial instruments180Deposits an
13、d other borrowings5746 Fair value of financial instruments186Assets under management and administration5747 Superannuation commitments187Risk management5848 Operating lease commitments189Disclosure controls and procedures and internal control over 49 Capital expenditure commitments189 financial repo
14、rting6350 Related party disclosures190Transactions with related and other non-independent parties6551 Remuneration of directors and executives192Risk factors6552 Remuneration of external auditor206Critical accounting policies6653 Fiduciary activities207Accounting developments6954 Life insurance busi
15、ness disclosures207Non-GAAP financial measures6955 Supplementary statement of financial position214Corporate governance7056 Reconciliation with US GAAP and other US GAAP disclosures215Report of the directors8057 Events subsequent to balance date226Financial report99Directors declaration227Statement
16、of financial performance100Independent auditors report228Statement of financial position101Shareholder information229Statement of cash flows102Glossary253Principal establishments257Presentation of information2Basis of presentationThis annual financial report is prepared in accordance with Australian
17、GAAP,which differs in some respects from US GAAP(as set out in note 56in the financial report).Comparative amounts have been reclassified toaccord with changes in presentation made in 2004,except where otherwisestated.Currency of presentationAll currency amounts are expressed in Australian dollars u
18、nless otherwisestated.Merely for the convenience of the reader,this annual financial reportcontains translations of certain Australian dollar amounts into US dollars atspecified rates.These translations should not be construed as representationsthat the Australian dollar amounts actually represent s
19、uch US dollar amountsor could be converted into US dollars at the rate indicated.Unless otherwisestated,the translations of Australian dollars into US dollars have been madeat the rate of US$0.7244=A$1.00,the noon buying rate in New York Cityfor cable transfers in Australian dollars as certified for
20、 customs purposes bythe Federal Reserve Bank of New York(noon buying rate)on September 30,2004.Certain definitions and glossaryThe Companys fiscal year ends on September 30.As used herein,the fiscalyear ended September 30,2004 is referred to as 2004 and other fiscal yearsare referred to in a corresp
21、onding manner.The abbreviations$m and$bnrepresent millions and thousands of millions(ie.billions)of Australiandollars respectively.Financial statements means the Companysconsolidated financial statements for the year ended September 30,2004,September 30,2003 and September 30,2002 included herein at
22、pages 100 to227.Any discrepancies between total and sums of components in tablescontained in this annual financial report are due to rounding.A glossary of some of the key terms used in this annual financial report iscontained at page 253.In addition,non-GAAP financial measures have beendefined at p
23、age 69.Forward-looking statements This annual financial report contains certain forward-looking statementswithin the meaning of section 21E of the United States Securities ExchangeAct of 1934.The United States Private Securities Litigation Reform Act of1995 provides a safe harbour for forward-lookin
24、g information to encouragecompanies to provide prospective information about themselves without fearof litigation,so long as the information is identified as forward-looking and isaccompanied by meaningful cautionary statements identifying importantfactors that could cause actual results to differ m
25、aterially from thoseprojected in the information.The words anticipate,believe,expect,project,estimate,intend,should,could,may,target,goal,objective,plan and othersimilar expressions are used in connection with forward-looking statements.In this annual financial report,forward-looking statements may,
26、withoutlimitation,relate to statements regarding:?economic and financial forecasts,including but not limited to statementsunder the financial review and report of the directors;?anticipated implementation of certain control systems and programs,including,but not limited to those described under the
27、financial review risk management;and?certain plans,strategies and objectives of management.Such forward-looking statements are not guarantees of future performanceand involve known and unknown risks,uncertainties and other factors,manyof which are beyond the control of the Group,that may cause actua
28、l results todiffer materially from those expressed in the statements contained in thisannual financial report.For example:?the economic and financial forecasts contained in this annual financialreport will be affected by movements in interest and foreign currencyexchange rates,which may vary signifi
29、cantly from current levels,as wellas by general economic conditions in each of the Groups major markets.Such variations,if adverse,may materially impact the Groups financialcondition and results of operations;?the implementation of control systems and programs will be dependenton such factors as the
30、 Groups ability to acquire or develop necessarytechnology or systems,its ability to attract and retain qualified personneland the co-operation of customers and third party vendors;and?the plans,strategies and objectives of management will be subject to,among other things,government regulation,which
31、may change at anytime and over which the Group has no control.In addition,the Groupwill continue to be affected by general economic conditions in Australiaand worldwide,movements and conditions in capital markets,thecompetitive environment in each of its markets and political andregulatory policies.
32、There can be no assurance that actual outcomes will not differ materiallyfrom the forward-looking statements contained in this annual financial report.Financial summary3Shareholder returns?Diluted earnings per share decreased 19.5%to 196.1 cents.Excludingsignificant items,diluted earnings per share
33、decreased 9.5%to 220.4cents.?Diluted cash earnings(1)per share decreased 23.1%to 201.7 cents.Excluding significant items,diluted cash earnings per share decreased13.8%to 226.0 cents.?Return on average ordinary shareholders funds decreased from 18.3%to14.0%(15.8%excluding the impact of significant it
34、ems).?Dividends of 166 cents per share compared with 163 cents per sharelast year.In 2004,the interim dividend of 83 cents per share was fullyfranked and the final dividend of 83 cents per share will also be fullyfranked.In 2003,the interim dividend of 80 cents per share was fullyfranked and the fin
35、al dividend of 83 cents was also fully franked.?Economic Value Added(EVA)(1)decreased 28.4%to$1,617 million.EVA is a registered trademark of Stern Stewart&Co.EVA measures theeconomic profit earned in excess of the Groups cost of capital.Growth and diversification?Total assets grew by 2.4%in local cu
36、rrency terms.?Net assets grew by 8.7%in local currency terms.?Movements in exchange rates increased total assets(in Australian dollarterms)by$4.2 billion.?Gross loans and advances increased 8.3%in local currency terms.?Assets under management and administration grew by 10.9%.(1)Refer to non-GAAP fin
37、ancial measures on page 69 andreconciliations of non-GAAP financial measures on page 6.Net profit attributable to ordinary members of the Company&significant items10432(2)(3)(1)52000200120022004Significant itemsNet profit attributable to members of the Company(before significant items)$bn2003Diluted
38、 cash earnings(before significant items),diluted earnings÷nds per share1005025020015003002000200120022004DPSDiluted cash EPS(before significan items)centsDiluted EPS2003Assets under management&administration30157560450902000200120022004$bn2003Profitability?Net profit attributable to members of
39、 the Company decreased 19.7%to$3,177 million.?Net profit attributable to members of the Company before significantitems(1)decreased 10.0%to$3,561 million.?The current years result includes the following after tax significantitems:?net profit of$315 million on sale of shareholdings in St GeorgeBank L
40、imited,AMP Limited and HHG PLC;?foreign currency options trading losses of$252 million;?write-down of impaired application software of$307 million;?charge to provide for doubtful debts of$204 million as a result ofa revision of an accounting estimate;and?profit of$64 million on write-back of a provi
41、sion for costs relatedto the sale of SR Investment,Inc.The 2003 result included no significant items.The information hereunder has been derived from the audited financial report of the Group,or where certain items are not shown in the Groups financial report,it has been prepared for the purpose of t
42、his annual financial report.Accordingly,this information should be read in conjunction with and is qualified in its entirety by reference to the financial report.Comparative amounts have been reclassified to accord with changes in presentation made in 2004,except where otherwise stated.20042004(1)20
43、032002(2)2001(3)2000(4)$mUS$m$m$m$m$mSummary of financial performanceAustralian GAAPNet interest income7,191 5,209 7,419 7,222 6,960 6,371 Net life insurance income1,012 733 444 (10)128 332 Other banking and financial services income4,831 3,500 5,010 7,006 4,749 4,124 Mortgage servicing and originat
44、ion revenue-378 810 640 Movement in the excess of net market value over net assets of life insurance controlled entities(137)(99)(160)(155)510 202 Significant revenue993 719 -2,671 5,314 -Operating expenses(6,812)(4,935)(6,354)(8,707)(6,470)(5,807)Amortisation of goodwill(103)(75)(98)(101)(167)(197)
45、Charge to provide for doubtful debts(559)(405)(633)(697)(989)(588)Significant expenses(1,675)(1,213)-(3,266)(6,866)(204)Profit from ordinary activities before income tax expense4,741 3,434 5,628 4,341 3,979 4,873 Income tax expense relating to ordinary activities(1,190)(862)(1,681)(962)(1,891)(1,632
46、)Net profit3,551 2,572 3,947 3,379 2,088 3,241 Net loss/(profit)attributable to outside equity interest Life insurance business(365)(264)16 (6)(5)(2)Net profit attributable to outside equity interest Other(9)(7)(8)-Net profit attributable to members of the Company3,177 2,301 3,955 3,373 2,083 3,239
47、Dividends paid/payable(5)2,405 1,742 2,255 2,266 2,080 1,858 Adjusted to accord with US GAAPNet income2,747 1,990 3,527 3,455 1,794 3,004 20042004(1)20032002(2)2001(3)2000(4)$mUS$m$m$m$m$mSummary of financial positionAustralian GAAPInvestments relating to life insurance business41,013 29,710 35,846
48、31,012 31,381 31,103 Loans and advances(after provisions for doubtful debts)247,836 179,532 225,735 212,929 197,827 187,079 Total assets411,309 297,952 397,471 377,387 374,720 343,677 Total risk-weighted assets(6)286,805 207,762 254,266 253,135 257,513 238,589 Deposits and other borrowings220,752 15
49、9,913 201,194 198,526 186,936 180,699 Life insurance policy liabilities36,134 26,175 32,457 30,425 30,257 29,879 Bonds,notes and subordinated debt32,573 23,596 24,257 24,961 24,984 21,051 Perpetual floating rate notes350 254 367 460 507 461 Exchangeable capital units(7)1,262 914 1,262 1,262 1,262 1,
50、262 Net assets29,766 21,562 27,211 23,251 23,557 21,407 Contributed equity10,191 7,382 9,728 9,931 10,725 9,855 Ordinary shares7,271 5,267 6,078 7,256 8,050 7,180 Equity instruments(8)2,920 2,115 3,650 2,675 2,675 2,675 Total equity(excludes outside equity interest)25,900 18,762 24,407 23,184 23,489
51、 21,361 Adjusted to accord with US GAAPTotal assets418,050 302,835 398,917 380,280 377,167 344,227 Total equity24,818 17,978 23,862 24,005 23,987 21,836 GroupGroupSelected financial data4Group20042004(1)20032002(2)2001(3)2000(4)$US$Shareholder informationAustralian GAAPEarnings per share(9)Basic1.97
52、 1.43 2.49 2.06 1.22 2.02 Diluted1.96 1.42 2.44 2.03 1.23 1.99 Earnings per share before significant items(9)(10)Basic2.23 1.61 2.49 2.32 2.47 2.11 Diluted2.20 1.60 2.44 2.27 2.43 2.08 Cash earnings per share(10)Basic2.03 1.47 2.69 2.22 1.11 2.06 Diluted2.02 1.46 2.62 2.18 1.12 2.02 Cash earnings pe
53、r share before significant items(10)Basic2.29 1.66 2.69 2.48 2.37 2.15 Diluted2.26 1.64 2.62 2.43 2.33 2.11 Dividends per share(5)1.66 1.20 1.63 1.47 1.35 1.23 Total shareholder return(3 year annualised accumulation)(%)(11)3.8 3.8 11.1 19.2 12.8 11.3 Economic Value Added(EVA)($m)(12)1,617 1,171 2,25
54、9 1,284 1,129 1,379 Dividends per American depositary share(ADS)(5)8.30 6.01 8.15 7.35 6.75 6.15 Dividend payout ratio(%)(5)72.14 72.14 56.46 56.62 56.13 57.56 Net assets per share19.19 13.90 18.09 15.11 15.15 14.12 Share price at year end26.98 19.54 30.80 33.48 25.66 25.51 Number of ordinary shares
55、 at year end(No.000)1,551,349 n/a1,504,635 1,534,840 1,551,575 1,516,111 Adjusted to accord with US GAAPNet income per share(9)Basic1.69 1.22 2.21 2.11 1.03 1.87 Diluted1.69 1.22 2.13 2.06 1.04 1.81 Dividends per ADS(US$)(5)(13)n/an/a6.03 4.12 3.51 3.50 Dividends as percentage of net income(%)90.90
56、90.90 66.69 65.59 115.94 61.85 Group20042003200220012000%Selected financial ratiosAustralian GAAPAverage equity(ordinary shareholder funds)to average total assets(excluding statutory funds)(14)(15)5.8 5.7 6.3 6.4 6.3 Return on average assets(16)0.7 1.0 0.9 0.5 1.1 Return on average equity(ordinary s
57、hareholder funds)(15)(16)14.0 18.3 15.1 9.0 17.3 Average net interest spread1.94 2.18 2.39 2.34 2.39 Average net interest margin2.35 2.53 2.67 2.71 2.88 Gross non-accrual loans to gross loans and acceptances0.46 0.65 0.76 0.87 0.68 Net impaired assets to equity(parent entity interest)3.5 5.0 5.7 6.0
58、 4.9 Total provisions for doubtful debts to gross impaired assets198.1 138.0 141.5 143.5 182.5 Capital risk asset ratios(17)Tier 17.3 7.7 7.6 7.5 6.6 Tier 24.3 3.3 3.7 3.9 4.0 Deductions(1.0)(1.4)(1.3)(1.2)(1.3)Total10.6 9.6 10.0 10.2 9.3 Ratio of earnings to fixed charges(18)1.4 1.6 1.5 1.3 1.4 Adj
59、usted to accord with US GAAPNet income as a percentage ofAverage total assets(excluding statutory funds)(14)0.8 1.0 1.0 0.5 1.1 Average equity11.5 14.8 14.5 7.7 14.6 Total equity as percentage of total assets(excluding statutory funds)(14)6.6 6.6 6.9 7.0 7.0 Ratio of earnings to fixed charges(18)1.2
60、 1.3 1.4 1.2 1.4 Selected financial data5Group20042003200220012000$m$m$m$m$mReconciliations of non-GAAP measures(10)Net profit to cash earnings before significant items reconciliation Net profit attributable to members of the Company3,177 3,955 3,373 2,083 3,239 Adjusted forNet(loss)/profit attribut
61、able to outside equity interest Life insurance business365 (16)6 5 2 Net profit attributable to outside equity interest Other9 8 -Net profit3,551 3,947 3,379 2,088 3,241 Adjusted forNet loss/(profit)attributable to outside equity interest Life insurance business(365)16 (6)(5)(2)Net profit attributab
62、le to outside equity interest Other(9)(8)-Distributions on other equity instruments(187)(183)(187)(213)(198)Movement in the excess of net market value over net assets of life insurance controlled entities137 160 155 (510)(202)Income tax expense/(benefit)on movement in the excess of net market value
63、over net assets of life insurance controlled entities(153)40 (3)177 56 Amortisation of goodwill103 98 101 167 197 Cash earnings3,077 4,070 3,439 1,704 3,092 Adjusted forSignificant revenue(993)-(2,671)(5,314)-Significant expenses1,675 -3,266 6,866 204 Income tax expense/(benefit)on significant items
64、(298)-(189)384 (68)Cash earnings before significant items3,461 4,070 3,845 3,640 3,228 EVA reconciliation(current methodology)(19)Cash earnings before significant items3,461 4,070 Adjusted forImputation credit value earned681 727 Other(20)58 (7)EVA net operating profit after tax4,200 4,790 Average o
65、rdinary shareholder funds21,341 20,579 Adjusted forCumulative amortisation of goodwill(average)1,748 1,648 Significant items(average)192 -Cumulative movement(after tax)in the excess of net market value over net assets of life insurance controlled entities(average)(202)(220)Average economic capital(2
66、1)23,079 22,007 Cost of capital(22)11.0%11.5%Capital charge(23)(2,583)(2,531)EVA1,617 2,259 EVA reconciliation(previous methodology)Cash earnings before significant items4,070 3,845 3,640 3,228 Adjusted forImputation credit value earned733 622 695 545 Net amortisation of prior period significant ite
67、ms(272)(243)(327)(25)Other(20)(7)(67)(127)(68)EVA net operating profit after tax4,524 4,157 3,881 3,680 Capital charge(23)(2,856)(2,873)(2,752)(2,301)EVA1,668 1,284 1,129 1,379 Average economic capital(21)24,849 24,985 23,927 20,178 Cost of capital(22)11.5%11.5%11.5%11.4%Selected financial data6Grou
68、p20042003200220012000$m$m$m$m$mAverage ordinary shareholder funds reconciliationTotal average equity(refer to note 39 in the financial report)27,802 24,111 23,847 23,427 20,261 Adjusted forNational Income Securities(average)(1,945)(1,945)(1,945)(1,945)(1,945)Preference shares(average)(227)(730)(730)
69、(730)(730)Trust Preferred Securities(average)(975)(5)-Outside equity interest(average)(3,314)(852)(68)(67)(46)Average ordinary shareholder funds(15)21,341 20,579 21,104 20,685 17,540 Group20042003200220012000Other informationTotal staff Full-time and part-time47,025 45,20646,64249,71051,879Full-time
70、 equivalent(24)43,517 42,54043,20247,59749,514Exchange rates(average and closing per A$1.00)AverageBritish pound0.40550.38240.36220.36260.3902Euro0.59700.56480.57980.58800.6310United States dollar0.72650.61250.53240.52270.6102New Zealand dollar1.12541.11421.19921.24741.2648ClosingBritish pound0.3973
71、0.40720.34740.33540.3710Euro0.57990.58500.55280.53930.6166United States dollar0.71490.68040.54400.49280.5427New Zealand dollar1.06821.14461.15651.21351.3351United States dollar(per A$1.00)Average(25)0.72630.61670.53290.51810.6032September 300.72440.67970.56280.49460.5415On November 12,2004 the noon
72、buying rate was US$0.7685 per A$1.00.NovemberOctoberSeptemberAugustJulyJuneUnited States dollar(per A$1.00)High0.78850.74890.71680.72240.73270.7158Low0.74550.72110.69040.69910.69560.6816(1)Translated at the noon buying rate on September 30,2004 of US$0.7244=A$1.00.(2)Includes amounts relating to ope
73、rating assets and operating platform of HomeSide US to February 28,2002,sold on March 1,2002,and SR Investment,Inc.(the parent entity of HomeSide US)to September 30,2002,sold on October 1,2002.(3)Includes amounts relating to Michigan National Corporation and its controlled entities to March 31,2001.
74、The Group sold this entity on April 1,2001.(4)Includes amounts relating to the MLC group from July 1,2000.The Group acquired these entities on June 30,2000.(5)Dividend amounts for a year represent the final and interim dividend in respect of that year,irrespective of when they are declared,determine
75、d and publicly recommended and includes issues under the bonus share plan in lieu of cash and the dividend reinvestment plan.Dividends and book value per ordinary share and per American depositary share(ADS)calculations are based on year-end fully paid equivalent ordinary shares,adjusted for loans a
76、nd rights issues as appropriate.Dividend payout ratio is based on the dividend amounts for a year by cash earnings before significant items.Refer to page 6 for a reconciliation of cash earnings before significant items.(6)The calculation to determine the market risk capital component of risk-weighte
77、d assets at September 30,2004,was carried out under the Standard Method as directed by APRA.In previous years,the market risk capital component of risk-weighted assets was calculated using the Internal Model Method.The Standard Method as prescribed by the APRA Prudential Standard(APS 113),limits rec
78、ognition of portfolio effects on outstanding positions and is substantially more restrictive on the rules regarding the matching of positions.(7)The exchangeable capital units of US$1 billion are recorded in this annual financial report at the historical rate of US$0.7922=A$1.00.(8)Equity instrument
79、s incorporate preference shares,National Income Securities and Trust Preferred Securities.(9)Refer to notes 8 and 56 in the financial report for an explanation of earnings per share.Group 2004Selected financial data7(10)Refer to page 69 for explanations of non-GAAP financial measures.(11)Total share
80、holder return measures the growth in the value of the investment in shares,assuming reinvestment of dividends.The calculation does not take intoaccount taxation of returns nor franking credits.(12)EVAis a registered trademark of Stern Stewart&Co.(13)Dividend amounts are translated into US dollars pe
81、r ADS(representing five fully paid ordinary shares)at the exchange rate on each of the respective payment dates for interim and final dividends.The 2004 final dividend of A$0.83 per ordinary share is not payable until December 8,2004.Accordingly,the total US dollar dividend per ADS cannot be determi
82、ned until that date.(14)Statutory funds are excluded given the significant restrictions imposed by life insurance legislation,regulations and the regulators thereunder,on these assets.However,current Australian accounting requirements do not allow for these assets and liabilities to be separated and
83、 disclosed separately on the statement of financial position.Refer to note 55 for detailed discussion of the separation of assets from the Groups total assets.(15)Refer to page 7 for a reconciliation of average ordinary shareholder funds.(16)Return represents net profit attributable to members of th
84、e Company after deducting distributions on other equity instruments.(17)As defined by APRA(refer to capital resources on page 49 and regulation of the financial services system on page 15).(18)For the purpose of calculating these ratios,fixed charges are comprised of interest on all indebtedness inc
85、luding interest on deposits,and one-third of rental charges(which is used to be representative of an interest factor).Earnings are calculated after all operating and income deductions,except fixed charges,extraordinary items and tax based on profit and are stated before outside equity interest.(19)T
86、he revised EVAmethodology has been applied to 2003 for comparison.(20)Other relates to the difference between EVAs use of the long-term projected tax rate of 30%and the effective tax rate used for cash earnings.(21)Average economic capital is a measure of the amount of capital invested in the Compan
87、y by shareholders which is based on average ordinary shareholdersfunds adjusted for significant items and those items excluded from the calculation of cash earnings(refer to non-GAAP financial measures on page 69 for an explanation of significant items and cash earnings).(22)Cost of capital is calcu
88、lated based on the capital asset pricing model.The change in cost of capital from 11.5%per annum to 11.0%per annum took effectfrom April 1,2004.(23)Capital charge is the average economic capital multiplied by the cost of capital.(24)Full-time equivalent employees(FTEs)includes part-time staff(pro-ra
89、ted)and non-payroll FTEs(ie.contractors).(25)The daily average of the noon buying rates.Selected financial data8IntroductionThe Group is an international financial services group that provides acomprehensive and integrated range of financial products and services.The Company traces its history back
90、to the establishment of The NationalBank of Australasia in 1858.National Australia Bank Limited is a publiclimited company,incorporated on June 23,1893 in Australia,which is theCompanys main domicile.Its registered office is 24th floor,500 BourkeStreet,Melbourne Victoria 3000,Australia.The Company o
91、perates underthe requirements of the Banking Act 1959(Cth)and Corporations Act 2001(Cth).Globally,as at September 30,2004,the Group had:?total assets of$411 billion;?over$81 billion in assets under management and administration;?$443 billion in funds under custody and investment administration;and?8
92、.4 million banking customers and 2.3 million wealth managementcustomers.The Company is the largest financial services institution(by marketcapitalisation)listed on the Australian Stock Exchange and is within the 30most profitable financial services organisations in the world(measure:profit;source:Fo
93、rtune;date:July 2004).StrategyTo meet the challenges that the Group faces following a difficult 2004 year,the Group is utilising a strategy consisting of four core elements.Thestrategy is framed around the imperatives of speed to market,sustainablegrowth and customer focus.The Groups focus in coming
94、 years will reinforce the actions undertakenduring 2004 in order to:?simplify the operations of the business make it easy for customers todo business with the Group;?deliver sustainable revenue growth realise the potential in the Groupsfranchises;?create the right environment for people to excel reb
95、uild the core of theorganisation;and?embed ownership of effective risk practices a critical ingredient ofgood customer service.The Group is united by these objectives.Across regions and globalbusinesses,initiatives are either underway or being developed.Substantial work is being done to make it easi
96、er for customers to do businesswith the Group.Operations are being simplified in direct response tocustomer feedback.The Group remains committed to growth in Australasia and the UK.Theintegration of the banking and wealth management businesses,particularly inAustralia,represents a strong avenue for
97、growth.Cultural renewal has commenced in earnest and the Group has started toembed a set of common principles to guide behaviours and aspirations.Relationships with key compliance stakeholders have been the subject ofintense scrutiny,both externally and internally.The Group hasacknowledged these sho
98、rtcomings and is working closely with thesestakeholders to re-establish positive relationships and to more broadly embeda compliance culture.Business operating modelThe Groups operating model for the year to September 30,2004 consisted offive lines of business:?Financial Services Australia;?Financia
99、l Services Europe;?Financial Services New Zealand;?Corporate&Institutional Banking;and?Wealth Management.These business lines were supported by the following global functions Finance,Technology,People&Culture,Risk Management,CorporateDevelopment,and Office of the CEO.The information contained within
100、 the annual financial report 2004 is basedon this business operating model.Changes to the business operating modelIn August 2004,the Group announced a number of changes to the structureof its business operating model and executive management team.The newbusiness operating model will be run along reg
101、ional lines for Australia,Europe and New Zealand,together with Institutional Markets&Services,which will operate on a global basis.This new business operating model willbe effective for the 2005 year.AustraliaThe Australian and Asian-based businesses will be managed as one regionaloperation.This wil
102、l result in the former operations of Financial ServicesAustralia,the Australian components of Corporate&Institutional BankingsCorporate Banking,National Custodian Services and Transactional Solutionsunits,the Asian component of Corporate&Institutional Corporate Banking,and the Australian and Asian c
103、omponents of Wealth Management,beingmanaged as one regional business.EuropeThe European-based businesses will be managed as one regional operation.This will result in the former operations of Financial Services Europe,theEuropean component of Corporate&Institutional Bankings CorporateBanking unit,an
104、d the European components of Wealth Management,beingmanaged as one regional business.New ZealandIt is proposed that the New Zealand-based businesses will be managed as oneregional operation.This will result in the former operations of FinancialServices New Zealand,the New Zealand component of Corpor
105、ate&Institutional Bankings Corporate Banking unit,and the New Zealandcomponents of Wealth Management,being managed as one regional business.Institutional Markets&ServicesThe global businesses of the former Corporate&Institutional Banking line ofbusiness will continue to be managed together as Instit
106、utional Markets&Business overview9Services.This includes the Financial Institutions,Markets,SpecialisedFinance and Services units of Corporate&Institutional Banking.Support unitsThe global corporate centre includes streamlined functions that support allthe regional businesses,including Corporate Aff
107、airs,Corporate Strategy,Financial and Risk Management,Major Projects,People&Culture,andTechnology.The information contained in the annual financial report 2004 is based on thebusiness operating model that was in place for the year to September 30,2004.This business operating model is described in de
108、tail below.Introduction to Financial ServicesThe Groups Financial Services businesses,or the retailing arms of theGroup,provide a range of financial products and services tailored to theneeds of their customers.The regional structure of these businesses enables broader authority and morecontrol over
109、 distribution,products and services.Each region is managedseparately with a distinct focus Financial Services Australia,FinancialServices Europe and Financial Services New Zealand.The Financial Services businesses in each region are structured to providecustomers with solutions to all their retail f
110、inancial needs.In each region,theFinancial Services businesses have six core business units Business,Personal,Agribusiness,Cards,Payments,and Asset Finance and FleetManagement supported by the specialist units of Marketing,Channel andProcess Optimisation,and Customer Service and Operations.The opera
111、tionsof each of these business units are outlined below.BusinessBusiness provides financial solutions to its customers,which range from soletraders to multi-national businesses.PersonalPersonal supports its retail and premium customers.AgribusinessAgribusiness is dedicated to serving the agricultura
112、l sector and concentratessolely on meeting the needs of primary producers,service providers toagriculture and processors of agricultural produce.CardsCards manages the business and personal credit card requirements ofcustomers.Cards is also responsible for the personal loan platforms for theAustrali
113、an region.PaymentsPayments is responsible for the processing and completion of paymenttransactions and the development of payment processes and systems,particularly in e-commerce.Asset Finance and Fleet ManagementAsset Finance and Fleet Management specialises in plant,equipment andmotor vehicle leas
114、ing,as well as the broader area of fleet management.MarketingMarketing represents the centralisation of marketing and productdevelopment functions within the retailing operations in each region.Channel and Process OptimisationChannel and Process Optimisation is responsible for all the electronicdeli
115、very channels,call centres,quality delivery of retail products andservices,development of major transformation projects and processefficiencies,and improvements within the retail operations.Customer Service and OperationsCustomer Service and Operations enables the Group to more readily take anend-to
116、-end perspective on what it does and to give greater control over theservices provided to meet the needs of local customers more effectively.Itcomprises the following operational services Account Services,Collections,Corporate Real Estate,Lending,Strategic Sourcing,Trade,andVendor Management.Custome
117、r Services and Operations undertakes anumber of specialised business activities on behalf of the Group.Financial Services AustraliaFinancial Services Australia is the Australian retailing arm of the Group thatprovides financial solutions that meet the needs of its 3.7 million customersin Australia.A
118、t September 30,2004,Financial Services Australia had 17,514 full-timeequivalent employees.This year has provided challenges for the business as some negative impactson the Companys brand and reputation were experienced following thediscovery of losses related to the unauthorised trading in foreign c
119、urrencyoptions.In order to drive business growth and development,Financial ServicesAustralia focused on improving the customer experience.Processes are being reviewed and new systems implemented to improvecustomer service.For example,during the year the electronic businesslending capability was roll
120、ed out across Australia.This is a time-savingelectronic alternative to manual business lending processes.Financial Services Australias extensive physical distribution operates toservice customers at a location convenient to them.The upgrade of branchesand the building of integrated financial service
121、 centres continued,with 50branches refurbished and a further 14 integrated financial service centresbuilt across Australia.At September 30,2004,there are 34 integratedfinancial service centres(catering for all customers financial advice needs),219 business banking centres,108 agribusiness locations,
122、787 branches,andover 3,000 Australia Post GiroPost outlets(which allows customers totransact banking business at certain Australian Post outlets).Business overview10The array of financial solutions available to customers includes a range ofdeposit and lending products,financial planning,credit cards
123、,paymentfacilities,leasing,asset finance and transaction accounts.During the year,arange of new products were introduced,including SMART accounts,whichoffer flat fee transaction accounts,two new credit cards,which operate on theAmerican Express Company network,and an improved farmers choicepackage p
124、roviding long-term interest-only finance.In addition,WealthManagement and Corporate&Institutional Banking products and servicesare available such as treasury,equity finance,custodian services,superannuation,insurance and investment solutions.Financial Services Australias electronic distribution prov
125、ides customers withthe choice to meet their financial needs when they want via the internet,overthe telephone,through one of more than 1,500 ATMs or through an extensivenetwork of point of sale(EFTPOS)terminals.More than 630 ATMs areaudio enabled for vision impaired customers.There were approximatel
126、y880,000 registered internet banking customers at September 30,2004.Only6%of all transactions(by volume)are now carried out through the branchnetwork,reflecting changing customer preferences and behaviour.Financial Services Australias relationship management philosophy supportsan integrated financia
127、l services model as Business,Personal and Agribusinessbankers work closely with Wealth Management and Corporate&Institutional Banking to identify and meet the life goals of customers.Financial Services Australia has the largest share of business lending(excluding agribusiness)with 25%market share as
128、 at September 30,2004(source:TNS,measure:credit outstanding),which is the result of initiativesover a number of years,centred on the relationship management model.Initiatives have included the development of Business and Agribusinessbanking teams with specialist knowledge and an understanding of the
129、financial needs of customers.For premium personal customers,FinancialServices Australia has a relationship management philosophy where eachcustomer has a personal banker to manage their needs.Specialists,such asfinancial advisers and estate planners,are introduced to meet more complexneeds.A compreh
130、ensive customer relationship management(CRM)systemunderpins the physical and electronic distribution channels and therelationship management philosophy.This CRM system has the capability to record and integrate a substantialproportion of customer interactions,which enables better knowledge ofcustome
131、rs preferences and future financial needs.Analytical capabilitiesallow this knowledge to be used to identify customer needs and provide leadsand information to bankers and financial planners to pro-actively contactcustomers to meet those needs.In December 2003,the CRM system won theNational Centre f
132、or Database Marketing(USA)Gold Award for excellence inCRM.In March 2004,most staff commenced relocating to the Australianoperations new headquarters at Docklands,Melbourne.The building wasdesigned to facilitate teamwork,interaction and productivity,and increaseemployee motivation by providing an exc
133、ellent working environment.Refer to page 34 for detailed information of the financial performance ofFinancial Services Australia.Financial Services EuropeFinancial Services Europe is the European retailing arm of the Group thatprovides financial solutions to meet the needs of its 3.6 million custome
134、rs inthe UK and the Republic of Ireland.At September 30,2004,Financial Services Europe had 11,765 full-timeequivalent employees.The Groups retailing activities in Europe(UK and Republic of Ireland)operate under four brands.The Groups regional banks are Clydesdale BankPLC in Scotland,Yorkshire Bank P
135、LC in Northern England,Northern BankLimited in Northern Ireland and National Irish Bank Limited in the Republicof Ireland.Each bank offers a broad range of financial services to both retailand business customers.Supporting these services are the products providedby Wealth Management and Corporate&In
136、stitutional Banking,offeringcustomers a further range of financial solutions.Clydesdale Bank was established in 1838 in Glasgow and has a long historyof support for Scottish industries and communities.With 226 branches,Clydesdale Bank is one of Scotlands largest retail banks,as well as one ofthe cou
137、ntrys leading business banks.Yorkshire Bank was founded in 1859 in Halifax,West Yorkshire,and todaymaintains a strong regional focus in the north of England and the Midlands.Yorkshire Bank has a strong personal customer base and a businesscapability.Yorkshire Bank was acquired by the Group in 1990 a
138、nd has 234branches.During the year,the Group progressed the legal entity merger of Clydesdaleand Yorkshire Banks to reduce associated corporate and supportinfrastructure costs.The separate brands of Clydesdale Bank and YorkshireBank will be retained.Northern Bank was established in 1809 when the Nor
139、thern BankingPartnership was formed in Belfast,where Northern Bank is still based.Northern Bank has 95 branches,while the Dublin-based National Irish Bankhas a network of 59 branches.The 2004 year has seen the implementation of a broad range of initiativesthat represent a major investment in the gro
140、wth,efficiency and quality of theGroups European businesses.Growth initiatives have concentrated onbuilding brands,improving sales effectiveness and expanding the Groupsdistribution footprint into the south east of England.The foundations are now set for this expansion program with theestablishment
141、this year of a network of strategically located financialsolutions centres.Financial solution centres offer integrated business andprivate banking services to business and high net worth customers and,atSeptember 30,2004,8 centres were operating,being in Bristol,London City,London West End,Milton Ke
142、ynes,Oxford,Reading,Southampton andWatford.Aligned to this program,the Group also entered the intermediarymarket,selling Clydesdale Banks mortgage products through a range of keybroker partners.In February 2004,a new integrated branding program was launched which isdesigned to instil a number of key
143、 brand values trust,expertise,approachability,and empowerment into every aspect of the customerexperience.A significant part of this branding program was a series of newtelevision commercials shown in prime time across key market areas inScotland,England and Northern Ireland.Business overview11Effic
144、iency programs are primarily focused on improving manufacturingproductivity and the standardisation of processes and business operatingmodels.A key initiative was the creation of a new branch model,which hasseen the introduction of new sales and service structures and thecentralisation of administra
145、tive and processing functions to allow staff tofocus on customers.This is supported by other initiatives such as thestandardisation and optimisation of employee roles and improvements tochannel offerings such as internet banking,call centres and ATMs.The distribution network is made up of 614 outlet
146、s and 143 business bankingcentres and premium outlets.These are supported by two customer contactcentres,internet facilities and 1,180 ATMs.During the year,significant advances in the rationalisation and enhancementof products to a single product set supporting multiple brands and distributionchanne
147、ls were made,with the release of a new current account and offsetmortgage product.Another area of focus is the rationalisation of suppliers todeliver enhanced purchasing power.Financial Services Europe has concentrated on operating sound businessesthat meet its obligations and responsibilities.For e
148、xample,the upgrading offront-end systems enables the requirements of the Financial ServicesAuthority mortgage and insurance regulations to be met.The system isdesigned to provide a more efficient platform for sales and servicing.Theobjective is to improve customer service by capturing all the releva
149、ntinformation at the point of contact with the customer,and having it flowdirectly through the processing system.Attention has also been directed to further develop talent and the quality ofleadership.Several initiatives,such as the introduction of long serviceawards and more flexible working condit
150、ions,were introduced to attract andretain quality staff,particularly locally recruited managers.The Group remains committed to developing its businesses in Europe and isimplementing a range of initiatives to improve shareholder value.However,all options are being considered as part of a wide-ranging
151、 review.Severalexpressions of interest in the businesses of Northern Bank and National IrishBank have been received and the Group considers it is in shareholdersinterests to explore this option.As such,an investment bank has beencommissioned to issue an information memorandum and test the market.Ref
152、er to page 34 for detailed information of the financial performance ofFinancial Services Europe.Financial Services New ZealandFinancial Services New Zealand is the New Zealand retailing banking arm ofthe Group that provides financial solutions to meet the needs of its 1.1million customers in New Zea
153、land at September 30,2004.At September 30,2004,Financial Services New Zealand had 4,324 full-timeequivalent employees.The Groups retail banking activities in New Zealand operate under the Bankof New Zealand(BNZ)brand.The Group acquired BNZ in 1992.BNZ has a strong brand position in theNew Zealand ma
154、rket with comprehensive coverage across the country.Itoffers a range of financial services and is one of the largest financial serviceproviders in New Zealand.BNZ offers innovative products and solutionssuch as GlobalPlus,a loyalty-based program which includes credit card andhome loan products.BNZ i
155、s facing increasingly tougher market conditions,characterised by aslowdown in the New Zealand economy and a tightening of competitionfollowing Lloyds TSB Bank PLC sale of National Bank of New Zealand toAustralia and New Zealand Banking Group Limited in December 2003.Partly in response to these condi
156、tions,2004 was characterised by majorinvestment by BNZ in products and services and in its retail network.The ongoing enhancement of the physical distribution network,coupled withimproved technology,automation and functionality through electronic andremote channels,continues to be a core strategy.BN
157、Zs vision is to providecustomers with tailored financial solutions,which are deliverable through arange of convenient and cost-effective channels.The distribution network is comprised of 178 outlets including 14 businessbanking centres,405 ATMs,and shared access to an extensive nationwideEFTPOS netw
158、ork.BNZ also has well-established telephone bankingcapabilities,in addition to its internet banking service catering for more than200,000 registered users as at September 30,2004.Continued growth is being driven through BNZs CRM strategy calledTOPS.TOPS is a computer-based system that notifies staff
159、 of trigger eventsfrom customer transactional activity and milestone attainment,resulting incustomers being contacted by BNZ at a time when they need it.During the year,BNZ has deployed a new state-of-the-art teller informationtechnology system in its branches,launched new banking products in theyou
160、th market,and launched an internet banking service designed especiallyfor businesses.Refer to page 35 for detailed information of the financial performance ofFinancial Services New Zealand.Corporate&Institutional BankingCorporate&Institutional Banking manages the Groups relationships withlarge corpo
161、rations,banks,financial institutions,supranationals(such asdevelopment banks)and government bodies.With operations in Australia,Europe,New Zealand,New York and Asia(Hong Kong,Singapore,SeoulTokyo and Labuan),Corporate&Institutional Banking has dedicatedleadership teams to provide local,accessible ma
162、nagement for customers.At September 30,2004,Corporate&Institutional Banking had 2,832 full-time equivalent employees.Corporate&Institutional Banking provides debt financing,risk managementand investor services and products.It comprises Corporate Banking,Financial Institutions,Markets,Specialised Fin
163、ance,National CustodianServices,Transactional Solutions and a Services unit.It embraces the Groups purpose by devoting considerable resources tounderstanding the needs of customers,and to deliver first-class solutions thatexceed their expectations.This has been a difficult year for the business.Foll
164、owing the unauthorisedforeign currency options trading losses announced in January 2004,Corporate&Institutional Banking enhanced its risk systems andprocedures and it is continuing to enhance its risk management framework.The remedial actions outlined by the Australian Prudential RegulationBusiness
165、overview12Authority(APRA)and the Australian Securities and InvestmentsCommission(ASIC)enforceable undertakings in response to this issue arebeing addressed.For a detailed discussion of the Companys losses relating to unauthorisedtrading in foreign currency options and associated remedial actions,ref
166、er tothe report of the directors on page 84.Corporate BankingCorporate Banking is responsible for the Groups relationships with largecorporations and provides corporate lending products and other financingsolutions.Customer teams are selected to provide the appropriate blend ofrelationship managemen
167、t,industry knowledge and product skills.Customer coverage is structured along industry segment lines to promotespecialist knowledge and understanding.There are five major industrysegments:consumer goods and services;telecommunications,media andtechnology;industrials,materials and health care;energy
168、and utilities;andproperty and construction finance.Financial InstitutionsFinancial Institutions manages the Groups relationships with banks,otherfinancial institutions(insurance and fund managers),supranationals andgovernment bodies,which includes the Groups correspondent bankingrelationships.Market
169、sMarkets focuses on traded products and risk management solutions.It provides foreign exchange,money market,commodities and derivativesproducts globally through a dedicated 24 hour dealing capability.Theseproducts assist both Corporate&Institutional Bankings customers and theGroups small and medium
170、business customers to manage their diversefinancial risks.Markets is active in the debt capital markets,and securitisation and loansyndications markets,helping customers to diversify their financingarrangements and supplying investors with access to a variety of assetclasses.Markets also manages the
171、 liquidity portfolio for the Group in each of itsmajor markets.It assists in interest rate risk management and provides short-term funding for the Group.Specialised FinanceSpecialised Finance supplies a range of financial solutions utilised in large-scale,complex transactions such as project finance
172、,structured finance andacquisition finance.Using its specialised knowledge of the respective legal,commercial,regulatory and financial implications of these transactions,it developsinnovative financing structures for customers.National Custodian ServicesNational Custodian Services provides custody a
173、nd related services to foreigninstitutions,superannuation funds,government bodies,fund managers,insurance companies and other entities within Australia and New Zealand.The key products offered include sub-custody,global custody,mastercustody,investment administration outsourcing,securities lending a
174、nd cashdeposit facilities.The Company,through National Custodian Services,is one of the largestcustodian banks in Australia(measure:assets under custody andadministration,source:Australian Custodial Services Association,date:June2004)with assets under custody and administration of$432 billion atSept
175、ember 30,2004.On July 14,2004,the Group announced plans to close its National CustodianServices UK operations and reached agreement to transfer its customers toThe Bank of New York Company,Inc.,subject to approval of customers.The agreement represents an enhancement of a strong relationship with The
176、Bank of New York Company,Inc.,which is the Groups global custodian foroffshore assets.Transactional SolutionsTransactional Solutions provides a range of products and services includingcash management,e-commerce,merchant facilities,liquidity managementand international payment services.Customers have
177、 access to a committed team that includes a specialistimplementation manager,a transactional manager and a dedicated contactperson.ServicesServices is responsible for the management of the operating platform forCorporate&Institutional Banking,including technology,operations andmarketing.These key ar
178、eas have two regional hubs(Australia and Europe)to promote efficiency,optimise future investment and provide commonproduct capability across five geographic regions.Refer to page 35 for detailed information of the financial performance ofCorporate&Institutional Banking.Wealth ManagementWealth Manage
179、ment works closely with the broader Group to providecustomers with an integrated financial services experience.This involvesidentifying changing customer needs and providing access to the wide rangeof services and solutions that the Group offers.Wealth Management partners with financial advisers to
180、provide qualityfinancial planning services including wealth creation,wealth protection,banking,superannuation and retirement solutions to build and protectcustomers wealth throughout their lives.It also provides corporate andinstitutional customers with outsourced investment,superannuation andemploy
181、ee benefit solutions.Wealth Management is focused on four mainbusiness activities Investments,Insurance,Advice Solutions,and PrivateBank.At September 30,2004,Wealth Management managed$81.1 billion onbehalf of 2.3 million retail and corporate customers in Australia,Europe,Asia and New Zealand.In its
182、core Australian market,as at June 30,2004,itheld the largest share of total individual risk business with a 15.1%share ofin force annual premiums(source:DEXX&R Life Analysis Report;date:June 30,2004).It is ranked second in annual new individual risk businesspremiums with a 13.6%share(source:DEXX&R L
183、ife Analysis Report;date:Business overview13June 30,2004).At the same time,it was ranked number one in market shareof master trusts with a 17.1%market share of funds under management(source:Plan for Life Australian Retail&Wholesale Investments MarketShare&Dynamics Report;date:June 30,2004).As at Sep
184、tember 30,2004,Wealth Management employed 6,048 full-timeequivalent employees.Through its business relationships with financial advisers,WealthManagement is focused on encouraging the community to seek financialadvice to help them achieve their lifestyle goals.Wealth Management hasmore than 3,100 al
185、igned and salaried advisers and relationships with morethan 2,600 external advisers at September 30,2004.Investment in the business has continued with the launch of a new integratedadvice platform,AdviserCentral,and ongoing enhancements to investmentplatforms and reporting and service capabilities i
186、n the Australian market.This places Wealth Management in a strong position to be the partner ofchoice for financial advisers and enabler of quality advice solutions.Internationally,Wealth Management is growing its competitive advantage byleveraging core capabilities that the business has developed i
187、n Australia intothe European and Asian markets.During the year,Pivotal in the UKexpanded its current offering to external financial advisers beyond the MLCmanager of managers capability to include a business consultancy service andthe launch of the MLC Personal Pension Plan.InvestmentsInvestments in
188、corporates the following business activities:?investment platforms that provide investments,superannuation andretirement solutions for retail customers.This incorporates investmentchoices ranging from fully-implemented solutions for customersutilising the manager of managers capability,to fully-disc
189、retionaryoptions where the customer and financial adviser can direct investmentsto the offering(s)of their choice.All of these platforms providereporting and administration services;?investment,superannuation and employee benefit solutions forcorporate and institutional customers;and?asset managemen
190、t,providing investment management advisory servicesincluding research,selection and monitoring of investment managersunder a multi-manager,multi-style approach that underpins WealthManagements investment offerings.InsuranceInsurance includes:?life insurance,income protection and other risk insurance
191、 cover forretail customers in Australia,New Zealand and Asia;?life insurance services in the UK.The Group sold its UK-incorporatedlife insurance company,National Australia Life Company Limited,onDecember 31,2003.This has enabled Wealth Management to focus oncustomer relationship management and distr
192、ibution,rather than productmanufacture.Further,a strategic alliance with AXA was formed tooffer commercial insurance to business customers of the Groups banksin the UK and the Republic of Ireland;?general insurance agency services(incorporating home and contents,motor vehicle,loan protection,credit
193、card and other general insurancecover)for retail customers in Australia and the UK;and?group life insurance for corporate,club or business customers to enablelife insurance policies to be incorporated as part of employeeentitlements.Advice SolutionsAdvice Solutions provides the financial planning to
194、ols and support servicesfor Wealth Managements network of salaried,self-employed aligned andexternal financial advisers,including:?AdviserCentral,an integrated advice platform that supports the deliveryof investment,insurance and debt advice;?business development and consulting services to assist ad
195、visers tooperate their financial planning businesses more efficiently;?marketing,business and customer management tools and processes;?technology,research and technical support,including paraplanning andquality review services;and?recruitment,education and development of advisers and their supportst
196、aff,including quality advice programs.Private BankPrivate Bank provides financial services to high net worth individuals,including banking,financial planning,superannuation,and access to taxation,estate planning and special expatriate services through external advisers.Refer to page 36 for detailed
197、information of the financial performance ofWealth Management.OtherSupport functionsThe Groups support functions focus on strategic and policy direction for theGroup and incorporate the following units:Finance,Technology,People&Culture,Risk Management,Corporate Development,and Office of the CEO.While
198、 these support functions are organised on a global basis,many of theiroperations are integrated within the Groups business lines and theircontribution to the Group is reported within the results of those businesses.Sale of HomeSide USThe sale of the operating assets and platform of HomeSide US to Wa
199、shingtonMutual Bank,FA was completed on March 1,2002,in accordance with theagreement reached on December 12,2001.Under the terms of the sale,theGroup received cash of$2,314 million for the operating assets,whichconsisted primarily of$2,081 million in warehouse and pipeline mortgageloans.After allowi
200、ng for transaction costs and triggered costs,primarilyemployee liabilities,a loss(after tax)of$8 million was recorded by theGroup.On October 1,2002,the Group sold SR Investment,Inc.(the parent entity ofHomeSide US)to Washington Mutual Bank,FA.Controlled entities otherthan HomeSide US were excluded f
201、rom the sale.The assets and liabilities ofSR Investment,Inc.and its controlled entities were included in the Groupsfinancial position up to and including the year ended September 30,2002 andtheir results were included in the Groups financial performance up to andincluding the year ended September 30
202、,2002.The Group received proceedson sale of$2,671 million for assets with a cost of$2,686 million,resulting ina profit on sale of$6 million after all disposal costs and income tax.Thisresult was included in the Groups financial performance for the year endedSeptember 30,2002.Business overview14Compe
203、titionThe Australian financial system is characterised by a large number oftraditional and new players and well-developed equity and,corporate bondmarkets.There are four major national banks(including the Company)andmany other financial conglomerates with national operations offering acomplete range
204、 of financial services,as well as a number of smaller regionalinstitutions and niche players.Non-bank financial institutions have been aforce in the Australian financial system,although many have demutualisedover the past decade to capture capital-related and other competitiveadvantages.Non-bank fin
205、ancial institutions offer a wide portfolio ofproducts and services from insurance,investments and superannuation(pensions)to compete in the markets traditionally serviced by banks.Competition also comes from numerous Australian and,in many cases,international non-bank financial intermediaries includ
206、ing investmentmerchant banks,specialist retail and wholesale fund managers,buildingsocieties,credit unions and finance companies.Product and functionalspecialists operate and are important players in the household and businessmortgage,credit card deposit and other payment services markets.The rapidd
207、evelopment and acceptance of the internet and other technologies haveincreased competition in the financial services market and improved choiceand convenience for customers.These forces are evident across all of the Groups businesses in each of itsgeographic markets.Within the broader financial serv
208、ices industry,increased competition has led to a reduction in operating margins only partlyoffset by fees and other non-interest income and increased efficiencies.Thelatter has been largely achieved through greater investment in newtechnologies for processing,manufacturing and retailing products and
209、services.These trends towards increasingly contestable markets offeringimproved access,wider choice and lower prices are expected to continue inthe future.Over the last several years,a number of regulatory authorities have reviewedcompetition issues,including the UK Competition Commission with regar
210、dto the small to medium enterprise banking market,the Reserve Bank ofAustralia(RBA)and the Australian Competition and Consumer Commission(ACCC)with regard to the payments system(refer to payment systemreforms in Australia on page 17),and the review of the Trade Practices Act1974(Cth)conducted by an
211、Australian Commonwealth Governmentappointed committee chaired by Sir Daryl Dawson.In March 2002,the UK Competition Commission issued its conclusion on itsinquiry into the small to medium enterprise banking market.TheCommission found that major banks in England,Scotland and NorthernIreland,including
212、Clydesdale Bank and Northern Bank,were acting as partof a complex monopoly.Yorkshire Bank was not named as part of thecomplex monopoly,due to its relatively small share of the English market.As a result of the Commissions proposals,the four largest clearing banksoperating in England were required to
213、 comply with a pricing remedy fromJanuary 1,2003.The four largest clearing banks were singled out as theywere not only considered to be acting as part of a complex monopoly,butwere considered to be acting against the public interest.This remedy hasresulted in these banks offering their small to medi
214、um enterprise bankingmarket customers a more competitive proposition.The impact of thesechanges on the Groups UK operations has been negligible.In 2003,the UK Office of Fair Trading also obtained further undertakingsfrom the eight main banking groups,including Clydesdale Bank andNorthern Bank,relati
215、ng to the time it takes for small to medium enterprises toswitch their main bank accounts to other lenders.The banks commencedreporting their performance against targets from January 1,2004.In June 2004,the Australian Commonwealth Government introduced theTrade Practices Legislation Amendment Bill 2
216、004 based on therecommendations reported on April 16,2003 by an AustralianCommonwealth Government appointed committee chaired by Sir DarylDawson reviewing the Trade Practices Act 1974(Cth).This Bill was passedby the House of Representatives on August 4,2004,and was introduced intothe Senate on Augus
217、t 5,2004.It then lapsed with the calling of theAustralian federal election on October 9,2004 and is due to be reintroducedinto Parliament in early 2005.The legislation focuses on six key areas:mergers and acquisitions,jointventures,authorisation,third line forcing,ACCC powers and accountability,and
218、small business.The Group supports a number of these measures as theywill provide greater flexibility and accountability in the merger approvalprocess,provide more certainty in respect of pro-competitive joint venturesand simplify the regulatory process for industry reform.Regulation of the financial
219、 servicessystemAustraliaAPRA is the prudential regulator of Australian authorised deposit-takinginstitutions(referred to as ADIs),which comprise banks,building societies,and credit unions as well as life and general insurance companies,friendlysocieties and superannuation funds.The RBA has overall r
220、esponsibility for monetary policy,financial systemstability and,through a Payments System Board,payment system regulationincluding the operations of Australias real-time gross settlement system.ASIC enforces and regulates company and financial services laws to protectconsumers,investors and creditor
221、s.ASIC is an independent governmentbody that regulates financial markets,corporations,securities,futures,consumer protection in superannuation,insurance and deposit taking.The ACCC administers the Trade Practices Act 1974(Cth)and the PricesSurveillance Act 1983(Cth).The ACCC promotes competition and
222、 fair tradein the marketplace to benefit consumers,business and the generalcommunity.Consumer Affairs offices in each State and Territory are responsible forspecific credit and fair trading legislation.Financial transaction reportinglegislation is federally monitored by the Australian Transaction Re
223、ports andAnalysis Centre(AUSTRAC).The Banking Act 1959(Cth)allows APRA to issue prudential standards that,if breached by ADIs or groups containing ADIs,can trigger legallyenforceable directions.Under the Banking Act 1959(Cth),APRA has strongand defined powers to direct the activities of an ADI in th
224、e interests ofdepositors or when an ADI or a group containing an ADI has contravened itsprudential framework.These direction powers enable APRA to imposecorrective action without taking the step of assuming control.The BankingAct 1959(Cth)also requires an ADI to inform APRA of breaches ofprudential
225、requirements and of any materially adverse events(whether inrespect of an ADI in a group or the overall group containing that ADI),andmakes provision for the application of fit and proper tests for directors andmanagement of ADIs.Business overview15APRA has issued prudential standards covering liqui
226、dity,credit quality,market risk,capital adequacy,audit and related arrangements,largeexposures,associations with related entities and group risk management,outsourcing,funds management and securitisation,and risk management ofcredit card activities.APRA is reviewing board composition,and has issuedd
227、raft prudential standards covering fit and proper requirements and businesscontinuity management.APRA requires ADIs to provide regular reports covering a broad range ofinformation,including financial and statistical data relating to their financialposition and prudential matters.APRA gives special a
228、ttention to capitaladequacy(refer to capital adequacy on page 49 for current details),sustainability of earnings,loan loss experience,liquidity,concentration ofrisks,potential exposures through equity investments,funds management andsecuritisation activities,and international banking operations.In c
229、arrying out its supervisory role,APRA supplements its analysis ofstatistical data collected from ADIs with selective on-site visits by specialistteams to overview discrete areas of banks operations.These include assetquality,balance sheet,interest rate risk management,market risk andoperational risk
230、 reviews and formal meetings with ADIs management andexternal auditors.APRA also formalises a consultative relationship with each ADIs externalauditor with the agreement of the ADI.The external auditors provideadditional assurance to APRA that prudential standards applying to ADIs arebeing observed,
231、and that statutory and other banking requirements are beingmet.External auditors also undertake targeted reviews of specific riskmanagement areas selected at the annual meeting between the ADI,itsexternal auditor and APRA.In addition,each ADIs chief executive officerattests to the adequacy and opera
232、ting effectiveness of the ADI groupsmanagement systems to control exposures and limit risks to prudent levels.The association of an ADI with related entities is regulated by AustralianPrudential Standard APS 222“Equity Associations”.Under that prudentialstandard,the Company is required to obtain APR
233、As prior approval for theestablishment or acquisition of a regulated presence domestically or overseas.There are also prior consultation requirements whereby the Company mustconsult with APRA before establishing or acquiring a subsidiary(other thancertain special purpose financing entities),committi
234、ng to acquire more than a10%equity interest in an entity that operates in the field of finance,or incertain circumstances taking up an equity interest in an entity in a work-outsituation.Further,without the consent of the Treasurer of theCommonwealth of Australia,no ADI may enter into any agreement
235、orarrangement for the sale or disposal of its business(by amalgamation orotherwise),or for the carrying on of business in partnership with an ADI,oreffect a reconstruction.Wealth Management is regulated by both ASIC and APRA.ASICadministers legislation relating to Wealth Managements key financialser
236、vices,including managed investments,superannuation,retirement incomestreams and insurance.Its role is to ensure industry participants comply withlegislation,while promoting fair,confident and informed participation in theAustralian market by investors and consumers.APRA provides prudentialregulation
237、 through the oversight of Wealth Managements life insurancecompanies and approved trustees of superannuation funds.Non-Australian jurisdictionsAPRA,under the international Basel framework,assumes the role of homebanking supervisor and maintains an active interest in overseeing theoperations of the G
238、roup,including its offshore branches and subsidiaries.The Groups branch and banking subsidiaries in Europe are subject tosupervision by the Financial Services Authority(FSA)in the UK,and in theRepublic of Ireland,the Irish Financial Services Regulatory Authority.TheGroups banking subsidiary in New Z
239、ealand is subject to supervision by theReserve Bank of New Zealand(RBNZ).In the UK and the Republic of Ireland,the local regulatory frameworks arebroadly similar to those in force in Australia.Each of the banking regulatoryauthorities in those countries has introduced risk-based capital adequacyguid
240、elines in accordance with the framework developed by the BaselCommittee on Banking Supervision.The emphasis of the RBNZs regulatory approach is primarily on enhanceddisclosure and directors attestations to key matters.Under conditions ofregistration,banks are required to comply with minimum prudenti
241、al andcapital adequacy requirements.The RBNZ monitors banks financialcondition and conditions of registration,off-site,principally on the basis ofpublished disclosure statements.The Groups largest branches in the Asian region are in Hong Kong andSingapore.The primary regulator in Hong Kong is the Ho
242、ng Kong MonetaryAuthority,which is responsible for maintaining monetary and bankingstability by regulating banking business and deposits and the supervision ofauthorised institutions.In Singapore,the Monetary Authority of Singapore is responsible for theregulation of monetary,banking and financial p
243、olicy including insurance,securities and currency issuance.In the US,branch operations are subject to supervision by the Office of theComptroller of the Currency.The other key regulators of financial servicesare the Securities and Exchange Commission(SEC)the Board of Governorsof the Federal Reserve
244、System and the Office of Foreign Assets Control.In the UK,Wealth Management is regulated by the FSA,which isresponsible for maintaining market confidence,promoting public awareness,protecting customers and reducing financial crime.In other offshore areas ofbanking and wealth management activity,the
245、Group is subject to theoperating requirements of relevant local regulatory authorities.Changing regulatory environmentBoth within the financial services industry and more generally,businesses areworking within a changing regulatory environment.An outline of the moresignificant current or pending reg
246、ulatory changes impacting the Group is setout in the following sections.In response to these and other new legislativeand regulatory requirements,the Group has established initiatives toimplement compliant business processes with particular focus on improvingthe customer experience.Business overview
247、16Australian Financial Services LicencesThe Group has obtained from ASIC its new Australian financial serviceslicences issued pursuant to the Corporations Act 2001(Cth).The GroupsAustralian operations are operating under 19 licences representing the widevariety of financial services that it offers.T
248、he Group entered into the newregulatory regime from December 1,2003,ahead of the conclusion of theindustry transition period on March 11,2004.For a discussion of enforceable undertakings given by the Company to ASIC,refer to the report of directors on page 86.Corporate Law Economic Reform Program(Au
249、dit Reformand Corporate Disclosure)Act 2004(Cth)On July 1,2004,the Corporate Law Economic Reform Program(AuditReform and Corporate Disclosure)Act 2004(Cth)(CLERP 9)became lawand introduced a range of disclosure,audit oversight and independence,conflict of interest and other reforms.In relation to fi
250、nancial reporting,many of the disclosure requirementsintroduced by CLERP 9 will take effect for the Company in 2005.However,the Company has taken those new requirements into account,and a numberof specific disclosures that will be required from 2005 have been included inthis annual financial report
251、on a voluntary basis.Operating and financial reviewInformation that members of the Company would reasonably require to makean informed assessment of:?the operations of the Group;?the financial position of the Group;and?the Groups business strategies and future prospects,has been included in the repo
252、rt of the directors.Non-audit services provided by the auditorDetails of non-audit services provided to the Group by the auditor(includingthe amount paid or payable to the auditor for those services)are included inthe report of the directors.Remuneration of directors and executivesThe remuneration r
253、eport within the report of the directors includes theBoards policy regarding remuneration,performance incentives,shares andperformance options.Detailed information regarding remuneration paid toeach director and executive,shares,performance options and performancerights granted to each director and
254、executive,and other related information isdisclosed in note 51 in the financial report to minimise duplication ofinformation currently required by relevant accounting standards.Theremuneration report includes cross-references to the location of thisinformation.The concise annual report also includes
255、 a detailed discussion ofthe Companys remuneration arrangements.Basel II Capital AccordIn 1988,the Bank for International Settlements(BIS)developed the BaselCapital Accord that sets out international benchmarks for assessing bankscapital adequacy requirements.In response to changes in banking practi
256、ces,BIS reviewed the Basel Capital Accord and released a revised regulatoryframework known as the Basel II Capital Accord(Basel II).APRA supports the introduction of the revised framework,which willcommence for the Group from the end of the 2005 financial year with theparallel run of existing and ne
257、w requirements.The new framework proposes changes in the formulae used to measurebanks minimum capital requirements and additional identification of risktypes.The framework is structured on:?minimum capital requirements;?key principles of supervisory review processes;and?market discipline(public dis
258、closure).The Group is committed to the implementation of the revised framework andhas a program underway to achieve this.As part of this,areas of impact areexpected to include the Groups risk management processes and publicdisclosure of its risk profile.The Group continues to monitor developments an
259、d is working with its keyregulators in Australia and overseas to ensure that the Groups Basel IIprogram aligns with regulatory requirements.International Financial Reporting StandardsIn July 2002,the Financial Reporting Council in Australia formallyannounced that Australian reporting entities would
260、be required to complywith Australian accounting standards equivalent to International FinancialReporting Standards(AIFRS)for financial years commencing on or afterJanuary 1,2005.The adoption of AIFRS is expected to have a materialeffect on the Groups reported financial performance and position.The G
261、roup continues to evaluate the areas most impacted by the standards.Refer to note 2 in the financial report for additional information on theimpact of adoption of AIFRS by the Group.Australian tax consolidation regimeUnder Australian income tax legislation that has now been enacted(taxconsolidation
262、regime),Australian resident entities of a corporate group maybe taxed as a single taxpayer from July 1,2002.During the year,theCompany(as the ultimate Australian parent entity of the Group)made anelection to consolidate and lodged its first consolidated income tax return.The decision to consolidate
263、resulted in a decrease in the income tax expenseof$150 million,which is reflected in the results of the Wealth Managementbusiness during 2004.Payment system reforms in AustraliaThe first stage of the RBAs reforms on the credit card payment system inAustralia were introduced during 2003,providing mer
264、chants with the abilityto charge an additional fee for credit card transactions.The Group has notnoticed any material impact from this change.The second stage of the creditcard reforms,effective October 31,2003,introduced a new cost-basedapproach to calculating credit card interchange fees.Interchan
265、ge fees arewholesale fees that banks pay one another.The cost-based approach hassignificantly reduced credit card interchange fees.The third stage of the credit card reforms has also been introduced.InFebruary 2004,the RBA imposed Access Regime changes under thePayment Systems(Regulations)Act 1998(C
266、th).The Access Regime requiresthat the class of specialist credit card institutions supervised by APRA beeligible to apply for membership in the scheme on the same basis as otherADIs.The Access Regime also requires the removal of certain restrictionsand penalties on the credit card acquiring activit
267、y of members of the scheme.Business overview17The effect of the Access Regime is to facilitate participation in the scheme byinstitutions that specialise in credit card issuing,acquiring,or both,and thatdo not conduct other banking business.In September 2004,the RBA made a decision to designate the
268、ElectronicFunds Transfer at Point of Sale(EFTPOS)debit card payment system as apayment system under section 11 of the Payment Systems(Regulation)Act1998.This follows the Australian Competition Tribunal decision to disallowbanks from reducing EFTPOS interchange fees to zero.Having designatedEFTPOS as
269、 a payment system,the RBA may impose an access regime onparticipants and/or determine standards to be complied with by participantsin the system.After considering whether it would be in the public interest todo so,the RBA has decided not to designate the ATM system as a paymentsystem at this stage.A
270、nti-money launderingIn most countries in which the Group operates,measures have been adoptedto restrict the financial capacity of terrorists and their organisations,and tocombat use of the financial system for money laundering.The Groupcontinues to develop its business practices and systems for the
271、detection andprevention of transactions that may involve prescribed terrorists or moneylaundering.In December 2003,the Australian Commonwealth Government announcedits endorsement of the global anti-money laundering standards and theproposed overhaul of the Australian legislation.The proposed reforms
272、 willimpact the Groups Australian banking and financial services operations.Following the public release of an issues paper and a policy paper in 2004,the Australian Commonwealth Government is preparing a draft exposure Billwhich is expected to be released by early 2005.UK domestic reforms to retail
273、 financial servicesregulationThere are substantial policy reforms under way in the UK initiated by the UKGovernment and the UK Financial Services Authority.These includedepolarisation,responding to the proposals of the Sandler Review,reformingsoft commission rules and extending regulation to general
274、 insurance andmortgage business.Mortgages will be subject to Financial Services Authority regulation for thefirst time from October 2004.The Group is re-engineering its platforms inthe UK to streamline compliance with pre-and post-sale regulation ofmortgages that come into effect at that time.Genera
275、l insurance is also to come within the ambit of the Financial ServicesAuthoritys regulation for the first time from January 2005.Any entityinvolved in the broking of insurance needs to be authorised as an insuranceintermediary.The Group is well progressed in a project to identify therelevant entitie
276、s and obtain authorisation.Internal control reporting under the US Sarbanes-OxleyAct of 2002With effect from the 2005 year,the Sarbanes-Oxley Act of 2002,andassociated US SEC rules and US Public Company Accounting OversightBoard auditing standards,will require the Company to include in its annualrep
277、ort a report of management on the Companys internal control overfinancial reporting.The internal control report will be required to include,amongst other things,managements assessment of the effectiveness ofinternal control over financial reporting and a statement that the externalauditor has issued
278、 an attestation report on managements assessment.TheGroup has a global project in place to enable management to evaluate andreport on internal control over financial reporting to the level of detailrequired by the legislation and associated rules and auditing standards.Organisational structureNation
279、al Australia Bank Limited is the holding company for the Group,aswell as the main operating company.During 2004,the Company had sevenwholly-owned main operating subsidiaries:Bank of New Zealand,Clydesdale Bank PLC,MLC Limited,National Australia FinancialManagement Limited,National Irish Bank Limited
280、,Northern Bank Limitedand Yorkshire Bank PLC.Refer to note 43 in the financial report for details of the principal controlledentities of the Group.Description of propertyThe Group operates around 2,042 outlets and offices worldwide,of which49%are in Australia,with the largest proportion of the remai
281、nder being inthe UK.Approximately 20%of the 2,042 outlets and offices are owneddirectly by the Group,with the remainder being held under commercialleases.The Groups premises are subject to continuous maintenance and upgradingand are considered suitable and adequate for the Groups current andforeseea
282、ble future requirements.Certain legal proceedingsEntities within the Group are defendants from time to time in legalproceedings arising from the conduct of their business.On August 29,2003,a civil class action complaint was filed in the USDistrict Court,Southern District of New York,against the Grou
283、p and othersfor alleged violations of the US federal securities law relating primarily todisclosure concerning the valuation of the mortgage servicing rights held byHomeSide US(sold in October 2002).The complaint failed to specify anyquantum of damages.The plaintiffs in the complaint filed their con
284、solidatedamended class action complaint on January 30,2004,and the Group movedto dismiss the consolidated amended class action complaint on March 11,2004.It is anticipated that the court will rule on the motion to dismiss duringthe 2005 financial year.On February 26,2004,the Company announced that i
285、t had received avoluntary document request from the SEC as part of an investigation intocertain Australian registrants and public accounting firms.The documentrequest covers the Company and controlled entities and includes issuesrelating to audit independence(refer below).In addition,the Company has
286、provided certain information to the SEC about the accounting and internalcontrols of the Company and its controlled entities,including the foreigncurrency options trading matter and HomeSide US.On July 30,2004,the Director of Corporate Enforcement in the Republic ofIreland released the report of the
287、 High Court Inspectors into certain pastbusiness activities of National Irish Bank Limited(a controlled entity of theCompany).Since 1998,when the High Court Inspectors investigationcommenced,the Group has paid or provided$109 million associated with itsBusiness overview18involvement in the investiga
288、tion and the remediation programs implementedor proposed by it.It is not expected that any further material costs will resultfrom these programs.The Group does not consider that the outcome of any proceedings,eitherindividually or in aggregate,is likely to have a material effect on its financialposi
289、tion.Where appropriate,provisions have been made.For further information on contingent liabilities of the Group,refer to note44 in the financial report.Certain services provided by the externalauditor and SEC investigation mattersrelated to independenceThe Company is subject to both Australian and U
290、S auditor independencerules.The US rules apply to the Company as it is a registrant and files reportswith the SEC.From time to time,the Company engages major accounting firms to furnishemployees to supplement its own staff in performing reviews of loanscategorised as requiring management by the Comp
291、anys Credit Restructuringunit in Australia.The Company has no centralised method to identify suchemployees;however,since October 2003 it has been identified that,atdifferent times during the years ended September 30,2001,2002 and 2003,seven employees of the Companys external auditor,KPMG Australia(a
292、ndone of its affiliated overseas firms)(KPMG),from its Corporate RecoveryServices group,provided certain non-audit services to the Companys CreditRestructuring unit.Each of these employees may have performed initialreviews to determine whether a loan file should have been categorised asrequiring man
293、agement by the Credit Restructuring unit(a categorised loan).Six of these employees also provided review services in respect ofcategorised loans.These loan review services on categorised loans consisted primarily ofreviewing files relating to selected problem loans and approving(eitherindividually o
294、r jointly with another colleague of at least the same seniority)credit analyses or credit actions on those loans,including approvals or jointapprovals regarding loan loss provisions.These approvals or joint approvalswere subsequently overviewed by a more senior person within theorganisation.For a pe
295、riod of approximately five weeks in 2002,one of theKPMG employees was undertaking functions that included the overview ofapprovals made by more junior persons.On occasions,up to six of the KPMG employees also communicated aboutthese matters,in the name of the Company,with some debtors.In addition,so
296、me of the KPMG employees that provided these services were temporarilyassigned titles by the Company and,in some instances,were providedbusiness cards.No such services have been provided by KPMG employeesfrom around October 1,2003.Information to identify the fact that a KPMG employee worked on anypa
297、rticular loan file is not maintained by the Company in any centralisedsystem.Accordingly,it is not possible to precisely determine the amount ofloan files worked on by KPMG employees,nor the associated specificprovision for doubtful debts or non-accrual amount in the Groups financialstatements.To pr
298、ovide some context for the scale of the activitiesundertaken by KPMG employees,monthly status reports prepared by theCredit Restructuring unit have been used to identify loan files allocated toKPMG employees.Because these reports were originally prepared for adifferent purpose(ie.workflow management
299、),they do not identify allrelevant files(for example,due to informal reassignment of the loan file toanother reviewer),and several reports have not been retained.Also,thereports do not identify instances where a KPMG employee acted as a jointapprover of loan actions or where a KPMG employee undertoo
300、k preliminaryreview work to determine whether a loan file should be considered acategorised loan.The loan files identified in these management reports,andsome additional files identified through other means as having been allocatedto the KPMG employees,are referred to as the KPMG employee-allocatedl
301、oans.As noted,these do not include all loan files with which the KPMGemployees were involved.At September 30,2003,the total amount of KPMG employee-allocated loanswas$181 million(representing 0.08%of the Groups total loans andadvances),including$33 million of non-accrual loans(or 2.02%of theGroups n
302、on-accrual loans).At September 30,2002 and 2001,the analogousfigures were$259 million and$268 million of loans in total(0.12%and0.14%of the Groups total loans and advances,respectively),including$45 million and$89 million of non-accrual loans(or 2.48%and 4.59%of theGroups total non-accrual loans).Th
303、ese percentages reflect restated loansand advances,and non-accrual loans for respective years.The specificprovision for doubtful debts established for the KPMG employee-allocatedloans was$11 million,$10 million and$31 million at September 30,2003,2002 and 2001,respectively.These numbers are sourced
304、from managementinformation systems designed for purposes other than statutory financialreporting and do not include KPMG employee-allocated loans that at balancedate were no longer managed by the Credit Restructuring unit because duringthe year they had been exited by the Company,fully written off o
305、r returned tothe business as performing loans.Such loans do not have a specific provisionraised against them at balance date and are not non-accrual at that date.The seventh KPMG employee providing services to the Credit Restructuringunit assisted for a short period in 2001 in assessing whether to c
306、ategorisecertain loans as requiring management by the Credit Restructuring unit.Thatactivity,while inherently involving credit quality,did not involve specificprovisioning or decisions regarding non-accrual status of loans.The loansanalysed by this KPMG employee are not included in the figures for K
307、PMGemployee-allocated loans.The provision of the loan review services was brought to the attention of theAudit Committee in October 2003 and an internal review of the matter wasconducted by management under the supervision of the Audit Committee.The review included a third party review of certain lo
308、an files identified by theCompany as having been KPMG employee-allocated loans.For each ofthese loans,the third party identified where a KPMG employee had beeninvolved in any financial decision making on the loan,obtained anunderstanding of the relevant issues that should have been considered anddet
309、ermined the appropriate loan loss provision,if any,that should have beenapplied.The third party concluded that,during the relevant period of KPMGemployees involvement,the loans were properly classified in accordancewith the Companys loan grading guidelines and that the loan loss provisionsapplied we
310、re appropriate.The Company and KPMG consulted with theAustralian regulators and the SEC and informed them of the details of thismatter and the results of the internal review and conclusions.During 2003,2002 and 2001,KPMG employees also performed otherservices for the Group,including in the tax and i
311、nternal audit functions.TheCompany is investigating these and other non-audit services performed byKPMG.The Company has received a voluntary document request from the SECDivision of Enforcement as part of an investigation into certain AustralianBusiness overview19Business overviewregistrants and pub
312、lic accounting firms.The SEC Division of Enforcementhas requested documents and information and is investigating issues since atleast as early as October 1,2000(the commencement of the 2001 year)regarding auditor independence and regarding the Companys accounting andinternal controls,including the f
313、oreign currency options unauthorised tradingmatter and HomeSide US.There are several relationships with KPMG that the SEC may assertcontravened the SECs auditor independence rules.These includesecondments of KPMGs personnel during the 2001,2002 and 2003 years incertain areas,including the seven who
314、performed loan review work in theCompanys credit restructuring unit,as well as a large number of KPMGsecondees who worked for various periods in the Companys internal auditdepartment,tax unit and wealth management unit.All internal auditsecondments were terminated by the end of the 2002 year and,all
315、 KPMGsecondments have ceased from around the end of the 2003 year.The SEC is also reviewing services of KPMG relating to potential or actualborrowers from the Company,such as acting as receiver and manager,investigating accountant,monitoring consultant and an agent for a mortgageein possession.The C
316、ompany announced in July 2004 that Ernst&Young had been selectedas the Companys new external auditor for the 2005 year,subject to theapproval of the Companys shareholders at the annual general meeting to beheld on January 31,2005.The Company and KPMG have stated there havebeen no disagreements regar
317、ding accounting or financial reporting matters.The SEC Division of Enforcement has also requested information about theCompanys investment in HomeSide US,which resulted in the recognition of$1,323 million(after tax)impairment loss on mortgage servicing rights(MSR),$1,436 million provision for change
318、s in valuation assumptions toreduce the carrying value of the MSR to an estimated market sale value and a$858 million goodwill writedown in 2001.Investigations conducted into thecircumstances which led to these losses concluded that one of the causes ofthe write down of the HomeSide US asset was the
319、 existence of deficiencies inthe staffing and structure of the risk management area within HomeSide USand noted that the absence of a Group executive located at HomeSide USresulted in areas of risk management weakness that the Group identified notbeing corrected as immediately or rigorously as the G
320、roup directed.The Company has also provided to the SEC information about theCompanys$360 million pre-tax losses from foreign currency options tradingannounced in January 2004.For a discussion of the foreign currency optionstrading losses,refer to the PricewaterhouseCoopers and APRA reports,described
321、 in the report of the directors on pages 84 to 86 and disclosurecontrols and procedures and internal control over financial reporting onpages 63 to 65.The SEC has also requested information about theCompanys former head of risk management who,prior to joining the Groupin July 2001,had been the KPMG
322、engagement partner for the Companysaudit.He departed in March 2004 in connection with a review of seniormanagement following the foreign currency options unauthorised tradingmatter discussed above.While the Company cannot predict action the SEC may take in response to itsinvestigation,it has authori
323、ty to impose or negotiate a broad range of possiblesanctions for any breaches.These could include requiring the Company tomake a monetary payment,entry of a cease-and-desist order or injunctionrequiring the Company to cease future violations of the securities laws orface substantial monetary sanctio
324、ns,and requiring the Company to improvethe Companys internal controls or policies,change or curtail the Companysbusiness,change the Companys management or take other steps,such asengaging an independent consultant to evaluate and report on the Companyscontrols,policies or other matters and the Compa
325、nys progress towardsimprovement within mandated time frames.The SEC could also require theCompany to engage an accounting firm other than KPMG to performprocedures and report on aspects of the Companys accounts or financialstatements relevant to areas raising auditor independence concerns.However,as
326、 stated above,the Company cannot predict the outcome of theSEC investigation.20Financial reviewSummary Group200420032002$m$m$mNet profit attributable to members of the Company3,1773,9553,373Adjust for significant items:Significant revenue(993)-(2,671)Significant expenses1,675-3,266 Attributable inco
327、me tax benefit(298)-(189)Significant expenses after tax384-406Net profit attributable to members of the Company before significant items3,5613,9553,779Net profit attributable to members of the Company3,1773,9553,373Adjust for:Distributions on other equity instruments(187)(183)(187)Significant revenu
328、e(993)-(2,671)Significant expenses1,675-3,266 Movement in the excess of net market value over net assets of life insurance controlled entities137160155 Attributable income tax(benefit)/expense(451)40 (192)Amortisation of goodwill10398101Cash earnings before significant items3,4614,0703,845Year ended
329、 September 30,2004 compared with yearended September 30,2003Net profit attributable to members of the Company of$3,177 million in 2004,decreased$778 million or 19.7%compared with 2003.Net profit of$3,551million in 2004,decreased$396 million or 10.0%compared with 2003.Significant items are those indi
330、vidually significant items included in netprofit.The current year result included the following after tax significantitems:?foreign currency options trading losses of$252 million;?write-down of impaired application software of$307 million;?charge to provide for doubtful debts of$204 million as a res
331、ult of arevision of an accounting estimate;?net profit of$315 million on sale of strategic shareholdings in StGeorge Bank Limited,AMP Limited and HHG PLC;and?net profit of$64 million on write-back of a provision for costs related tothe sale of SR Investment,Inc.The 2003 result included no significan
332、t items.Net profit attributable to members of the Company before significant items of$3,561 million in 2004,decreased$394 million or 10.0%compared with2003.Cash earnings(before significant items)of$3,461 million in 2004,decreased$609 million or 15.0%compared with 2003.Net interest income of$7,191 mi
333、llion in 2004,was$228 million or 3.1%lower than 2003.This was driven by a decrease in the net interest marginfrom 2.53%to 2.35%,partly offset by lending growth.The fall in marginlargely resulted from the strong growth in lower margin mortgages and fixedrate lending within the retail banking business,as well as a reduction incontribution from the Markets and Specialised Finance divisions ofCorporat
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