NAB Full Financials

Annual Financial Report 2005 new thinking new actions National Australia Bank Limited ABN 12 004 044 937 This annual financial report 2005 is lodged with the Australian Securities and Investments Commission and Australian Stock Exchange Limited. Nothing in this annual financial report 2005 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 otherwise stated. Table of contents Chairman’s message 2 2 Transition to Australian equivalents to International Managing Director's message 3 Financial Reporting Standards 126 Presentation of information 4 3 Segment information 133 Financial summary 5 4 Revenue from ordinary activities 136 Selected financial data 6 5 Profit from ordinary activities before income tax expense 137 Business overview 10 6 Income tax expense 141 Introduction 10 7 Dividends and distributions 142 Strategy and corporate principles 10 8 Earnings per share 143 Business operating model 10 9 Cash and liquid assets 143 Total Australia 10 10 Due from other financial institutions 143 Total United Kingdom 12 11 Due from customers on acceptances 144 Total New Zealand 13 12 Trading securities 144 Institutional Market & Services 13 13 Available for sale securities 145 Other 14 14 Investment securities 147 Competition 14 15 Investments relating to life insurance business 149 Regulation of the financial services system 14 16 Loans and advances 150 Changing regulatory environment 16 17 Provisions for doubtful debts 152 Organisational structure 17 18 Asset quality disclosures 155 Description of property 17 19 Shares in controlled entities, joint venture Certain legal proceedings 17 entities and other securities 158 Certain services provided by the external auditor – matters 20 Regulatory deposits 159 related to independence 18 21 Property, plant and equipment 160 Financial review 19 22 Income tax assets 161 Summary of financial performance 19 23 Goodwill 162 Summary of financial position 21 24 Other assets 162 Economic outlook 22 25 Due to other financial institutions 163 Net interest income 23 26 Deposits and other borrowings 164 Net life insurance income 26 27 Life insurance policy liabilities 165 Other banking and financial services income 27 28 Income tax liabilities 165 Movement in the excess of net market value over net assets 29 Provisions 166 of life insurance controlled entities 29 30 Bonds, notes and subordinated debt 167 Significant revenue 30 31 Other debt issues 169 Operating expenses 30 32 Other liabilities 169 Charge to provide for doubtful debts 31 33 Contributed equity 170 Significant expenses 32 34 Reserves 173 Income tax expense relating to ordinary activities 34 35 Retained profits 174 Net profit by segment 34 36 Outside equity interest 174 Employees 42 37 Total equity reconciliation 175 Return on average equity 43 38 Shares, performance options and performance rights 176 Earnings and dividends per share 43 39 Average balance sheet and related interest 188 Liquidity and funding 44 40 Maturity analysis 191 Capital resources 48 41 Interest rate risk 192 Gross loans and advances 52 42 Notes to the statement of cash flows 197 Asset quality disclosures, charge to provide and provisions 43 Particulars in relation to controlled entities 200 for doubtful debts 53 44 Contingent liabilities and credit commitments 201 Deposits and other borrowings 56 45 Derivative financial instruments 205 Assets under management and administration 57 46 Fair value of financial instruments 211 Risk factors 58 47 Superannuation commitments 212 Risk management 59 48 Operating lease commitments 214 Disclosure controls and procedures and internal control over 49 Capital expenditure commitments 215 financial reporting 65 50 Related party disclosures 215 Transactions with related and other non-independent parties 66 51 Equity instrument remuneration of directors and specified executives 217 Critical accounting policies 67 52 Remuneration of external auditor 222 Accounting developments 69 53 Fiduciary activities 223 Non-GAAP financial measures 70 54 Life insurance business disclosures 224 Corporate governance 71 55 Supplementary statement of financial position 232 Remuneration report 81 56 Reconciliation with US GAAP and other US GAAP disclosures 233 Report of the directors 101 57 Capital adequacy 248 Financial report 113 58 Events subsequent to balance date 249 Statement of financial performance 114 Directors’ declaration 250 Statement of financial position 115 Independent audit report 251 Statement of cash flows 116 Report of independent registered public accounting firm 253 Notes to the financial statements 117 Shareholder information 255 1 Principal accounting policies 117 Glossary 285 Form 20-F cross reference index 286 1 Chairman's message I was honoured to take up the position of Chairman of the National The theme ‘New Thinking, New Actions’ initiated by John Stewart has Australia Bank Limited (NAB) in September this year. Over the almost given rise to a large number of initiatives across the Group designed to 150 years of its life as a company, the NAB has played an important role make its business more efficient and well placed for growth. These are in the development of Australia and it is now also an active financial described in detail in the management reports that follow. services operator in the United Kingdom and New Zealand. One of the things your directors are determined to ensure is that The past two years have been challenging ones for the NAB. Losses management’s actions are focused on the long term. It is evident that incurred in foreign currency options trading in January 2004 revealed many of the difficulties experienced by the Company over recent years shortcomings in the NAB’s systems and culture and there has been a resulted from a desire to satisfy external, short-term demands. That is no strong focus in the period since to rectify these. This has been way to run a business if the core objective is to provide superior long-term accompanied by a widespread change of personnel at senior management shareholder returns. Many decisions taken in the interests of good long- and Board levels. term returns, such as investments in information systems, may have a negative effect on near-term results. The Board plays an important role in Those actions have borne significant fruit, with the NAB now performing supporting management actions in such instances against pressure from better in its markets. However, much remains to be done in systems those whose focus is on the short-term. development, risk management, regulatory compliance and culture change. Given the determination of the Board and senior management, and the The NAB is a great institution with a proud history. The directors are talent, enthusiasm and dedication of the people involved, I have no doubt determined to ensure that our shareholders and other stakeholders once about the eventual positive outcomes. again view the Company as a positive force in the communities in which it operates. On behalf of the Board, I pay tribute to the efforts of Graham Kraehe, who stepped down as Chairman and as a director in September. Graham assumed In closing, may I again acknowledge the dedicated efforts of all our the Chair in February 2004, and has led the program of change in senior employees, many of whom make significant personal sacrifices in the management and Board ranks with great dedication and skill. interests of the Company. The Board contains a good mix of directors with backgrounds in the financial services industry, general business and commerce, and in regulatory affairs. Our two most recently appointed directors, Patricia Cross and Kerry McDonald, will provide additional, valuable experience upon joining the Board in December 2005. Patricia adds significant experience in the financial industry, while Kerry brings to the Board substantial industry experience in the New Zealand region. John Stewart has, similarly, assembled an excellent senior management team since he was appointed Managing Director and Group Chief Executive in February 2004. The team’s efforts over the past 18 months have required a focus not only on meeting the internal challenges but also on the satisfaction of new compliance obligations resulting from the Basel II Capital Accord, the requirements of the United States’ Sarbanes-Oxley legislation and International Financial Reporting Standards. That so much has been achieved in restoring the Company’s fortunes in these circumstances is an Michael A Chaney AO enormous credit to management’s efforts. Chairman 2 Managing Director's message 2005 highlights New Financial Solutions Centres and flagship branches in high traffic areas in the north of England and in Scotland have been opened. x New regional operating model; x Appointment of new executive team; Expansion into the south of England to attract small to medium-sized x Sale of the Irish Banks at a profit of $1,043 million (after tax); and business customers and high net worth individuals has been underway x Restructuring costs of $838 million. using an integrated financial services approach. 2005 summary In New Zealand, we have a well-established business in a competitive and mature market. The objective has been to grow through continued The 2005 financial year brought us half way through our three-year improvements to customer service and product range. One example of this recovery program. is the award-winning customer service provided by Bank of New Zealand’s call centres. Net profit attributable to members of the Company increased by 30% to $4,132 million. Diluted earnings per share increased from 196.1 cents to 248.1 cents. The Institutional Markets & Services business was at the centre of the Dividends per share for the year were 166 cents, franked to 80%. regulatory review that took place following the foreign currency options trading losses. During the year, the Group adopted a new regional operating model that is designed to make the organisation more nimble and customer focused.

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