Annual Review 2015




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Balance sheet strength


We continued to maintain strong capital, funding and liquidity positions in line with our ongoing commitment to maintain NAB’s balance sheet strength. This provides us with confidence to respond to changing market and regulatory conditions facing the finance sector in Australia and globally.

This year, NAB continued to access a diverse range of wholesale funding across senior, subordinated and secured debt markets, as well as the domestic retail hybrid market. We raised $26.5 billion of term wholesale funding, fulfilling our 2015 funding requirements.

We continued to grow deposits and improved our Customer Funding Index, which represents the proportion of our core assets that are funded by customer deposits, from 70.4% in 2014 to 71.5% in 2015.

Our Liquidity Coverage Ratio (LCR) of 115% (quarterly average at 30 September 2015) exceeds the minimum regulatory requirement of 100%.

NAB’s capital management strategy is focused on adequacy, efficiency and flexibility. We focus on holding capital in excess of our internal risk-based assessment of required capital, while meeting regulatory requirements, being consistent with our balance sheet risk appetite and making sure stakeholder expectations are met.

Our balance sheet strength means NAB is well placed to meet regulatory change and respond to future challenges.

In June 2015, the NAB Group completed a $5.5 billion capital raise through a 2 for 25 fully underwritten pro rata accelerated renounceable rights issue, adding 141 basis points of CET1 capital. The additional capital will help to address APRA’s announcement in July 2015 of an increase in mortgage risk weights from 1 July 2016 for internal ratings-based approach accredited Authorised Deposit-taking Institutions to an average of 25% in response to the Financial System Inquiry. The capital raised will also help to facilitate the proposed exit from our Clydesdale Bank and Yorkshire Bank operations.

In July 2015, NAB completed its full divestment of GWB, our former US banking subsidiary. The total sale was undertaken as three separate tranches, and increased the NAB Group’s CET1 capital ratio by 1 basis point during the six months to March 2015 and by 36 basis points during the six months to September 2015.

As at 30 September 2015, NAB’s CET1 ratio was 10.24% (13.53% on an Internationally Comparable basis41) and we remain well capitalised. The NAB Group’s CET1 operating target remains between 8.75% and 9.25%, based on current regulatory requirements. As at 30 September 2015, our Leverage ratio was 5.5% on an APRA basis and 6.0% on an Internationally Comparable basis.41 42 43

We will continue to regularly review our operating target levels and aim to retain flexibility in executing capital initiatives in order to support NAB’s balance sheet strength.


Risk management


Risk exists in every aspect of our business and the environment in which we operate. Maintaining our focus on risk and compliance is a ‘non-negotiable’, as we continue to improve the customer experience.

Managing our risk


Risk management starts with the annual strategic planning, risk appetite and operational planning processes, all of which are strongly inter-related to ensure NAB establishes financial objectives that are compatible with its risk appetite.

On a day-to-day basis, we manage risk using a ‘Three Lines of Defence’ model, with risk management responsibilities for all employees being clearly articulated through our ‘Risk Management Accountability Model’.


Improving risk performance


Risk@nab is our core program of initiatives we are delivering across NAB to ensure risk management is effective, sustainable and measurable. A key element of this program is continuing to strengthen our ‘Risk Management Framework’, ensuring alignment with APRA’s increased expectations under prudential standard CPS 220. This includes continuing work on bringing our ‘Risk Management Accountability Model’ to maturity, and driving behaviours to support a robust risk culture.

We have improved our operational risk and compliance management practices through introducing a single set of streamlined processes and the rolling out of a skills matrix and operational planning tools. The new integrated operational risk and compliance system ‘risksmart’ goes live across the organisation in November 2015.

So we can continue to enhance our risk capability, we have also released across Risk, Management Assurance and Audit, the first three mandatory training programs from the ‘Risk Professionals Learning Framework’.

Risk culture


Sound risk culture is considered a core element of an effective risk management framework and is influenced by everyone across NAB, from the NAB Board to our bankers. At NAB, we describe risk culture as “Our people understanding and living ‘Do the right thing’. It’s about taking the right risk, with the right controls, for the right return”.

The risk culture dashboard provides key insights into the transparency of risk and how employees across the NAB Group acknowledge, respect and respond to risk.


Conduct


When carrying out our day-to-day business activities, NAB advocates customer fairness and strives to act in the best interests of our customers and the outcomes they desire. As well as continuing to leverage learnings from our experience in the UK, the heightened regulatory focus on conduct risk (customer fairness) both in Australia and internationally is also helping to shape the way our approach to risk management is evolving. In 2016, a Conduct framework will be finalised to enable NAB to more effectively manage and mitigate conduct related exposures.

Risk accountability across our three lines of defence

1. Line management


Responsible for managing the risks originating within the business.

Identify, assess, control and monitor risks.

Manage risks within risk appetite.

Establish and maintain a robust risk and control environment.


2. Risk


Responsible for ensuring that the risk and control environment is actively and appropriately managed through the provision of risk insight, risk appetite and oversight.

Establish NAB Group-wide and specific risk appetite.

Develop and maintain policies, tools and processes for risk management.

Oversee, monitor and challenge the business on risk-related activities.

Define minimum standards and oversee related consequence management.

Provide insight.


3. Internal Audit


Provides independent assurance over the risk and control framework.

Independently review, monitor and test first and second line risk activities.

Independent assurance on compliance requirements by regulators.

Assess the overall effectiveness of the business’ risk and control environment and ability to self assess.


Material risk categories


The table below represents the nine key material risk categories which may impact NAB’s reputation and our actual or potential risk exposures. These key material risk categories are inter-related and NAB views and manages them collectively to deliver a better customer experience.

Risk category

The risk of loss from

Credit risk

the potential that a counterparty or customer will fail to meet its obligations to NAB in accordance with agreed terms.

Operational risk

inadequate internal processes and controls, people and systems or external events.

Compliance risk

failing to understand and comply with applicable laws, regulations, licence conditions, supervisory requirements, self-regulatory industry codes of conduct and voluntary initiatives, as well as internal policies, standards, procedures and frameworks.

Balance sheet and liquidity risk

NAB’s banking book activities, including capital, funding, liquidity, interest rate, foreign exchange and equity.

Traded market risk

adverse changes in fair value of positions from the NAB’s book trading activities, as a result of movements in foreign exchange and interest rates, volatilities and credit spreads.

Life insurance risk

when payments under life insurance policies exceed those anticipated in the premiums collected and underlying investment income earned.

Regulatory risk

failing to identify and monitor changes in the regulatory environment, damaging NAB’s relationship with its regulators, and failing to take the opportunity to help shape the development of emerging legislative framework and / or to effectively implement the required changes.

Defined benefit pension risk

the Group’s defined benefit pension scheme being in deficit (i.e. the pension fund assets are at a value below the discounted value of current and future pension fund obligations).

Strategic risk (including positioning and execution risk)

positioning - associated with the strategic choices that we make and their ongoing viability in response to, or in anticipation of, changes in the environment.

execution - failing to execute the chosen strategy.


Managing ESG risk


NAB’s ESG Risk Principles provide an overarching framework for us to integrate ESG risk considerations into our day-to-day decision-making.

During 2015, NAB experienced growing demand from stakeholders, including customers and investors, for more detailed information to help them better understand carbon risk in investment and lending portfolios. In response, we made public our commitment to carbon risk disclosure. NAB remains committed to identifying, developing and implementing ways to improve disclosure on carbon risk exposure through collaboration with other financial institutions in Australia and internationally.

In 2015, we undertook the following activities to deliver on this commitment:

Increased relevant disclosures on our lending to the energy and natural resources sectors in our Results Investor Presentations44.

Continued to participate in the United Nations Environment Program Finance Initiative (UNEP FI) and World Resources Institute Carbon Portfolio Initiative, to assist the development of standardised disclosure on carbon-related risk exposure for financial institutions.

Collaborated with our Australian Banking peers on disclosure of carbon-related risk exposure for financial institutions.

In addition, we progressed on the commitments we made in our ‘Improper Land Acquisition Policy Statement’, reaffirming that we consider the practice to be unacceptable. The Statement helps stakeholders understand our views on the matter and provides detail on how we manage ESG risk issues. More information is provided in our 2015 Dig Deeper report.

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