The more we look … the more we see what really matters Annual Review 2014




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The value of Integrated Reporting


We’re challenging ourselves to look at our business performance as a whole, through a framework set by the International Integrated Reporting Council (IIRC). This 2014 Annual Review demonstrates how we’re creating value for our stakeholders through our business strategy, operating environment, governance and financial and non-financial activities.

It captures the most impactful issues of the year as they relate to our performance. The content included in our 2014 Annual Review is the result of extensive engagement with customers, shareholders, our people, analysts, consumer advocate groups and community organisations – so it reflects what is most significant to stakeholders.


Being accountable


NAB’s 2014 Annual Review Steering Committee is responsible for ensuring the integrity of NAB’s integrated report (the 2014 Annual Review). The Steering Committee is comprised of representatives from key business functions including Shareholder and Investor Relations, Strategy, Finance, Governance, Risk, Legal and Corporate Responsibility, who have collectively prepared the 2014 Annual Review. The Steering Committee concludes that the 2014 Annual Review has been developed with due consideration of the IIRC Integrated Reporting framework.

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 13–19 of our 2014 Annual Financial Report under ‘Disclosure on Risk Factors’.

Making sure we listen


Understanding what matters to our stakeholders helps us continuously improve our business and processes. It shapes the way we think and behave. We reach out to investors, analysts, employees, consumer advocates, and suppliers each year through a series of formal and informal engagements. Some of our key forums include the Advisory Council on Corporate Responsibility, the CEO Consumer Briefing and our Indigenous Advisory Group, among other internal and external forums.

We also conduct an Annual Materiality Review to identify key governance, environmental and social issues likely to impact the business, which includes workshops, interviews and surveys. In 2014 we gathered more insight by increasing our focus on one to one interviews. See page 12 for details on our material issues.

Direct contact with customers has also been improved by NAB’s Social Media Command Centre, which is in its second year of operation. Our stakeholder engagement is chiefly guided by NAB policies and the AA1000 Stakeholder Engagement Standard. In line with the principle of concise reporting as part of the IIRC framework, we further detail our Annual Materiality Review and our performance on those material issues in our 2014 Dig Deeper paper, available at nabgroup.com/annualreports.

Glossary of terms


Term

Definition

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, mortgage servicing rights, brand names, value of business and contracts in force.

APRA

Australian Prudential Regulation Authority

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 the Company, adjusted for the items NAB considers appropriate to better reflect the underlying performance of the Group. In September 2014 cash earnings has been adjusted for the following:

Distributions

Treasury shares

Fair value and hedge ineffectiveness

Deferred Acquisition Costs (DAC) discount rate variation

Amortisation of acquired intangible assets

In the 2013 September year, cash earnings was adjusted for litigation expense and recovery. This item did not recur in the September 2014 year. Customer redress for Payment Protection Insurance has been recorded as operating expenses for cash earnings to be consistent with presentation in 2014. For statutory purposes these provisions were recorded as a charge to other operating income in 2013.


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 instruments 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 Group’s life insurance business and dilutive potential ordinary shares.

Cash return on equity (RoE)

Calculated as cash earnings divided by average shareholders’ equity, excluding non-controlling interests and other equity instruments 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.



Core Assets

Represents gross loans and advances including acceptances, financial assets at fair value, and investments held to maturity.

Customer deposits

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

Deferred Acquisition Cost (DAC) discount

The profit impact of a change in value of deferred acquisition costs (net of reinsurance) included in insurance policy liabilities resulting from a movement in the inflation adjusted risk-free discount rate.

Distributions

Payments to holders of other equity instrument issues such as National Income Securities, Trust Preferred Securities, Trust Preferred Securities 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 and hedge ineffectiveness

Represents volatility attributable to the 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.

Full-time equivalent employees (FTEs)

Includes all full-time staff, part-time, 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.

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).


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).

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)

Cash earnings 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 Group.

Net profit attributable to owners of the Company

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

Tier 1 capital

Tier 1 Capital comprises the highest quality components of capital that fully satisfy all of the characteristics outlined under APRA’s prudential framework. It provides a permanent and unrestricted commitment of funds, are freely available to absorb losses, do not impose any unavoidable servicing charge against earnings and rank behind the claims of depositors and other creditors in the event of winding-up.

Tier 1 capital ratio

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

Treasury shares

Shares in the Company held by the Group’s life insurance business and in trust by a controlled entity of the 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 Group’s life insurance business are eliminated for statutory reporting purposes.

© 2014 National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686

1 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 some items which are included within the statutory net profit attributable to owners of the Company. Cash earnings does not purport to represent the cashflows, funding or liquidity position of the NAB Group, nor any amount represented on a cashflow 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 the Company, adjusted for the items NAB considers appropriate to better reflect the underlying performance of the NAB Group. In September 2014, cash earnings has been adjusted for the following: Distributions, Treasury shares, Fair value and hedge ineffectiveness, Deferred Acquisition Cost (DAC) discount rate variation, Amortisation of acquired intangible assets. Reconciliation to Statutory Profit: Section 5 of the 2014 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 2014 Annual Financial Report on 17 November 2014. A reconciliation of cash earnings to statutory net profit attributable to the owners of the Company is set out on page 34 of this 2014 Annual Review, and full reconciliations between statutory net profit and cash earnings are included on pages 5–8 of the 2014 Full Year Results Announcement. Page 4 of the 2014 Full Year Results Announcement contains a description of each non-cash earnings item for September 2014 and for the prior comparative periods. Cash earnings for the year ended 30 September 2013 have been restated to include Payment Protection Insurance (PPI) provision charges to make the 2014 results more comparable.

2 In 2014 we changed the provider for our engagement survey. To provide the trends analysis, comparable questions were included and are reflected in this score. Under the new Right Management methodology, our employee engagement score was 42%. See page 25 of this 2014 Annual Review for further detail on our employee engagement.

3 Data has been sourced from ESAA (Energy Supply Association of Australia) Electricity Gas Australia 2014, Appendix 1: Power Stations in Australia 2012–13.

4 APRA Banking System, September 2014.

5 Source: NAB internal.

6 RBA market share, September 2014.

7 Includes retail agencies, retail kiosks, agribusiness stores and private banking suites.

8 For further detail on components of financial figures in this table, please see ‘Consolidated Income Statement’, page 70 and ‘Dividend and Distribution’ page 83 of our 2014 Full Year Results Announcement.

9 Revenues is the total of Interest income, Net life insurance income and Total other income.

10 Operating costs equals Total operating expenses excluding Personnel expenses.

11 Payments to employees equals Personnel expenses.

12 Payments to providers of funding and capital is the total of Interest expense, Dividends on ordinary shares paid, Dividends on preference shares and Distributions on other equity instruments.

13 Payments to government refers to Taxes paid by the NAB Group and includes income tax, GST/VAT and employment taxes.

14 All references in ‘Economic conditions’ relate to the calendar year.

15 Includes retail agencies, retail kiosks, agribusiness stores and private banking suites.

16 NAB uses the US Green Building Council’s certification as Australia currently has no rating system for data centres.

17 Source: NAB internal.

18 Roy Morgan Research, Australian population 14+, 6 months to September 2014. Customer satisfaction is based on customers who answered very/fairly satisfied.

19 Roy Morgan Research, September 2013–September 2014, Australian Main Financial Institution personal customers, population aged 14+, six-month moving average. Customer satisfaction is based on customers who answered very/fairly satisfied.

20 Plan for Life, Australian Retail and Wholesale Investments Market Share and Dynamics Report, June 2014.

21 Retail Market Monitor for Retail (73%) and TNS Business Finance Monitor for Partners (7.8).

22 ‘Speak Up, Step Up’ survey conducted by Right Management, April 2014. The Right Model (E8) measures employees commitment, advocacy, satisfaction and pride in both their job (four questions) and in the organisation (four questions). Employees need to answer favourably to all eight items to be considered engaged.

23 TNS Business Finance Monitor – SME: Business customers up to $5m turnover (7.8).

24 APRA Banking System, September 2014.

25 As reported by the Asian Development Bank 29 September 2014.

26 Project Finance International 2006–2014 APAC Mandated Lead Arranger League Tables US$ Project Allocation, NAB analysis ranking against four major domestic banks – cumulative volume as at 30 June 2014.

27 Net Balance, Social Return on Investment forecast of the Lifeline Online Crisis Support Chat Service, December 2013.

28 ‘Speak Up, Step Up’ survey conducted by Right Management, April 2014. The Right Model (E8) measures employees’ commitment, advocacy, satisfaction and pride in both their job (four questions) and in the organisation (four questions). Employees need to answer favourably to all eight items to be considered engaged. Information on historical data can be found in our 2014 Dig Deeper paper, available at nabgroup.com/annualreports.

29 Refer to ‘Glossary and definitions’ on pages 42–46 for definitions of the above financial metrics.

30 Restated to include Payment Protection Insurance provision charges in operating expenses for cash earnings purposes, and for the impact of adopting new accounting standards as detailed in the Principal Accounting Policies on page 76 of the 2014 Full Year Results Announcement.

31 Section 5 of the 2014 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 2014 Annual Financial Report on 17 November 2014. Full reconciliations between statutory net profit and cash earnings are included on pages 5–8 of the 2014 Full Year Results Announcement. Page 4 of the 2014 Full Year Results Announcement contains a description of each non-cash earnings item for September 2014 and for the prior comparative periods.

32 Includes economic cycle adjustment, collective provision against loans of amortised cost and collective provision held on assets at fair value.

33 NAB Group non-financial performance table data is described in detail in our 2014 Dig Deeper paper available at nabgroup.com/annualreports. All figures are for the Group as at 30 September, unless otherwise stated.

34 Roy Morgan Research, September 2012–September 2014, Australian Main Financial Institution personal customers, population aged 14+, six-month moving average. Customer satisfaction is based on customers who answered very/fairly satisfied.

35 DBM Business Financial Services Monitor, September 2012–September 2014, six-month rolling average. Overall satisfaction with main financial institution based on scale of 0–10 (extremely dissatisfied to extremely satisfied). Segments based on annual turnover (Micro $0-<$1m; Small $1m–<$5m, Medium $5m–<$50m, Large $50m+).

36 Peter Lee Associates 2014 Large Corporate and Institutional Relationship Banking Survey Australia. Based on average point score of overall satisfaction with products and services.

37 The increase was in relation to improved reporting on customer complaints. For more information, see page 16.

38 Prior period numbers have been restated due to updated reporting methodology.

39 In partnership with Good Shepherd Microfinance. Cumulative data has been collected since 2005.

40 Total number includes retail agencies, retail kiosks, agribusiness stores and private banking suites.

41 Decrease due to the rate of increase of customers being greater than the growth rate of number of active users compared to 2013.

42 ‘Speak Up, Step Up’ survey conducted by Right Management, April 2014. The Right Model (E8) measures employees commitment, advocacy, satisfaction and pride in both their job (four questions) and in the organisation (four questions). Employees need to answer favourably to all eight items to be considered engaged. Information on historical data can be found in our 2014 Dig Deeper paper available at nabgroup.com/annualreports.

43 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. Note: Support roles reporting in to these roles (for example, Executive Manager and Executive Assistant) are not included in the data.

44 Total number of employees aged 50 and over as a percentage of headcount.

45 The percentage of employees who return to work following the conclusion of primary carer’s leave and any consecutive extended leave (for example, long service leave).

46 Number of all employees who exited NAB each year, as a percentage of the average permanent headcount for each respective year.

47 Number of all employees who voluntarily exited NAB each year, as a percentage of the average permanent headcount for each respective year.

48 The percentage of employees recognised as high performing during their 2013 performance review that remain employed at 30 September 2014.

49 Calculated by multiplying 7.75hrs for every volunteering day taken. Cumulative data has been collected since 2002.

50 An average salary of each employment group is applied to the number of hours contributed by the respective employment group. Cumulative data has been collected since 2002.

51 Supply chain data is as of 31 August 2014. Historical data was measured at an Australia and New Zealand region level, and is not comparable to 2014. For the definitions of material supplier across the NAB Group, please refer to our 2014 Dig Deeper paper available at nabgroup.com/annualreports.

52 Refer to ‘Glossary and definitions’ on page 42–46 for definitions of the above financial metrics.

53 Restated to include Payment Protection Insurance provision charges in operating expenses for cash earnings purposes and for the impact of adopting new accounting standards as detailed in the Principal Accounting Policies on pages 76 of the 2014 Full Year Results Announcement.

54 Corporate Functions and Other includes the impacts of provisions taken for UK related payment protection insurance and interest rate hedging products.

55 If there are any changes to these dates, the Australian Securities Exchange will be notified accordingly.
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