Annual Review 2015




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Our operating environment

Economic conditions18


Across the globe, growth remains below trend in 2015. The pace of growth in the big advanced economies has picked up, reflecting the US recovery from weak growth in the first quarter. But it’s the emerging market economies that drive most global growth, and they are slowing – with falling world trade volumes and softer commodity prices affecting output across much of East Asia and Latin America.

Global growth is forecast to remain at just over 3% through the next couple of years to 2017.

The Australian economic outlook remains mixed and patchy across a range of industries and geographies. Mining investment is declining sharply, public spending is limited and national income growth is weak as commodity prices continue to decline. However, there is increasing evidence to suggest that growth momentum is broadening across the non-mining economy in response to the lower Australian dollar and interest rates. This is most obvious in services sectors, including tourism.

On balance, GDP growth is expected to be moderate in 2015 at 2.3%, before picking up gradually through to 2.9% in 2016 and then 3.2% in 2017. Resource exports will make up the largest contribution to growth, while forecasts for domestic demand are weak. The unemployment rate is expected to stabilise at a little over 6%, before gradually falling over time.

In New Zealand, after solid economic growth of 3.3% in 2014, headwinds have emerged including a significant fall in dairy prices, and the tailwind from the post-earthquake rebuild in Canterbury has peaked. Moderate growth is still expected in 2015 (2.2%) and 2016 (1.8%) as the economy will be supported by lower interest rates, the decline in the New Zealand dollar and still-strong net immigration.

In 2015, the recovery in the UK economy from the severe 2008/2009 recession continued. Growth has slowed over 2015 but solid growth of 2.4% is still expected for the entire year, with a similar rate of growth (2.3%) forecast for 2016.



Responding to our challenges and opportunities

Low growth environment, intense competition for business banking customers and declining business lending margins


NAB is investing in priority segments across our Personal and Business Banking businesses where we have a clear competitive advantage, driving growth and returns.

We have added more bankers on the frontline and are investing in banker capability to support customers.

Our specialisation capability is extensive, for example in Agribusiness and Health where our deep industry knowledge is leveraged to create customer insights and tailored solutions, resulting in leading market shares and stronger returns profile than for non-specialist banking.

We are focused on improving our customers’ experience through enhancing our online capabilities, and improving our processes and policies to make it easier to do business with us.

Enhanced pricing, fee and margin tools and disciplines are being implemented to provide portfolio insights to coach bankers and address margin decline.

Addressing our legacy and low performing assets


We fully divested our US subsidiary Great Western Bancorp Inc.

We are committed to fully divesting our Clydesdale Bank and Yorkshire Bank operations through a demerger and IPO in February 2016. The UK Prudential Regulation Authority requires capital support of £1.7 billion in relation to potential future legacy conduct costs. Conduct provisions were raised in FY15 in relation to both payment protection insurance (PPI) and interest rate hedging product (IRHP) costs.19

We sold a £1.2 billion parcel of higher risk loans from our UK Commercial Real Estate portfolio.

We entered into a life reinsurance agreement which released $0.5 billion in capital to the NAB Group.

We reduced the size of our Specialised Group Assets portfolio from $4.1 billion to $2.1 billion in risk weighted assets.

In October 2015, we announced an agreement to sell 80% of NAB Wealth’s life insurance business to Nippon Life Insurance Company. Post this transaction, NAB will be left with a strong investments and superannuation business which is well positioned to grow.



Regulatory change


NAB continues to maintain a strong capital, liquidity and funding position.

In June, we raised $5.5b of CET1 capital through a rights issue to put NAB in a strong capital position ahead of expected regulatory requirements both domestically and globally.

We are responding to APRA’s requirement to restrict investor mortgage lending growth.

We continue to monitor and actively manage complex regulatory changes and associated costs, including Basel IV and the Federal Government’s Financial System Inquiry.


Technology, complexity and digital transformation


NAB continues to deliver projects that improve the customer experience and make it easier to do business with us. Examples include our Personal Banking Origination Platform (PBOP)20 pilot, NAB Connect21 upgrades, NAB StarXchange22 pilot and NAB Prosper23.

We continue to actively manage ageing technology to improve the stability and security of our systems.

Digital disruption has created more competition but we are embracing this through our innovation hub (NAB Labs), our $50 million NAB Ventures fund and partnering with third party technology experts.

››› Read more about our strategy on pages 22–26 or read more about our Risk Disclosures on pages 11-19 of our 2015 Annual Financial Report.



Our strategy

Vision, objective and goals


We refreshed our strategy in light of the changing business environment. Our vision is to be Australia and New Zealand’s most respected bank.

Our vision: To be Australia and New Zealand’s most respected bank

Our objective: Deliver superior returns to our shareholders

Our goals: Turn our customers into advocates, Engage our people, Generate an attractive return on equity

Our strategy: Focus on priority segments, Deliver a great customer experience, Execute flawlessly and relentlessly

Our people living our values: Passion for customers, Will to win, Be bold, Respect for people, Do the right thing

Our foundations: Balance Sheet, Risk, Technology

In developing NAB’s strategy, the risks and rewards of available opportunities are considered. This includes the markets and customer segments that we operate in, the source and degree of differentiation from competitors and the internal and external environment faced by NAB.

NAB’s objective is to deliver superior returns to our shareholders. To meet this objective, our refreshed strategy outlines three goals against which our performance is measured:


  1. Turning our customers into advocates: We seek to turn our customers into advocates and aim to have the highest Net Promoter Score amongst our peers24 for our priority customer segments. In 2015, we achieved modest gains, with NPS for priority segments improving from -18 to -16. In 2016 we will continue to drive improvement in customer experiences across our business that will improve customer advocacy. See page 24 for more information on customer experience.

  2. Engaging our people: We seek to create a high performing, values-aligned culture and aim to have an employee engagement score at the “global high performing benchmark” (currently 60%25). We made significant progress in FY15, with employee engagement in the Group increasing from 42% in FY14 to 52% in FY15. See page 31 for further information on employee engagement.

  3. Generating an attractive return on equity: We aim to generate an attractive return on equity for our shareholders. In FY15, the NAB Group’s statutory return on equity increased by 100 basis points to 13.1% compared to FY14. Cash return on equity increased by 40 basis points to 12.0%26 for the same period.

To achieve these goals we are:

Focusing on priority customer segments.

Delivering a great experience for customers.

Executing flawlessly and relentlessly.

Our people are the key enablers of our strategy and NAB’s ability to achieve its goals. See pages 27-32 for details on NAB’s culture and human capital management.


Realising our vision


We know that in order to be Australia and New Zealand’s most respected bank, we need to deliver on our strategy. Part of our strategic priority customer segment focus over the past year has been on micro, small and medium business customers in the Agribusiness sector.

A constant focus on innovation and sound land management has underpinned the success of Parilla Premium Potatoes Pty Ltd since their establishment in 1990. NAB has taken a long-term view to our relationship with Parilla, supporting it through market and seasonal fluctuations, to help see it established as one of Australia’s largest potato growers – currently producing over 55,000 tonnes of potatoes, carrots and onions each year.

Parilla has a sound reputation as an early adopter of technology to drive improved business outcomes. Central to their efficient use of water, energy and fertiliser has been the adoption of modern centre pivot technology. In 2015, NAB supported Parilla to acquire a new advanced centre pivot, expected to use 15% less energy and water and 20% less fertiliser, with our 0.7% energy efficiency bonus for equipment finance. This bonus is delivered with the support of the Clean Energy Finance Corporation, to enable NAB customers to invest in assets to reduce their energy costs and improve natural capital management.

We will continue to innovate and make things simple for our 29,000 Agribusiness customers across Australia and New Zealand to achieve our vision of becoming Australia and New Zealand’s most respected bank.


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