Clydesdale and Yorkshire Banks announce full year results

3 November 2006

Earnings from ongoing operations in the UK up 13%

London, 3 November 2006: National Australia Bank Group, owner of the Clydesdale and Yorkshire Banks, today released full year results for its UK operations, for the 12 months to 30 September 2006. These results demonstrate that the UK business is delivering on its promises.

Highlights:

Comparison to 12 months to 30 September 2005

• Underlying profit up 16.7% to £454m
• Post tax earnings up 12.8% to £229m
• Total income up 8.7% to £1,193m
• Net interest income up 14.6% to £769m
• Cost to Income ratio improved from 63.4% to 61.1% in the full year and to 59.5% in the half year
• Average gross loans and acceptances increased 25.6% to £20.6bn
• Average retail deposit balances increased 14.2% to £12.9bn

Lynne Peacock, Chief Executive Officer, said:

"These are strong results which clearly demonstrate the continued recovery in our UK business. Across our UK operations, income continues to increase while efficiency continues to improve with a reducing cost/income ratio. The strategic agenda outlined last year continues on track and is delivering sustained growth.

"Our network of integrated Financial Solutions Centres are really starting to deliver, with lending and deposit balances both up almost 30% over the year.

In addition, our mortgage balances have increased by a third, due to strong performances in all channels but particularly through our mortgage intermediary business which to date has introduced over 16,000 new customers to the Bank.

"Retail deposit balances grew 14.2%, and a strong performance in our direct channels reflects the significant investment made.

 "Today's results demonstrate very real momentum behind our differentiated business model."

 
Operational Milestones

Key operational milestones include:

• Our network of integrated Financial Solutions Centres are really starting to deliver, with lending and deposit balances both up by nearly 30% over the year
• Offering integrated business and private banking services to small-medium sized and mid-corporate business customers, there are now 74 Financial Solutions Centres within the UK, 36 in the South and 38 in the North.  Four new centres opened in the South while, in the North, five centres were relocated to new premises and a further seven centres were upgraded in the year. Supporting individual centres, 31 leading entrepreneurs and local professionals were appointed to act as non-executive chairpersons.
• The third party distribution channel now has 450 broker relationships and £1.6 billion mortgage advances were completed over the year.  Over 16,000 customers have now been introduced to the Bank through this channel to date.
• In retail distribution, there are 343 branches following the re-alignment of the high street branch presence which was completed by the end of March, six months ahead of schedule. The branch network continued to show improved performance in a number of areas with good growth in deposits, improvement in cross sales and mortgage sales up over the previous year (with 20% fewer branches). The Wealth Management sales force was also successfully integrated into the retail network during the year with an uplift in sales performance.
• The new branch Teller system was successfully deployed in all Yorkshire Bank branches.  Our programme to converge the back office systems of Clydesdale and Yorkshire onto one platform is well advanced. In September the transfer was announced of Account Management Services based in Aberdeenshire to Clydebank in Glasgow, demonstrating a further step in the rationalisation of back office processing centres.
• The Bank's contact centre in Glasgow has been named "Best Contact Centre of the Year 2006" in the prestigious Contact Centre World Awards for the European, Middle East and Africa Regions. The contact centre beat competition from more than 400 entrants and now moves to the world finals later in November.
• In July, Clydesdale Bank opened an international offshore branch in Guernsey, initially providing a 30-day notice account and fixed rate deposits products with plans to expand the range of services offered over the coming year.
• Clydesdale Bank's sponsorship of the successful Scottish Commonwealth Games team was awarded 'Most effective sponsorship campaign' at the recent UK Financial Services Forum awards for Marketing Effectiveness 2006. Following the success of the sponsorship, Clydesdale Bank has demonstrated its long term commitment to the Scotland team by announcing continued support through to the 2008 Youth Games and 2010 Commonwealth Games in New Delhi.  In addition, Clydesdale Bank has become the first corporate supporter of the bid to bring the 2014 Commonwealth Games to Glasgow.
• Both Yorkshire and Clydesdale Banks were awarded the 'Special Achievement for a New Corporate Partner' accolade from the British Heart Foundation at a special 'Heart of Business' awards ceremony.  To date in excess of £300,000 has been raised with staff and customers.
• Restructuring continues and the reconfiguration of the distribution networks and streamlining of operations is ahead of schedule. 99% of the planned 1,700 FTE reductions outlined in March 2005 have been completed and £86 million of the £117 million cost savings realised. 75% of the £109m provision raised had been utilised by the year end.

Financial Highlights (year to 30 September 2006)

• Post tax earnings before significant items increased 12.8% on the prior year reflecting higher income partially offset by increased expenses and charges to provide for doubtful debts.
• Underlying profit increased by 16.7% with income growth of 8.7% compared with expense growth of 4.2% with the following factors driving the result:
  • Net interest income has increased 14.6%.
  • Average gross loans and acceptances increased 25.6% on the prior year. Total business lending volumes grew by 40.1% whilst the continuing focus on mortgage lending has resulted in growth of mortgage volumes of 33.1%.
  • Average retail deposit volumes grew 14.2% driven by improved sales-force focus as well as pricing and new product development initiatives.
  • The net interest margin decreased 29 basis points from 3.83% to 3.54%.  Excluding the benefit of the proceeds from the sale of the Irish Banks, held for four months in the prior year, and the introduction of International Accounting Standards, the underlying margin decline was 44 basis points.
• Other operating income has decreased 0.7% reflecting:
  • The move to International Accounting Standards has driven a net £41.2 million decrease primarily through the new deferral of lending fees to the balance sheet. Underlying origination fees have increased £19 million.
  • A one off profit of £20.8 million in September 2005 half for property disposals compared with £10.8 million in the current year.
  • £5.6 million proceeds on the sale of the UK Discretionary Investment management business
    o Increased income from Danske Bank A/S of £17.8 million for the provision of transitional services (offset by an increase in expenses) due to increased activities in the build up to migration in April 2006 following the sale of our Irish banks.
  • A £7.2 million increase in Wealth Management insurance commissions and management charge income from funds under management.
  • Underlying other operating income excluding the impacts of International Accounting Standards and other one off items has increased by 7%.
• Operating expenses have increased 4.2% driven by:
  • Direct costs associated with the UK Growth Programme which have increased by £27.3 million including the recruitment and ongoing costs of staff in the Financial Solutions Centres, additional property associated costs, advertising and marketing costs and additional brokerage commission costs as a result of increased mortgage completions through the third party channel;
  • Overhead costs previously internally charged to the Ireland operation of £16.1 million;
  • An increase of £17.8 million due to costs associated with transitional services provided to Danske Bank A/S (see above);
  • Other inflationary costs and indirect costs associated with growing the balance sheet; partially offset by £57 million of incremental savings in the current year from the restructuring initiatives provided for in March 2005.
• The cost to income ratio of the business has improved by 230 basis points over the year.
• The charge to provide for doubtful debts has increased 45.5% (£40.0 million) on the prior year.  This reflects the deterioration seen across the UK market during the year in credit cards and personal lending books, together with additional provision charges which relate to increased lending growth of 27%. During the year a number of strategies have been put in place to mitigate these industry effects.  The lending decision process has been tightened, particularly around personal loans and credit cards and in the direct channels area, along with more rigorous fraud review processes.  Further pro-active collections strategies have been implemented including increased collections staff and improved pre-delinquency and arrears management.

Financial Highlights (movement from March 2006 half to September 2006 half)

Post tax earnings before significant items increased 16% with the following factors driving the result:

• Net interest income has increased 4.0% reflecting the growing momentum of the Financial Solutions Centres and third party distribution.
• Average gross loans and acceptance volumes increased 11.3% on the prior period with strong growth in business lending volumes (up 16.2%) and a continuing focus on mortgage lending (up 13.3%).
• Average retail deposit volumes grew 8.9% driven by the continued expansion in savings generation in the Financial Solutions Centres (15.5% average deposit growth in the half) and pricing initiatives on existing products.
• Other operating income has decreased by 6.4% reflecting:
  • Lower income from Danske Bank A/S of £8.0 million (offset by decreased expenses) for the provision of  transitional services which were largely complete in April 2006 following the sale of the Irish banks;
  • Lower profit share income from creditor insurance (£8.3 million) as this income is received in the first half of the year;
  • Sale proceeds (£5.3 million) from the disposal of the UK Discretionary Investment management business which were received in the first half with a residual £0.3 million received in the second half; partially offset by an increase in the profit on property disposals of £7.6 million as part of the property rationalisation programme;
• Operating expenses have decreased 5.0% driven by:
  • a decrease of £8.0 million (offset by decreased other operating income) due to costs associated with transitional services provided to Danske Bank A/S which were largely completed in April 2006 following the sale of the Irish banks;
  • £37 million of incremental savings from the restructuring initiatives provided for in the March 2005 half; partially offset by:
  • The costs associated with the UK Growth Programme. These have increased by £15.5 million reflecting the additional costs from the recruitment and ongoing costs of staff in the Financial Solutions Centres, additional property associated costs, advertising and marketing costs, additional brokerage commission costs as a result of increased mortgage completions through the third party channel and a self sustaining incentive scheme aimed at rewarding strong income performance;
  • Additional spend in the second half (£7.4 million) on compliance and investment in branch, customer-facing and back office systems;
  • Other inflationary costs and indirect costs associated with growing the balance sheet.
• The cost to income ratio improved by 320 basis points over the half year reflecting the effects of the cost reduction programme.
• The charge to provide for doubtful debts has remained flat on the March 2006 half. The additional collective provisions arising from the 11% increase in average lending volumes has been offset by improved pre-delinquency and arrears management and further tightening of the scorecards for credit cards and personal loans.

Performance Summary - UK ongoing operations

Key Performance Measures

⁽¹⁾  To reflect a change to the treatment of inter-company liabilities, the September 2005 full year net interest rate spread has been restated upwards by 15 basis points.  There has been no impact to Group net interest spreads.
National Australia Bank Group results are available on http://www.nabgroup.com.au/ (opens in a new window)

About the National Australia Bank Group:

The  National  Australia  Bank Group is an international financial services organisation that  provides  a  comprehensive  and  integrated  range  of financial  products and services through our group of banks.  NAB is one of the world's top 30 financial services companies and serves 7.7 million banking customers and over 2.3 million wealth management customers.

Globally, the National is organised around regional businesses in Australia, Asia, the United Kingdom and New Zealand. These regions include the  retail  bank brands, National Australia Bank in Australia, the Bank of New  Zealand,  and  the  Yorkshire  Bank  and  Clydesdale  Bank  in the UK.

For more information:

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