National Australia Group Announce Full Year
Results for European Retail Banking Operations

London, 10 November 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 significant items and tax for the year to 30 September 2004 of £349m, a 29% decrease on the previous year.

Mr Ross Pinney, Chief Executive National Australia Group Europe, said:  "The result was as expected and reflects the challenges we face as we turn around the performance of our European businesses.  Last year we commenced a programme to reinvigorate our European businesses and we can already see the first signs of turnaround and are very encouraged by the progress that has been made.

"We are moving forward on key growth initiatives such as our expansion into the south east of England, growing our SME offering and distributing our mortgages through intermediaries, and are starting to see the first signs of progress and turnaround in areas such as sales volumes and customer loyalty.

 "We have made progress in re-engineering processes, simplifying management structures and improving the efficiency of business operations.  We have released a variety of new products in personal and business banking, launched new advertising, and invested in new technology and compliance.

"However, we are in the early phases of an ongoing programme of change and are realistic about the time it will take before this results in improved financial performance."

Overview of Financial Performance

• Total income was 3.3% lower at £1,203m, despite volume growth during the year.  Volume growth was offset by a lower net interest margin caused by a change in product mix towards lower margin lending products.
• Lending balances increased 8.6% on last year driven by an increased focus on mortgage lending which delivered growth in mortgage volumes of 15.5%.
• Operating profit before tax was down 29.2% to £349m on the previous full year, as a result of an increase in our pension costs and higher expenses relating primarily to increased investment in the business and a number of one off costs, and lower income mentioned above.
• Pension fund expenses increased from £36m to £73m. 
• Operating expenses, excluding pension expenses, increased by £70m to £691m, driven by increased investment spend and a series of costs associated with compliance and changes in the regulatory landscape, including:
• £29m of increased investment in systems including the Customer Connect System, which involves the replacement of the front-end systems together with expenditure on integration;
• £8m of investment in Financial Solutions Centres, including personnel costs from the uplift in the number of customer-facing staff to support the growth strategy in the south east of England;
• £19.7m of non-recurring costs relating to additional provisions for retiree medical expenses, costs associated with endowment mis-selling and regulatory costs relating to the findings of the Republic of Ireland High Court Investigation into National Irish Bank;
• A £14m increase in ongoing expenditure on regulatory projects, such as compliance costs for Chip & Pin technology (mandatory European project to reduce card fraud), Basel II, IFRS and the Financial Services Authority mortgage regulation program;

Summary of Operational Developments

• The establishment of a network of Financial Solutions Centres offering integrated business and private banking services to SME and high net worth customers in the south east of England.  As at 30 September 2004, 8 centres were in operation and 15 more are planned by the end of 2005.  These centres are showing good early performance.  We are exploring ways to build on this in other markets and will ensure our business operating model supports this expansion.
• The sale of Clydesdale Bank mortgages through a number of key intermediary parties has opened new markets to Group products.  Alliances have been entered into with Charcol, Hamptons Mortgages, Kingsway Mortgages and Legal & General Mortgage Club. In the last three months of the financial year we wrote £125m of new business with high value customers.
• Customer acquisition levels have increased following investment in brand awareness and the launch of more competitive product offerings such as a new current account and an offset mortgage product.
• Mortgage volumes grew by £857m year-on-year with both Rapid Repay and Flexible repayment mortgage products increasing balances. The Offset mortgage was introduced at Yorkshire Bank during the year and proved highly successful and we plan to extend the offer to Clydesdale and National Irish Bank customers early next year.
• Investment in new information technology systems to improve customer service in the branches and integrate back office support functions.  Good progress has been made on the replacement of the front end system in branches to give our branch staff the tools to enable better cross selling capabilities.
• Continued focus on better cost management through a combination of re-engineering processes, simplifying management structures and improving the efficiency of business operations. 
• The legal entity merger of Clydesdale Bank and Yorkshire Bank is on track to take place by the end of the year.
• The establishment of a relationship with Legal & General has allowed us to offer an excellent range of life and critical illness insurance products and has resulted in a significant increase in sales, particularly sales linked to mortgages.
• £15 million will be invested in the refurbishment of the Clydesdale Bank head office complex in Glasgow and in the opening of a flagship Clydesdale Bank Financial Solutions Centre in Glasgow during 2005.

Notes to Editors:

Below are further details of financial performance.  Please note that operating profit before tax is shown in the tables as Cash Earnings Before Tax, as per Australian Generally Accepted Accounting Principles.

For further information, contact:

National Australia Group Corporate Affairs: Tim Pie    020 7710 2146

Tulchan Communications: Kate Inverarity   0207 353 4200

Financial Services Europe

Performance Summary

Key Performance Measures