Financial Services Europe Half-Year Results

12th May 2004

National Australia Group today released the consolidated result for its Financial Services Europe division (the retail banking arm of the Group in Great Britain and Ireland) announcing operating profits before tax for the half year to 31 March 2004 of £192m. This compares with £236m for the previous half-year and £257m for the same period last year.

Mr Ross Pinney, Chief Executive National Australia Group Europe, said: "These results reflect the challenge our business faces, but our franchises have excellent potential and the performance can be fixed.

"Last year we commenced a programme to reinvigorate our European operations and turn around our financial performance.  We are now taking the first steps in this programme and we are encouraged by evidence of movement in the right direction.  However, it is very much the early days of a work in progress.  The need for further investment means that it will take some time for the improvements to be reflected in improved profitability."

Major Financial Items

• Operating profit before tax was down by 18.6% compared with the previous half and 25.3% compared with first half of the previous year because of an increase in operating expenses and a slight fall in income
• Net interest income was down 1.1% on the first half of previous year due to reduced personal lending and tighter margins, which have been partially offset by mortgage growth of 11.9% since 31 March 2003.
• Excluding pension costs, expenses increased by 11.3% largely because of regulatory costs and investments in systems and growth.

Operational Highlights

Mortgage growth of 11.9% since 31 March 2003. With the new offset mortgage so far introduced only into Yorkshire Bank and around two-thirds of applicants having no existing mortgage with us, there is scope for significant growth.

A new generation of Integrated Financial Solutions centres with the first four centres opened in Liverpool, Bristol, Reading and Southampton. Four further centres will open in the near future in Oxford, Milton Keynes, Maidstone and Guildford, with further centres to open towards the end of the year.

Significant progress was made towards enabling the four European banks to operate as one.  This included the first phase of implementation of the Customer Connect System, involving replacement of front end systems, which was successfully implemented in more than 30 Yorkshire Bank outlets. Further significant system enhancements to improve customer service and increase sales opportunities will be introduced in the last quarter of 2004 within Clydesdale Bank, Yorkshire Bank and Northern Bank.

The first quarter of 2004 saw the launch of a major television advertising campaign aimed at raising brand awareness for Clydesdale Bank, Yorkshire Bank and Northern Bank, coordinated with the launch of new product releases.

As part of an extensive overhaul of the product range, the first quarter of 2004 saw the launch of new current and savings accounts, mortgages, loans and insurance.

A reduction in retail customer attrition to its lowest level in five years in England & Scotland.  In the middle income and young professional target area of premium and private customers, the number of customers has increased by 11% over 12 months.

Mr Pinney said: "Another highlight has been the results of our increased focus on attracting experienced and talented staff to lead significant aspects of our change programme, such as the expansion of the IFS businesses in the south east of England and our move into third party distribution of our leading mortgage products.

"Last year we set out to change our European operations and we can already see the first results from this work.  We have a long way to go, but we are committed to improving our performance and creating real shareholder value."

Financial Services Europe

Performance Summary

⁽¹⁾ Cash earnings before tax excludes amortisation expense.
⁽²⁾ Retail Deposits for March 2003 includes £0.5bn, previously classified as wholesale liabilities.

The FSE financial performance figures are compiled on a management operating basis and are an aggregation of the results of the continuing retail banking components of the businesses of Clydesdale Bank, Yorkshire Bank, Northern Bank and National Irish Bank and exclude certain one-off items such as costs associated with restructuring. These interim results do not constitute statutory accounts within the meaning of section 240 of the Companies Act 1985 and as such are unaudited. The auditor's reports on the full statutory accounts for the legal entities referred to above for the year ended 30 September 2003 were unqualified.