Financial Services Europe Annual Results Year to 30 September 2005

9 November 2005

National Australia Group UK operations deliver stable result during year of enormous change

London, 9 November 2005: The National Australia Bank Group today released the full year results for its UK banking and wealth management operations, announcing cash earnings before tax of £297 million for the 12 months to 30 September 2005, stable on the previous year.

Mrs Lynne Peacock, Chief Executive Officer, National Australia Group UK said:

"We have stabilised profits, while conducting a major restructure to make the business more competitive, are managing margins down to bring them more into line with the UK market and invested in an expansion program for future growth.

"We have taken the hard decisions that were needed for our business to be efficient, nimble and competitive and to develop an offering that is distinctive and strongly differentiates us from our competitors. We are getting costs under control and have made great progress in re-engineering processes, simplifying management structures and improving our efficiency.

"We have delivered more competitive products and invested in our brands, technology and compliance.  We have pressed ahead with building our integrated financial services business and third party distribution of our mortgage products, building a unique offering that is already showing results. We have also almost completed the reconfiguration of our retail branch network across the UK.

"We are now seeing strong results from our key areas of investment and believe we are generating the momentum we need to see sustained growth.  Mortgage volumes have increased substantially, with Clydesdale Bank writing an additional 40%, which now includes the sale of Clydesdale mortgages through mortgage brokers, while Yorkshire Bank was up 15% on the previous year.  Business lending volumes have also increased, with Clydesdale Bank up 19% and Yorkshire Bank up 40%.

"There is still a great deal to do to complete our turnaround. However, to have delivered this result in a period of such enormous change is an impressive achievement."

Operational Milestones

Key operational milestones included:

• The sale of National Irish Bank and Northern Bank to the Danske Bank Group;
• The completion of the "build" phase of a network of Financial Solutions Centres offering integrated business and premium banking services to small-medium sized business customers.  By 30 September 2005, there were 32 Financial Solutions Centres in the south of England, 28 centres in the north of England and 18 centres in Scotland;
• The expansion of the third party distribution channel which added £989m of mortgage completions by 30th September 2005.  The business now has relationships with more than 300 of the UK's leading brokers;
• A review of the distribution strategy and branch network which resulted in a decision to close 64 Clydesdale Bank branches and 38 Yorkshire Bank branches over a 6-12 month period.  This decision reflected the changing needs of our customers and the different ways in which they are banking;
• A £7 million investment to upgrade the internet banking platform, a £3 million upgrade to ATM software as well as continued expansion of the ATM network, including the introduction of the UK's first ATMs for the hearing impaired, and upgraded telephone banking services; and
• Further advances in integration of Clydesdale Bank and Yorkshire Bank, including:
  • the merger of the legal entities of the two banks;
  • a single management structure;
  • the consolidation of call centre services and back office processing and administration; and
  • the ongoing development of a single product set supporting multiple brands and distribution channels, including a new current account and an offset mortgage.

Financial Highlights (12 month comparisons)

• Net interest income has increased 0.9% with growing momentum as Financial Solutions Centres and Third Party Distribution impact on the results.  Strong underlying volume growth is being offset by the managed effects of margin contraction and changing portfolio mix.
• Lending volumes increased 21.1% on the previous year with major increases in variable and fixed rate mortgages, term lending and overdrafts.
• Retail deposits increased 7.8% driven by pricing initiatives on existing products and the launch of Current Account Plus designed to attract 'new to bank' customers.
• Other operating income has increased 18.4% reflecting:

  • an increase in origination fees of £12.1million driven by the volume growth of the Integrated Financial Solutions Centres and third party propositions;

  • higher annual management charges on Funds Under Management of £3.1 million driven by strengthening investment market performance in the current year;

  • the profit on property transactions of £21 million; and

  • new income from Danske Bank A/S of £19 million in respect of transitional services (offset by an increase in expenses).

• Operating expenses have increased 9.8% driven by:

  • increase of £19 million due to costs associated with transitional services provided to Danske Bank A/S;

  • costs associated with the transformation of the business have grown by £50million including the costs of approximately 260 new staff in Financial Solutions Centres;

  • additional property associated costs, advertising and marketing costs, additional brokerage commission costs as a result of 4,810 more mortgage completions through the third party channel and a self-sustaining incentive scheme aimed at rewarding strong income performance; and

  • overhead costs previously internally charged to the Ireland operation of £24million, and targeted to be managed out the business over 18 months from the date of sale.

For more information:

London    Tim Pie or Yolande Stratford 020 7710 2100
Glasgow  Lynn Hunter   0141 242 4357
Leeds      Peter Brown    0113 247 2510