Annual Review 2015




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Understanding this report


This document is not a concise report prepared under section 314(2) of the Corporations Act 2001 (Cth). NAB has not prepared a concise report for the 2015 financial year. All figures quoted are in Australian dollars unless otherwise stated.

A reference to ‘$’ is to an amount in Australian dollars and a reference to ‘£’ is to an amount in British pounds sterling. References to ‘NAB’ or the ‘Company’ are to National Australia Bank Limited ABN 12 004 044 937.

The ‘NAB Group’ refers to NAB and its controlled entities. All references are as at 30 September 2015 except where stated otherwise. Any references to changes (including an increase or decrease) relate to the previous year, unless otherwise stated. Unless otherwise stated, information in this document is presented on a cash earnings basis. Cash earnings is a non-IFRS key financial performance measure used by NAB, the investment community and NAB’s Australian peers with similar business portfolios.

2015 Annual Financial Report


The NAB Group’s audited financial statements, prepared in accordance with the Corporations Act 2001 (Cth) and Australian Accounting Standards, are published in our 2015 Annual Financial Report, which is available in hard copy on request and can be viewed at nabgroup.com/annualreports from 16 November 2015.

Additional Corporate Responsibility information is available in our 2015 Dig Deeper report, available online from 16 November 2015. The report provides detailed information for analysts and other stakeholders on our Corporate Responsibility performance, including historic trends and application of the Global Reporting Initiatives G4 guidelines.


Litigation


Entities within the NAB Group are defendants from time to time in legal proceedings. There are contingent liabilities in respect of claims, potential claims and court proceedings, against NAB Group companies. Where appropriate, provisions have been made.

Forward-looking statements


This document contains certain forward-looking statements. The words ‘anticipate’, ‘believe’, ‘expect’, ‘project’, ‘estimate’, ‘likely’, ‘intend’, ‘should’, ‘could’, ‘may’, ‘target’, ‘plan’ and other similar expressions are intended to identify forward-looking statements. Indications of, and guidance on, future earnings and financial position and performance are also forward looking statements.

Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors, many of which are beyond the control of the NAB Group, which may cause actual results to differ materially from those expressed or implied in such statements. There can be no assurance that actual outcomes will not differ materially from these statements.

Further information on important factors that could cause actual results to differ materially from those projected in such statements is contained on pages 11–19 of our 2015 Annual Financial Report under ‘Disclosure on Risk Factors’.

Glossary of terms


Term

Definition

AASB

Australian Accounting Standards Board.

Amortisation of acquired intangible assets

The amortisation of acquired intangibles represents the amortisation of intangible assets arising from the acquisition of controlled entities and associates such as core deposit intangibles, brand names, value of business and contracts in force.

ADIs

Authorised Deposit-taking Institutions.

APRA

Australian Prudential Regulation Authority.

ASIC

Australian Securities and Investments Commission.

AUSTRAC

Australian Transaction Reports and Analysis Centre.

Banking cost to income ratio

Represents banking operating expenses (before inter-segment eliminations) as a percentage of banking operating revenue (before inter-segment eliminations).

Basel III

Basel III is a global regulatory framework designed to increase the resilience of banks and banking systems and is effective for Australian Banks from 1 January 2013.

Cash earnings

Cash earnings is defined as net profit attributable to owners of NAB from continuing operations, adjusted for the items NAB considers appropriate to better reflect the underlying performance of the NAB Group. Cash earnings for the September 2015 full year has been adjusted for the following:

Distributions.

Treasury shares.

Fair value and hedge ineffectiveness.

Life insurance economic assumption variation.

Amortisation of acquired intangible assets.

Sale and demerger transaction costs.

In prior comparative periods, cash earnings has not been adjusted for sale and demerger transaction costs.



Cash earnings per share – basic

Calculated as cash earnings adjusted for distributions on other equity instruments, divided by the weighted average number of ordinary shares adjusted to include treasury shares held by the NAB Group’s life insurance business.

Cash earnings per share – diluted

Calculated as cash earnings adjusted for distributions on other equity instrument and interest expense on dilutive potential ordinary shares.

This adjusted cash earnings is divided by the weighted average number of ordinary shares, adjusted to include treasury shares held by the NAB Group’s life insurance business and dilutive potential ordinary shares.



Cash return on equity (ROE)

Calculated as cash earnings (annualised) divided by average shareholders’ equity, excluding non-controlling interests and other equity instrument and adjusted for treasury shares.

Common Equity

Tier 1 (CET1) capital

Common Equity Tier 1 (CET1) capital is recognised as the highest quality component of capital. It is subordinated to all other elements of funding, absorbs losses as and when they occur, has full flexibility of dividend payments and has no maturity date. It is predominately comprised of common shares; retained earnings; undistributed current year earnings; as well as other elements as defined under APS111 – Capital Adequacy: Measurement of Capital.

Common Equity

Tier 1 ratio

Common Equity Tier 1 as defined by APRA divided by risk-weighted assets.

Company

‘Company’ or ‘NAB’ means National Australia Bank Limited

ABN 12 004 044 937.



Continuing operations

Continuing operations are the components of the NAB Group which are not discontinued operations.

Core assets

Represents gross loans and advances including acceptances, financial assets at fair value, and other debt instruments at amortised cost (classified in comparative periods as investments held to maturity).

Customer deposits

Interest bearing, non-interest bearing and term deposits (includes retail and corporate deposits).

Discontinued operations

Discontinued operations are a component of the NAB Group that either has been disposed of, or is classified as held for sale, and represents a separate major line of business or geographical area of operations, which is part of a single co-ordinated plan for disposal.

Distributions

Payments to holders of other equity instrument issues such as National Income Securities, Trust Preferred Securities, Trust Preferred Securities II and National Capital Instruments.

Dividend payout ratio

Dividends paid on ordinary shares divided by cash earnings per share.

Earnings per share

Basic and diluted earnings per share calculated in accordance with the requirements of AASB 133 “Earnings per Share”.

Fair value

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at measurement date.

Fair value and hedge ineffectiveness

Represents volatility attributable to the NAB Group’s application of the fair value option, ineffectiveness from designated accounting and economic hedge relationships and economic hedges of significant approved funding activities where hedge accounting has not been applied.

Financial year

Year ended 30 September.

Full-time equivalent employees (FTEs)

Includes all full-time staff, part-time, temporary, fixed term and casual staff equivalents, as well as agency temps and external contractors either self-employed or employed by a third party agency. Note: This does not include consultants, IT professional services, outsourced service providers and non-executive directors.

Gross Domestic Product (GDP)

Gross Domestic Product (GDP) is the market value of the finished goods and services produced within a country in a given period of time.

Impaired assets

Consist of:

Retail loans (excluding unsecured portfolio managed facilities) which are contractually past due 90 days with security insufficient to cover principal and arrears of interest revenue

Non-retail loans which are contractually past due and there is sufficient doubt about the ultimate collectability of principal and interest and

Impaired off-balance sheet credit exposures where current circumstances indicate that losses may be incurred.



Unsecured portfolio managed facilities are also classified as impaired assets when they become 180 days past due (if not written off).

Insurance

Includes the provision of personal and group insurance by NAB Wealth.

Investment earnings on Retained Earnings (IoRE)

Investment earnings (gross of tax) on shareholders’ retained earnings, comprising investment earnings on surplus assets which are held in the statutory funds to meet capital adequacy requirements under the Life Insurance Act 1995 (Cth).

Life insurance economic assumption variation

The net impact on statutory profit of the change in value of life insurance policy liabilities (net of reinsurance) and investments relating to life insurance business due to changes in economic assumptions (inflation and the risk free discount rate).

NAB

‘NAB’ or the ‘Company’ means National Australia Bank Limited ABN 12 004 044 937.

NAB Group

‘NAB Group’ or ‘Group’ means the Company and its controlled entities.

Net interest margin (NIM)

Net interest income as a percentage of average interest earning assets.

Net profit attributable to non-controlling interest

Reflects the allocation of profit to non-controlling interests in the NAB Group.

Net profit attributable to owners of NAB

Represents the NAB Group’s statutory profit after tax and reflects the amount of net profit that is attributable to owners.

Sale and demerger transaction costs

Sale and demerger transaction costs represent costs incurred in demerging the UK operations, Clydesdale and Yorkshire banks.

Tier 1 capital

Tier 1 capital comprises Common Equity Tier 1 (CET1) capital and instruments issued by the NAB Group that meet the criteria for inclusion as Addition Tier 1 capital set out in APS111 - Capital Adequacy: Measurement of Capital.

Tier 1 capital ratio

Tier 1 capital as defined by APRA divided by risk- weighted assets.

Treasury shares

Shares in NAB held by the NAB Group’s life insurance business and in trust by a controlled entity of the NAB Group to meet the requirements of employee incentive schemes. The unrealised mark-to-market movements arising from changes in the share price, dividend income and realised profit and losses arising from the sale of shares held by the NAB Group’s life insurance business are eliminated for statutory reporting purposes.

Weighted average number of shares

Calculated in accordance with the requirements of AASB 133 ‘Earnings per share’.




1 Includes specified items as detailed on page 20 of the 2015 Full Year Results Announcement.

2 Explanation and definition of cash earnings: Cash earnings is a non-IFRS key financial performance measure used by NAB, the investment community and NAB’s Australian peers with similar business portfolios. NAB also uses cash earnings for its internal management reporting as it better reflects what NAB considers to be the underlying performance of the NAB Group. Cash earnings is calculated by excluding discontinued operations and other items which are included within the statutory net profit attributable to owners of NAB. Cash earnings does not purport to represent the cash flows, funding or liquidity position of the NAB Group, nor any amount represented on a cash flow statement. It is not a statutory financial measure and is not presented in accordance with Australian Accounting Standards nor audited or reviewed in accordance with Australian Auditing Standards. Cash earnings is defined as net profit attributable to owners of NAB from continuing operations, adjusted for the items NAB considers appropriate to better reflect the underlying performance of the NAB Group. In September 2015, cash earnings has been adjusted for the following: Distributions, Treasury shares, Fair value and hedge ineffectiveness, Life insurance economic assumption variation, Amortisation of acquired intangible assets and Sale and demerger transaction costs. Reconciliation to Statutory Profit: Section 5 of the 2015 Full Year Results Announcement includes the NAB Group’s Income Statement, including statutory net profit. The NAB Group’s audited financial statements, prepared in accordance with the Corporations Act 2001 (Cth) and Australian Accounting Standards, will be published in its 2015 Annual Financial Report on 16 November 2015. A reconciliation of cash earnings to statutory net profit attributable to the owners of NAB (statutory net profit less non-controlling interest in controlled entities) is set out on page 43 of this report, and full reconciliations between statutory net profit and cash earnings are included on pages 5–8 of the 2015 Full Year Results Announcement. Page 4 of the 2015 Full Year Results Announcement contains a description of each non-cash earnings item for September 2015 and for the prior comparative periods.

3 Net Promoter Score (NPS) measures how likely a customer would be to recommend NAB to a friend or colleague on a scale of 0-10. The overall score is calculated by subtracting the percentage of customers that answer 6 or below (‘detractors’) from the percentage of customers that answer 9 or 10 (‘promoters’). Priority Segments NPS is a simple average of the NPS scores of four priority segments: Mortgage Customers, Micro Business (<$1m), Small Business ($1m-<$5m) and Medium Business ($5m-<$50m). The Priority Segments NPS data is based on six month moving averages from Roy Morgan Research and DBM BFSM Research. Net Promoter® and NPS® are registered trademarks and Net Promoter Score and Net Promoter System are trademarks of Bain & Company, Satmetrix Systems and Fred Reichheld.

4 Source: ‘Speak Up, Step Up’ survey conducted by Right Management in May 2015.

5 In partnership with Good Shepherd Microfinance. Cumulative data collected since 2005.

6 Loss of control of Great Western Bancorp Inc. occurred on 3 August 2015. Refer to page 95 of the 2015 Full Year Results Announcement for further information.

7 September 2015. DB Financial Services Monitor, APRA aligned lending dollars. NAB Lending Market Share.

8 Based on unaudited management information data.

9 Internal – Groups Economics.

10 Includes retail agencies, agribusiness branches, and private banking suites.

11 Based on full-time equivalent employees (FTEs).

12 Explanation and definition of cash earnings: Cash earnings is a non-IFRS key financial performance measure used by NAB, the investment community and NAB’s Australian peers with similar business portfolios. NAB also uses cash earnings for its internal management reporting as it better reflects what NAB considers to be the underlying performance of the NAB Group. Cash earnings is calculated by excluding discontinued operations and other items which are included within the statutory net profit attributable to owners of NAB. Cash earnings does not purport to represent the cash flows, funding or liquidity position of the NAB Group, nor any amount represented on a cash flow statement. It is not a statutory financial measure and is not presented in accordance with Australian Accounting Standards nor audited or reviewed in accordance with Australian Auditing Standards. Cash earnings is defined as net profit attributable to owners of NAB from continuing operations, adjusted for the items NAB considers appropriate to better reflect the underlying performance of the NAB Group. In September 2015, cash earnings has been adjusted for the following: Distributions, Treasury shares, Fair value and hedge ineffectiveness, Life insurance economic assumption variation, Amortisation of acquired intangible assets and Sale and demerger transaction costs. Reconciliation to Statutory Profit: Section 5 of the 2015 Full Year Results Announcement includes the NAB Group’s Income Statement, including statutory net profit. The NAB Group’s audited financial statements, prepared in accordance with the Corporations Act 2001 (Cth) and Australian Accounting Standards, will be published in its 2015 Annual Financial Report on 16 November 2015. A reconciliation of cash earnings to statutory net profit attributable to the owners of NAB (statutory net profit less non-controlling interest in controlled entities) is set out on page 43 of this report, and full reconciliations between statutory net profit and cash earnings are included on pages 5–8 of the 2015 Full Year Results Announcement. Page 4 of the 2015 Full Year Results Announcement contains a description of each non-cash earnings item for September 2015 and for the prior comparative periods.

13 Corporate Functions and Other includes Group Funding, NAB UK Commercial Real Estate, specified items, other supporting units and the results of Specialised Group Assets. Specified items are detailed on page 20 of the 2015 Full Year Results Announcement.

14 In July 2015, NAB completed its full divestment of Great Western Bancorp, Inc. (GWB). Loss of control of GWB occurred on 3 August 2015. Refer to page 95 of the 2015 Full Year Results Announcement for further information.

15 Shared Value is a management strategy focused on companies creating measurable business value by identifying and addressing social problems that intersect with their business.

16 See page 39 for definitions of the material risk categories. Strategic, Compliance and Operational risks are applicable for all business activities listed.

17 Based on full-time equivalent employees (FTEs).

18 All dates in ‘Economic conditions’ relate to the relevant calendar year.

19 More information in relation to UK conduct charges can be found on page 20 of the 2015 Full Year Results Announcement.

20 Platform to originate and fulfil all personal products across all proprietary channels.

21 Online banking platform for business customers.

22 Fully automated, institutional global foreign exchange platform.

23 Online financial advice for NAB internet banking customers.

24 Net Promoter Score measures how likely a customer would be to recommend NAB to a friend or colleague on a scale of 0-10. The overall score is calculated by subtracting the percentage of customers that answer 6 or below (‘detractors’) from the percentage of customers that answer 9 or 10 (‘promoters’). Peers refers to three major Australian banks (ANZ, CBA, WBC).

25 Source: ‘Speak Up, Step Up’ survey conducted by Right Management in May 2015.

26 Excluding specified items as detailed on page 20 of the 2015 Full Year Results Announcement, cash return on equity for the year ended 30 September 2015 was 13.8%.

27 Micro business refers to businesses with turnover less than $1 million, Small business ($1 million - <$5 million) and Medium business ($5 million - <$50 million).

28 Source: By market share, APRA Banking System - September 2015.

29 Source: TNS Business Finance Monitor - September 2015. Market share for businesses with annual turnover of

$NZD 1 million - $NZD 150 million.



30 Priority Segments NPS is a simple average of the NPS scores of four priority segments: Mortgage Customers, Micro (<$1m) Business, Small ($1m-<$5m) Business and Medium ($5m-<$50m) Business. The priority segments NPS scores are based on six month moving averages from Roy Morgan Research and DBM BFSM. NAB compared with the NPS of the three major Australian banks (ANZ, CBA, WBC).

31 Source: By market share, APRA Monthly Banking Statistics - September 2015.

32 Institutional Banking Innovation Award, Institute of Finance Professionals New Zealand (INFINZ) Awards May 2015.

33 Based on a rate of 30% over an average loan value of approximately $3,500 and average term of 32.4 months. Estimated fees are based on a $250 establishment fee and a $10 per month administration fee.

34 Date based on permanent population only (excludes external employees such as casual employees and contractors).

35 Executive management positions (also known as senior executive positions) are those held by Executive Leadership Team members, Executive Leadership Team members’ direct reports and their direct reports. Support roles reporting in to these roles (for example, Executive Manager and Executive Assistant) are not included in the data. As at 30 September 2015, the proportion of females reporting directly to the Group CEO on the Group Executive Leadership Team was 33%.

36 As at 30 September 2015, 55% of the graduates who accepted positions in NAB’s 2016 Australian graduate program are women.

37 2014 Gender Equality Benchmark Report, Workplace Gender Equality Agency.

38 Source: ‘Speak Up, Step Up’ survey conducted by Right Management in May 2015.

39 Source: ‘Speak Up, Step Up’ survey conducted by Right Management in May 2015.

40 Including conflicts of interest, continuous disclosure, ethics and behaviours, remuneration, trading in NAB securities, and the whistleblower program.

41 Internationally Comparable ratios at 30 September 2015 align with the APRA study entitled “International capital comparison study” released on 13 July 2015.

42 Leverage ratio calculated using an Internationally Comparable Tier 1 capital measure includes transitional relief for non-Basel III compliant instruments.

43 For more information on NAB’s Capital Management and Funding, see pages 32 – 35 and pages 111 – 112 of our 2015 Full Year Results Announcement.

44 See page 112 of our 2015 Half Year Results Investor Presentation and page 115 of our 2015 Full Year Results Investor Presentation for more information.

45 2015 Workplace Effectiveness Survey, 85% of respondents agree that flexible working enables them to better manage their own wellbeing.

46 Refer to ‘Glossary of terms’ on page 53 for definitions of the financial metrics. All key performance measures and Group performance indicators are calculated on a cash earnings basis unless otherwise stated.

47 Figures are in Australian dollars, unless otherwise stated.

48 Information is presented on a continuing operations basis including prior period restatements. Refer to Glossary of terms on page 53 for definition of continuing operations and discontinued operations.

49 Section 5 of the 2015 Full Year Results Announcement includes the NAB Group’s Income Statement, including statutory net profit. The NAB Group’s audited financial statements, prepared in accordance with the Corporations Act 2001 (Cth) and Australian Accounting Standards, will be published in its 2015 Annual Financial Report on 16 November 2015.
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