Annual Financial Report 2002 National Australia Bank Limited ABN 12 004 044 937 This Annual Financial Report 2002 is lodged with the Australian Securities and Investments Commission and Australian Stock Exchange Limited. It is also filed with the United States Securities and Exchange Commission as an annual report on Form 20-F. Nothing in this Annual Financial Report 2002 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 Presentation of information 2 5 Profit from ordinary activities before income Financial highlights 3 tax expense 90 Selected financial data 4 6 Income tax expense 94 Business overview 7 7 Dividends and distributions 94 Introduction 7 8 Earnings per share 95 Strategy 7 9 Cash assets 96 Business operating model 7 10 Due from other financial institutions 96 Introduction to Financial Services 8 11 Due from customers on acceptances 96 Financial Services Australia 8 12 Trading securities 97 Financial Services Europe 9 13 Available for sale securities 97 Financial Services New Zealand 10 14 Investment securities 99 Wholesale Financial Services 10 15 Investments relating to life insurance business 103 Wealth Management 11 16 Loans and advances 103 Other 11 17 Provisions for doubtful debts 106 Competition 12 18 Asset quality disclosures 108 Regulation of the financial services system 13 19 Mortgage servicing rights 111 Changing regulatory environment 13 20 Shares in entities and other securities 111 European Economic and Monetary Union 14 21 Regulatory deposits 111 Organisational structure 14 22 Property, plant and equipment 112 Description of property 14 23 Income tax assets 113 Certain legal proceedings 14 24 Goodwill 114 Financial review 15 25 Other assets 114 Summary 15 26 Due to other financial institutions 116 Economic outlook 16 27 Deposits and other borrowings 116 Critical accounting policies 17 28 Life insurance policy liabilities 117 Net interest income 20 29 Income tax liabilities 118 Net life insurance income 22 30 Provisions 118 Other banking and financial services income 23 31 Bonds, notes and subordinated debt 118 Mortgage servicing and origination revenue 24 32 Other debt issues 120 Movement in the excess of net market value over net assets of 33 Other liabilities 121 life insurance controlled entities 25 34 Contributed equity 121 Significant revenue 26 35 Reserves 124 Operating expenses 26 36 Retained profits 125 Charge to provide for doubtful debts 27 37 Outside equity interest 125 Significant expenses 28 38 Total equity reconciliation 125 Net profit by segment 30 39 Employee share, bonus and option plans 126 Employees 36 40 Average balance sheets and related interest 131 Assets and equity 37 41 Maturity analysis 133 Return on average equity 38 42 Interest rate risk 134 Earnings and dividends per share 38 43 Notes to the statement of cash flows 139 Shareholder value 39 44 Particulars in relation to controlled entities 142 Liquidity and funding 39 45 Contingent liabilities and credit commitments 143 Capital resources 42 46 Derivative financial instruments 147 Gross loans and advances 45 47 Fair value of financial instruments 152 Impaired assets, provisions and allowance for loan losses 46 48 Superannuation commitments 154 Deposits and other borrowings 49 49 Operating lease commitments 155 Assets under management and administration 50 50 Capital expenditure commitments 156 Risk management 51 51 Financing arrangements 156 Transactions with related and other non-independent parties 57 52 Related party disclosures 156 Risk factors 57 53 Remuneration of directors 159 Accounting developments 58 54 Remuneration of executives 160 Corporate governance 59 55 Remuneration of auditors 161 Report of the directors 64 56 Fiduciary activities 162 Financial report 73 57 Life insurance business disclosures 162 Statement of financial performance 74 58 Reconciliation with US GAAP 169 Statement of financial position 75 59 Events subsequent to balance date 177 Statement of cash flows 76 Directors’ declaration 178 Notes to the financial statements 77 Auditors’ report 179 1 Principal accounting policies 77 Shareholder information 180 2 Supplementary statement of financial position 85 Form 20-F cross reference index 195 3 Segment information 86 Principal establishments 197 4 Revenue from ordinary activities 89 1 Presentation of information Basis of presentation Forward-looking statements This annual financial report is prepared in accordance with generally accepted This annual financial report contains certain ‘forward-looking statements’ accounting principles (GAAP) applicable in Australia (Australian GAAP), within the meaning of section 21E of the United States Securities Exchange which differs in some respects from GAAP in the United States (US GAAP) Act of 1934. The United States Private Securities Litigation Reform Act of (as set out in note 58 in the financial report). Comparative amounts have been 1995 provides a safe harbour for forward-looking information to encourage reclassified to accord with changes in presentation made in 2002, except where companies to provide prospective information about themselves without fear otherwise stated. of litigation, so long as the information is identified as forward-looking and is accompanied by meaningful cautionary statements identifying important Currency of presentation factors that could cause actual results to differ materially from those projected in the information. The words anticipate, believe, expect, project, estimate, All currency amounts are expressed in Australian dollars unless otherwise intend, should, could, may, target, goal, objective, plan and other similar stated. Merely for the convenience of the reader, this annual financial report expressions are used in connection with forward-looking statements. contains translations of certain Australian dollar amounts into US dollars at specified rates. These translations should not be construed as representations In this annual financial report, forward-looking statements may, without that the Australian dollar amounts actually represent such US dollar amounts limitation, relate to statements regarding: or could be converted into US dollars at the rate indicated. Unless otherwise • economic and financial forecasts, including but not limited to statements stated, the translations of Australian dollars into US dollars have been made at under the financial review and report of the directors; the rate of US$0.5429 = A$1.00, the noon buying rate in New York City for • anticipated implementation of certain control systems and programs, cable transfers in Australian dollars as certified for customs purposes by the including, but not limited to those described under the financial review - Federal Reserve Bank of New York (noon buying rate) on September 30, risk management; and 2002. • certain plans, strategies and objectives of management. Certain definitions Such forward-looking statements are not guarantees of future performance and National Australia Bank Limited is herein referred to as the Company and, involve known and unknown risks, uncertainties and other factors, many of together with its controlled entities, as the Group. The Company’s fiscal year which are beyond the control of the Group, that may cause actual results to ends on September 30. As used herein, the fiscal year ended September 30, differ materially from those expressed in the statements contained in this 2002 is referred to as 2002 and other fiscal years are referred to in a annual financial report. For example: corresponding manner. The abbreviations $m and $bn represent millions and • the economic and financial forecasts contained in this annual financial thousands of millions (ie. billions) of Australian dollars respectively. Financial report will be affected by movements in interest and foreign currency statements means the Company’s consolidated financial statements for the exchange rates, which may vary significantly from current levels, as well year ended September 30, 2002, September 30, 2001 and September 30, 2000 as by general economic conditions in each of the Group’s major markets. included herein at pages 73 to 178. Any discrepancies between total and sums Such variations, if adverse, may materially impact the Group’s financial of components in tables contained in this annual financial report are due to condition and results of operations; rounding. • the implementation of control systems and programs will be dependent on such factors as the Group’s ability to acquire or develop necessary Consistency of information technology or systems, its ability to attract and retain qualified personnel and the co-operation of customers and third party vendors; and The Company is required to lodge a separate preliminary final report • (Appendix 4B) with Australian Stock Exchange Limited (ASX) for the year the plans, strategies and objectives of management will be subject to, ended September 30, 2002. That Appendix 4B is in the form, and contains the among other things, government regulation, which may change at any information, required by the ASX Listing Rules and does not contain all of the time and over which the Group has no control. In addition, the Group will continue to be affected by general economic conditions in Australia and information in this annual financial report. Otherwise, there is no material worldwide,