Financial Services Europe Half Year Results to March 2006

11 May 2006

London, 11 May 2006: National Australia Bank Group, owner of the Clydesdale and Yorkshire Banks, today released interim results for its UK banking and wealth management operations, for the six months ended 31 March 2006. These results demonstrate that the UK business is making real progress.

Highlights:

Comparison to six months to 30 September 2005

• Cash earnings before tax of £154 million, (+5.5%)
• Underlying profit rises to £219 million (+10.1%)
• Cost to Income Ratio improved to 62.9% (65.1%)

Comparison to six months to 31 March 2005

• Average lending balances (£19.6bn) increased 25.6%
• Average retail deposit balances reached £12.4bn (+10.7%)
• Net interest income (£374m) increased by 15.1%

Ms Lynne Peacock, Chief Executive Officer, National Australia Bank UK said:

"The business is just where we planned it should be - income is increasing, efficiency is improving and the strategic agenda and management actions outlined last year are being delivered.

"The increased income across the UK operations reflects growing business momentum. Our integrated Financial Solutions Centres achieved lending balances of £12.3 billion (+13.7%) and deposit balances of £5.5 billion (+8.9%) at the half year. Our mortgage intermediary business continues to show good progress with a further £822 million (+5.8%) of gross mortgage advances in the last six months. We continue to see improved performance in the retail branch network and have also experienced a significant increase in direct channel transactions over the last six months.

"Today's results are a credit to our UK employees who have remained focused on growing the business during a period of enormous change. We are committed to a strong presence in the UK and the results give us confidence that our differentiated business model continues to gain traction and is starting to deliver sustainable profit growth."

Operational Milestones

Key operational milestones include:

• The network of integrated Financial Solutions Centres achieved business lending balance increases of 13.7% to £12.3bn and deposits growth of 8.9% to £5.5bn in the six months to 31 March 2006
• The expansion of the third party distribution channel which added £822m of mortgage advances in the six months to 31 March 2006 (+5.8% in the six months to September 2005 and +288.3% compared to the same period last year)
• The branch network showed improved performance in a number of areas with good growth in deposits, improvement in cross sales and mortgage sales up by more than a third over the same period last year
• Continued expansion of the network of integrated Financial Solutions Centres offering integrated business and premium banking services to small-medium sized business customers with an additional 4 centres opened in the south over the last six months.  By 31 March 2006, there were 36 Financial Solutions Centres in the south of England, 28 centres in the north of England and 18 centres in Scotland
• The appointment of 25 leading entrepreneurs and local professionals to act as non-executive chairpersons for our integrated Financial Solutions Centres
• Over 70% of Clydesdale and Yorkshire Bank transactions are made via direct channels, with the largest growth being in online activity (36% increase compared to the same period last year).  Direct sales have increased 13.5% compared to the same period last year. A £5.5m investment was made in marketing teradata systems over this period
• Introduction of pension reforms to the Clydesdale Bank, Yorkshire Bank and the National Australia Bank UK pension schemes, following an employee ballot which supported the reforms. National Australia Bank is also making a one-off contribution of £100 million across its three defined benefit schemes. From 1 April 2006, the defined benefit schemes moved to a structure known as "career average"
• Migration and separation of back office processing for Northern Bank and National Irish Bank from UK operations, in line with original timetable set in December 2004. The two Irish banks were sold to the Danske Bank Group at the end of February 2005. Since then, NAB UK has continued to provide a full range of transitional services whilst progressing the migration activities
• An agreement to transfer the UK Discretionary Investment Management business to Tilney Investment Management scheduled to be completed by May this year
• An agreement to outsource the administration of the Bank's UK trust and estate services to Mazars from June 2006. The Bank retains responsibility as trustee and executor for existing and new business
• Commitment from Clydesdale Bank to continue its financial support to the Commonwealth Games Council for Scotland (CGCS) for the 2010 Games in Delhi. Commitment from Yorkshire Bank to sponsor a programme with Leeds University Business School and continue its sponsorship of Opera North. Continued support of the British Heart Foundation, with Clydesdale and Yorkshire Banks as their 'charity partner' for a second year
• During the period Clydesdale Bank plc launched a medium term note programme under the NAB Group US$30 billion Global MTN Programme. Since launch, three issuances under the programme have been made resulting in a total of £650 million of Floating Rate Notes being issued. In addition, in February 2006, Clydesdale Bank plc launched its first stand-alone subordinated debt transaction.

Financial Highlights (movement on September 2005 half)

Underlying profit increased 10.1% with the following factors driving the result:

• Net interest income has increased 9.7% with growing momentum as Financial Solutions Centres and Third Party Distribution impact on the results
• Average lending volumes increased 12.6% on the previous period with major increases in mortgage and business lending
• Average retail deposits increased 6.9% driven by improved sales focus and pricing initiatives
• Other operating income is 5.3% lower reflecting
  • IFRS accounting policy changes driving a net £21million decrease through the deferral of lending fees partly offset with the mark to market valuations of IFRS defined ineffective hedges
  • one off profit of £21m in September half for property disposals with a residual £1million received in the March half; partially offset by
  • an increase in underlying origination fees of £6.3million driven by the volume growth of the integrated Financial Solutions Centres and third party propositions;
  • creditor profit share;
  • sales proceeds for the sale of UK Discretionary Investment management business to Tilney Investment Management;
  • increased Danske transitional service income (offset in expenses) of £5.4m as a result  the sale of the Irish banks in February 2005
  • After adjusting for one-off items, including IFRS, other operating income has increased by 8.8%
• Operating expenses have decreased 0.2% primarily driven by:
  • £21million incremental savings from restructuring initiatives
  • decreased investment project spend of £10million. Offset by:
  • costs associated with the transformation of the business have increased by £12.9million including the costs of circa - 130 new staff in the integrated Financial Solutions Centres
  • increased costs of £5.4m associated with transitional services provided to Danske Bank A/S (offset in income)
• Charge to provide for doubtful debts has increased 22.6%. This reflects additional provision charges related to increased lending growth and the continued deterioration seen across the UK market in credit cards and personal lending books.

For more information:

National Australia Bank      
London    Yolande Stratford  020 7710 1934  
Glasgow   Kenny Kemp        0774 708 7957
Leeds       Peter Brown         0113 247 2510
     
College Hill    
Tony Friend   0207 457 2020
Roddy Watt   0207 457 2020