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The Bank of Nova ScotiaANNUAL
FINANCIAL
REPORT
2017
Our vision is to
be Australia and
New Zealand’s most
respected bank
Robert Ravens
Bridestowe Lavender Estate
National Australia Bank Limited
ABN 12 004 044 937
This 2017 Annual Financial Report (Report) is lodged with the Australian Securities and
Investments Commission and ASX Limited. National Australia Bank Limited (NAB) is publicly
listed in Australia. The Report contains information prepared on the basis of the Banking Act
1959 (Cth), Corporations Act 2001 (Cth) and Accounting Standards and Interpretations issued by
the Australian Accounting Standards Board. NAB also produces a non-statutory Annual Review
which can be viewed online at nabgroup.com/annualreports.
To view the Report online, visit nabgroup.com/annualreports. Alternatively, to arrange for
a copy to be sent to you free of charge, call Shareholder Services on 1300 367 647 from within
Australia, or +61 3 9415 4299 from outside Australia.
Nothing in the Report is, or should be taken as, an offer of securities in NAB for issue or sale,
or an invitation to apply for the purchase of such securities.
All figures in the Report are in Australian dollars unless otherwise stated.
Table of Contents
Report of the Directors
Operating and financial review
Directors’ information
Other matters
Auditor’s independence declaration
Remuneration report
Corporate governance
2
2
19
25
29
30
56
Financial Report
Income statements
Statements of comprehensive income
Balance sheets
Cash flow statements
Statements of changes in equity
Notes to the financial statements
Directors' declaration
Independent auditor's report
Shareholder information
Glossary
57
59
60
61
62
63
65
143
144
150
156
2017 Annual Financial Report
1
Report of the Directors
Operating and financial review
The directors of National Australia Bank Limited (NAB) present their
report, together with the financial statements of the Group, being NAB
and its controlled entities, for the year ended 30 September 2017.
Further information on important factors that could cause actual results
to differ materially from those projected in such statements is
contained on page 11 under “Disclosure on Risk Factors”.
Certain definitions
Rounding of amounts
The Group’s financial year ends on 30 September. The financial year
ended 30 September 2017 is referred to as 2017 and other financial
years are referred to in a corresponding manner. The abbreviations $m
and $bn represent millions and thousands of millions (i.e. billions) of
Australian dollars respectively. Any discrepancies between total and
sums of components in tables contained in this report are due to
rounding.
Key terms used in this report are contained in the Glossary.
Forward-looking statements
This report contains statements that are, or may be deemed to be,
forward-looking statements. These forward-looking statements may be
identified by the use of forward-looking terminology, including the terms
"believe", "estimate", "plan", "project", "anticipate", "expect", “target”,
"intend", “likely”, "may", "will", “could” or "should" or, in each case, their
negative or other variations or other similar expressions, or by
discussions of strategy, plans, objectives, targets, goals, future events
or intentions. Indications of, and guidance on, future earnings and
financial position and performance are also forward-looking
statements. You are cautioned not to place undue reliance on such
forward-looking statements.
Such forward-looking statements are not guarantees of future
performance and involve known and unknown risks, uncertainties and
other factors, many of which are beyond the control of the Group,
which may cause actual results to differ materially from those
expressed or implied in such statements. There can be no assurance
that actual outcomes will not differ materially from these statements.
Page 4 of this report describes certain initiatives relating to the Group’s
strategic agenda (“Program”), including certain forward-looking
statements. These statements are subject to a number of risks,
assumptions and qualifications, including: (1) detailed business plans
have not been developed for the entirety of the Program, and the full
scope and cost of the Program may vary as plans are developed and
third parties engaged; (2) the Group’s ability to execute and manage
the Program in a sequenced, controlled and effective manner and in
accordance with the relevant project and business plan (once
developed); (3) the Group’s ability to execute productivity initiatives
and realise operational synergies, cost savings and revenue benefits in
accordance with the Program plan (including, in relation to CTI and
ROE targets, the extension of improvements beyond the current
Program plan); (4) the Group’s ability to meet its internal net FTE
reduction targets; (5) the Group’s ability to recruit and retain FTE and
contractors with the requisite skills and experience to deliver Program
initiatives; (6) there being no significant change in the Group’s financial
performance or operating environment, including the economic
conditions in Australia and New Zealand, changes to financial markets
and the Group’s ability to raise funding and the cost of such funding,
increased competition, changes in interest rates and changes in
customer behaviour; (7) there being no material change to law or
regulation or changes to regulatory policy or interpretation, including
relating to the capital and liquidity requirements of the Group; and (8)
for the purpose of calculating FTE cost savings and redundancy costs,
the Group has assumed an average FTE cost based on Group-wide
averages, and such costs are not calculated by reference to specific
productivity initiatives or individual employee entitlements.
2
NATIONAL AUSTRALIA BANK
In accordance with ASIC Corporations (Rounding in Financial /
Directors' Reports) Instrument 2016/191, all amounts have been
rounded to the nearest million dollars, except where indicated.
Principal activities
The principal activities of the Group during the year were banking
services, credit and access card facilities, leasing, housing and general
finance, international banking, investment banking, wealth
management services, funds management and custodian, trustee and
nominee services.
Significant changes in the state of affairs
During the 2017 financial year, a number of changes to the
composition of the Board occurred:
• Non-executive director Mr Daniel Gilbert retired from the Board on
16 December 2016.
• Non-executive director Ms Jillian Segal retired from the Board on
16 December 2016.
In addition, non-executive director Ms Ann Sherry AO was appointed
to the Board on 8 November 2017.
In November 2017, NAB announced changes to its Executive
Leadership Team. Ms Angela Mentis, currently Chief Customer Officer
– Business and Private Banking, was appointed Managing Director
and CEO of Bank of New Zealand. Mr Anthony Healy, currently
Managing Director and CEO of Bank of New Zealand, was appointed
Chief Customer Officer – Business and Private Banking. The
appointments, which are subject to regulatory approval, will take effect
from 1 January 2018.
The Group’s Business
The Group is a financial services organisation with approximately
33,000 employees, operating through a network of more than 900
locations, with more than 571,000 shareholders and serving over nine
million customers.
The majority of the Group's financial services businesses operate in
Australia and New Zealand, with branches located in Asia, the United
Kingdom (UK) and the United States (US). The Group's brands share
a commitment to providing customers with quality products and
services. The Group's relationships are based on the principles of
providing quality help, guidance and advice to achieve better financial
outcomes for customers.
In 2017 the Group operated the following divisions:
• Consumer Banking and Wealth comprises the NAB and UBank
consumer banking divisions, and the Wealth divisions of Advice,
Asset Management and Superannuation. The division provides
customers with access to independent advisers, including
mortgage brokers and the financial planning network of self-
employed, aligned and salaried advisers in Australia.
• Business and Private Banking focusses on serving priority small
and medium (SME) customers via the NAB Business franchise and
specialist services in key segments including Agriculture, Health,
Government, Education, Community and Franchise. The division
also serves NAB's micro and small business customers and
includes Private Banking and JBWere.
Report of the Directors
Operating and financial review (continued)
• Corporate and Institutional Banking provides a range of lending and
transactional products and services related to financial and debt
capital markets, specialised capital, custody and alternative
investments. The division serves its customers in Australia and
globally through branches in the US, UK and Asia with specialised
industry relationships and product teams.
• NZ Banking comprises the Retail, Business, Agribusiness,
Corporate and Insurance franchises and Markets Sales operations
in New Zealand, operating under the ‘Bank of New Zealand’ brand.
It excludes Bank of New Zealand's Markets Trading operations.
Strategic Highlights
Vision and Objectives
The Group’s strategic focus supports its vision of becoming Australia
and New Zealand’s most respected bank. In the September 2017 full
year, this was underpinned by three key objectives:
1. Our customers are advocates
2. Our people are engaged
3. Our shareholders receive attractive returns
To meet these objectives, execution was focussed around four key
themes – deepening relationships in priority customer segments,
delivering a great customer experience, reshaping our business to
perform, and being known for great leadership, talent and people.
Deepen relationships in priority customer segments
The Group has prioritised four customer segments where it is
focussing investment to deepen customer relationships. These are
small and medium business customers given NAB’s strong market
position and attractive returns, combined with home owners and
investors.
Investment in priority segments is driving improved results. This is
evident in the performance of Business and Private
Banking which, during the September 2017 full year, recorded positive
revenue growth on higher volumes and stronger margins.
Delivering a great customer experience and reshaping our
business to perform
The Group uses the Net Promoter Score (NPS) (1) system to access
real-time, targeted feedback so it can understand and improve the
customer experience. For the September 2017 full year, our priority
segment NPS (1) (2) was first of the major peer banks.
The Group is committed to using customer feedback and a new way of
working to transform the end-to-end customer experience across a
range of products and channels. This is known as Customer Journeys.
In the September 2017 full year, the Group launched seven Customer
Journeys aimed at driving customer advocacy through increased
efficiencies and improved interactions with customers. Examples
include:
• A new 10 minute digital transaction account onboarding for
business customers with simple needs, significantly reducing
processing time for onboarding new customers and removing the
need for a customer to visit a branch.
• A faster, easier application process for Everyday Accounts,
reducing application time to seven minutes.
• A simplified digital Superannuation portal to help customers better
understand their retirement options and e-forms pre-populated with
existing customer data.
• A virtual banking assistant pilot for business customers using
artificial intelligence chat technology to help customers fulfill simple
needs through self-service.
The Group continues to enhance its products and services for
customers through digitisation and innovation, as evidenced by:
• Enabling small business customers to access funding quickly with
QuickBiz unsecured lending expanded to include business cards
and overdraft facilities.
• The launch of the HICAPS Go mobile app solution in partnership
with start-up, Medipass Solutions, which allows health patients to
book and pay for services via their mobile device while receiving full
transparency of costs, and for practitioners removes the need for a
physical terminal.
The Group is also exploring new strategic alliances and direct equity
investments through its dedicated innovation fund, NAB Ventures, to
fast-track improvements in customer experience and leverage
innovative new technologies and business models. Examples of
investments made during the September 2017 full year include
investments in Veem (business-to-business global payments) and
Wave (a cloud-based integrated suite of small business tools including
accounting, invoicing, payments, and payroll for micro businesses).
Great leadership, talent and people
•
The Group is committed to attracting, developing and inspiring talent to
drive a culture that delivers high performance. Key initiatives during the
September 2017 full year include:
• Significant investment in senior executive assessment to
understand organisational leadership strengths driving
performance.
Implementing targeted development programs including
accelerated streams for high potential female talent and executives
identified as key talent.
Introducing a new performance framework with leaders accountable
for coaching every day, supported by monthly performance and
development conversations.
Investment in new technology to track performance, talent,
capability and deliver leadership data and insights.
•
•
Generating attractive returns
The Group has continued to shift its portfolio towards business with
higher returns where it has strong capability to compete. For the
September 2017 full year, the Group delivered a statutory ROE of
10.9% and a cash ROE of 14.0% on a continuing operations basis.
Maintain and strengthen our foundations
The Group underpins its strategy by maintaining strong foundations:
balance sheet strength (including capital, funding and liquidity), risk
management capability (including credit and operational risk) and core
technology platforms and infrastructure.
The Group remained well capitalised during the September 2017 full
year, and expects to meet APRA's new ‘unquestionably strong’ capital
requirements in an orderly manner by 1 January 2020. The Common
Equity Tier 1 (CET1) ratio as at 30 September 2017 was 10.1%.
(1) Net Promoter® and NPS® are registered trademarks and Net Promoter Score and Net Promoter System are trademarks of Bain & Company, Satmetrix Systems and Fred
Reichheld.
(2) Priority Segments Net Promoter Score (NPS) is a simple average of the NPS scores of four priority segments: Home Owners, Investors, Small Business ($0.1m-<$5m)
and Medium Business ($5m-<$50m). The Priority Segments NPS data is based on six month moving averages from Roy Morgan Research and DBM BFSM Research.
2017 Annual Financial Report
3
Report of the Directors
Operating and financial review (continued)
The Group has maintained strong liquidity through the September
2017 full year with a quarterly average Liquidity Coverage Ratio (LCR)
of 123%, which is above the APRA requirement of 100%. The
30 September 2017 Net Stable Funding Ratio (NSFR) was 108%,
above the APRA minimum regulatory requirement of 100% from
1 January 2018.
Overall credit risk in the Group’s portfolio remains sound, and bad and
doubtful debts are stable. Portfolio concentrations are managed with
reference to established Group risk appetite settings.
Accelerating our strategy
The environment in which the Group operates is one of rapid and
constant change. The Group’s customers are now largely 'digital-first'
and expect seamless, personal experiences. New competitors
continue to emerge, and community and regulatory expectations have
never been greater. The risks faced by the Group are constantly
evolving, requiring ever greater vigilance around cybercrime and data
protection.
The Group is optimistic about the future and the opportunities for NAB
in a changing world, and moves forward in a much stronger position.
This allows the Group to plan for the longer term and, on 2 November
2017, the Group announced an acceleration of its strategy to enable
the Group to grow while staying focussed on productivity.
This includes an estimated $1.5 billion increase in investment over the
next three years. A key focus will be driving a major uplift in innovation
and capabilities in the Group’s leading Australian SME franchise. The
timing and amount of investment spend may vary depending on the
operating environment.
The Group expects this to deliver benefits including:
•
Improved customer experience with fewer, simpler products,
delivered by digital channels.
• Cumulative cost savings, currently targeted at greater than $1
billion by 30 September 2020, as the Group significantly simplifies
and automates processes, reduces procurement and third party
costs, and gets closer to its customers with a flatter organisational
structure.
Increased revenue from higher customer retention and targeted
market share gains.
•
• Reduced operational and regulatory risks from a simplified, more
responsive and resilient technology environment.
The Group is reshaping its workforce to enable it to deliver for its
customers and by 30 September 2020 expects to create up to 2,000
new jobs while about 6,000 roles will be impacted as the Group further
automates and simplifies its business. This will result in a net reduction
in staff currently targeted at approximately 4,000 by 30 September
2020, which is expected to give rise to a restructuring provision of
$0.5-0.8 billion in the first half of the 2018 financial year. Throughout
this process, the Group will treat its people with care and respect and
equip them for the future.
Reflecting the accelerated investment impact, September 2018 full
year expenses are expected to grow 5-8%, with expenses then
targeted to remain broadly flat through to 30 September 2020
(excluding the restructuring provision and large one-off expenses).
Taking account of the near term impact of these changes, the Board
expects to maintain dividends for the September 2018 full year at the
same level as the September 2017 full year, subject to no material
4
NATIONAL AUSTRALIA BANK
change in the external environment and satisfactory Group financial
performance.
The Group has set four new aspirational objectives:
• NPS positive and number 1 NPS of Australian major banks for the
Group's priority segments.
• Cost-to-income ratio towards 35%.
• Number 1 ROE of Australian major banks.
• Top quartile employee engagement.
The Group plans to achieve these by being the best business bank;
becoming simpler and faster for its customers and its people;
focussing on new and emerging growth opportunities; and having great
leaders, talent and culture.
This is an ambitious and necessary plan. It will enable the Group to
continue to deliver for all its stakeholders, live its purpose to 'back the
bold who move Australia forward' and achieve the Group’s vision to be
Australia and New Zealand’s most respected bank.
Financial performance summary
The following financial discussion and analysis discloses net profit on
both a statutory and cash earnings basis. The statutory basis is
presented in accordance with the Corporations Act 2001 (Cth) and
Australian Accounting Standards and is audited by the auditors in
accordance with Australian Auditing Standards.
Non-IFRS key financial performance measures used by
the Group
Certain financial measures detailed in the Directors’ Report are not
accounting measures within the scope of IFRS. Management review
these financial metrics in order to measure the Group’s overall financial
performance and position and believe the presentation of these
industry standard financial measures provides useful information to
analysts and investors regarding the results of the Group's operations
and allows ready comparison with other industry participants. These
financial performance measures include:
• Cash earnings
• Statutory ROE
• Cash ROE
• Net Interest Margin (NIM)
• Average equity (adjusted)
• Average interest earning assets
• Average assets.
The Group regularly reviews the non-IFRS measures included in its
Directors’ Report to ensure that only material financial measures are
incorporated. Certain other financial performance measures detailed in
the Directors' Report are derived from IFRS measures and are
similarly used by analysts and investors to assess the Group’s
performance. These measures are defined in the Glossary.
Any non-IFRS measures included in this document are not a substitute
for IFRS measures and readers should consider the IFRS measures
as well. The non-IFRS financial measures referred to above have not
been presented in accordance with Australian Accounting Standards
nor audited or reviewed in accordance with Australian Auditing
Standards unless they are included in the Financial report.
Further information in relation to these financial measures is set out
below and in the Glossary.
Information about cash earnings
Cash earnings is a non-IFRS key financial performance measure used
by the Group, the investment community and NAB’s Australian peers
Report of the Directors
Operating and financial review (continued)
with similar business portfolios. The Group also uses cash earnings for
its internal management reporting as it better reflects what it considers
to be the underlying performance of the Group.
Cash earnings is calculated by excluding discontinued operations and
other items which are included within the statutory net profit
attributable to owners of NAB.
Cash earnings does not purport to represent the cash flows, funding or
liquidity position of the Group, nor any amount represented on a cash
flow statement. It is not a statutory financial measure and is not
presented in accordance with Australian Accounting Standards nor
audited or reviewed in accordance with Australian Auditing Standards.
A full reconciliation between statutory net profit and cash earnings
including a description of each non-cash earnings item is included on
pages 70 to 72 in Note 2 Segment information in the Financial
report.
Information about net interest margin
Net interest margin (NIM) is a non-IFRS key financial performance
measure that is calculated as net interest income (derived on a cash
earnings basis) expressed as a percentage of average interest earning
assets. A full reconciliation between statutory net interest income and
cash earnings derived net interest income including non-cash
explanations is included on pages 70 to 72 in Note 2
Segment information in the Financial report. Further information in
respect of average interest earning assets is included under the
heading 'Average balances' below and in the Glossary.
Average balances
Average balances, including average equity (adjusted), total average
assets and average interest earning assets are based on daily
statutory balances derived from internally generated trial balances
from the Group's general ledger and are used for internal reporting
purposes including reporting to the Board on a monthly basis.
The methodology used to obtain average balances is to take the
average of the opening balance and the balances at the end of each
day in the period. This methodology produces numbers that more
accurately reflect seasonality, timing of material accruals (such as
dividends) and restructures (including discontinued operations), which
would otherwise not be reflected in a simple average.
Refer to the following page for a five-year summary of the Group’s
average equity (adjusted), total average assets and average interest
earning assets.
2017 Annual Financial Report
5
Report of the Directors
Operating and financial review (continued)
5 Year Financial Performance Summary
Net interest income
Total Other income
Total Operating expenses
Charge to provide for bad and doubtful debts
Profit before income tax expense
Income tax expense
Net profit for the period from continuing operations
Net (loss) / profit after tax for the year from discontinued operations
Net profit for the year
Attributable to owners of NAB
Attributable to non-controlling interests
2017
$m
13,182
4,842
(8,539)
(824)
8,661
(2,480)
6,181
(893)
5,288
5,285
3
Group (1)
2015
$m
12,462
5,975
(8,189)
(733)
9,515
(2,709)
6,806
(414)
6,392
6,338
54
2016
$m
12,930
5,192
(8,331)
(813)
8,978
(2,553)
6,425
(6,068)
357
352
5
2014(2)
$m
13,415
5,441
(10,227)
(847)
7,782
(2,598)
5,184
114
5,298
5,295
3
2013(2)
$m
13,351
4,852
(8,305)
(1,810)
8,088
(2,725)
5,363
-
5,363
5,355
8
Group performance indicators
Year to
Sep 17
Sep 16
Sep 15
Sep 14
Sep 13
Key Indicators
Statutory earnings per share (cents) - basic (3)
Statutory earnings per share (cents) - diluted (3)
Statutory return on equity
Cash return on equity
Profitability, performance and efficiency measures
Dividend per share (cents)
Net interest margin (1)
Capital
Common Equity Tier 1 ratio
Tier 1 ratio
Total capital ratio
Risk-weighted assets ($bn) (4)
Volumes ($bn)
Gross loans and acceptances (1) (4) (5)
Average interest earning assets (1)
Total average assets (1)
Customer deposits (4)
Average equity (adjusted) - Statutory
Average equity (adjusted) - Cash
Asset quality
194.7
189.1
10.9%
14.0%
198
1.85%
10.06%
12.41%
14.58%
382.1
565.1
711.3
798.8
407.6
47.5
47.5
8.8
15.5
0.5%
14.3%
198
1.88%
9.77%
12.19%
14.14%
388.4
545.8
689.5
855.8
390.5
44.3
45.5
252.7
245.4
15.2%
14.8%
198
1.90%
10.24%
12.44%
14.15%
399.8
521.9
658.1
864.6
362.0
40.5
42.2
219.0
215.4
12.1%
11.6%
198
1.91%
8.63%
10.81%
12.16%
367.7
537.6
703.0
853.4
383.0
42.0
43.6
225.9
224.0
13.0%
14.1%
190
2.02%
8.43%
10.35%
11.80%
362.1
522.1
661.6
802.5
428.4
39.5
40.8
90+ days past due and gross impaired assets to gross loans and acceptances (1)
0.70%
0.85%
0.63%
1.19%
1.69%
Other
Funds under management and administration (FUM/A) (spot) ($bn) (6)
Assets under management (AUM) (spot) ($bn) (6)
Full Time Equivalent Employees (FTE) (spot) (1)
Full Time Equivalent Employees (FTE) (average) (1)
133.8
195.3
33,422
33,746
125.0
184.9
34,263
34,567
N/A
N/A
33,894
34,148
N/A
N/A
41,420
41,153
N/A
N/A
42,164
42,783
(1)
(2)
(3)
(4)
(5)
(6)
Information is presented on a continuing operations basis. September 2015 was restated for the demerger of CYBG and the sale of 80% of Wealth's life insurance business to Nippon Life in September 2016,
with the exception of APRA information (capital). September 2014 was restated for the sale of Great Western Bancorp Inc. but has not been restated for the demerger of CYBG, the sale of 80% of the
Wealth's insurance business to Nippon Life nor APRA information (capital). No further comparative periods have been restated. The Group's consolidated financial statements for the financial years ended
30 September 2013, 2014 and 2015 can be found in the corresponding reports published by the Group for the respective periods.
AASB 9 "Financial Instruments" was adopted from 1 October 2014. 2013 and 2014 periods were not restated.
In September 2015, Earnings per share was restated for September 2014 by adjusting the weighted average number of ordinary shares in order to incorporate the bonus element in the 2015 rights issue, as
per AASB 133.
Spot balance as at reporting date.
Including loans and advances at fair value.
For September 2017, there has been a change to the presentation of FUM/A and AUM to include two separate disclosures that represent all managed funds and assets from which the Group derives
revenue. Certain items will be represented in both FUM/A and AUM and therefore the two should not be summed. Comparative period information has been restated for September 2016.
September 2017 v September 2016
On a statutory basis, net profit attributable to owners of NAB increased
by $4,933 million mainly due to the loss on discontinued operations in
2016. From a continuing operations perspective, statutory net profit
attributable to owners of NAB decreased by $242 million or 3.8%
mainly driven by unfavourable volatility in fair value and hedge
ineffectiveness. The volatility largely relates to the Group's long term
funding portfolio and is income neutral over the full term of
transactions.
Net interest income increased $252 million or 1.9% including a
decrease of $281 million that was offset by movements in economic
hedges in other operating income. The underlying increase was driven
by growth in both housing and business lending volumes, combined
with repricing activity. These movements were partially offset by a
6
NATIONAL AUSTRALIA BANK
Report of the Directors
Operating and financial review (continued)
lower earnings rate on capital and the impact of the bank levy for the
final quarter of the 2017 financial year.
Total other income decreased by $350 million or 6.7%. This includes
an increase of $281 million due to movements in economic hedges,
offset in net interest income. The underlying decrease was largely
driven by unfavourable movements in fair value and hedge
ineffectiveness, combined with lower sales of risk management
products to the Group's customers as a result of reduced market
volatility, and lower Wealth income largely from margin compression.
This was partially offset by higher gains in Treasury from the narrowing
of credit spreads in the liquidity portfolios.
Total operating expenses increased by $208 million or 2.5% driven by
continued investment in technology and associated depreciation and
amortisation charges, higher redundancy costs, the impact of annual
salary increases and provisions for regulatory remediation and legal
costs. These were partially offset by productivity benefits including
workforce restructuring, digitisation, and reduction in third party spend.
The charge to provide for bad and doubtful debts increased by $11
million or 1.4% due to higher collective provision charges primarily
driven by overlays for the commercial real estate, retail trade and
mortgage portfolios. This was partially offset by improvements in credit
quality across business lending, and the New Zealand dairy portfolio,
resulting in a lower level of new impairments.
Income tax expense decreased by $73 million or 2.9% largely due to a
decrease in profit before tax.
Review of Group and Divisional Results
Consumer Banking and Wealth
Business and Private Banking
Corporate and Institutional Banking
NZ Banking
Corporate Functions and Other (2)
Cash earnings
Non-cash earnings items
Net (loss) from discontinued operations
Net profit attributable to owners of NAB
Group
2017(1)
$m
1,633
2,841
1,535
882
(249)
2016(1)
$m
1,565
2,673
1,367
804
74
6,642
6,483
(464)
(893)
5,285
(63)
(6,068)
352
(1)
(2)
Information is presented on a continuing operations basis.
Corporate Functions & Other includes Treasury, Technology and Operations, and Support
Units.
September 2017 v September 2016
Group
Cash earnings increased by $159 million or 2.5% largely driven by
higher net interest income from increased volumes and repricing,
partially offset by higher operating expenses largely from continued
investment in the business, net of productivity savings. The charge for
bad and doubtful debts rose slightly due to increased collective
provision overlays.
Consumer Banking and Wealth
Cash earnings increased by $68 million or 4.3% driven by balance
sheet growth and repricing. This was partially offset by reduced Wealth
income mainly from margin compression and higher expenses from
continued investment in core banking technology, the mobile platform
and the Wealth business, net of productivity savings.
Business and Private Banking
Cash earnings increased by $168 million or 6.3% driven by balance
sheet growth and repricing benefits in the lending portfolio. This was
partially offset by higher expenses from continued investment in
technology and associated depreciation and amortisation charges, net
of productivity savings, and increased charges for bad and doubtful
debts from higher write-backs recognised in 2016.
Corporate and Institutional Banking
Cash earnings increased by $168 million or 12.3% largely driven by
lower charges for bad and doubtful debts and productivity and FTE
savings. Productivity savings were achieved through restructuring
operations and simplification of infrastructure and back office support
services. Revenue was flat with growth in business lending and lower
funding costs offset by lower revenue from sales of customer risk
management products.
NZ Banking
Cash earnings increased by $78 million or 9.7% driven by strong
growth in both housing and business lending, partially offset by a
weaker net interest margin mainly due to lower earnings on capital as
a result of a low interest rate environment and a competitive market for
deposits. This was combined with a decrease in the charge to provide
for bad and doubtful debts mainly driven by a recovery in the dairy
portfolio. This was partially offset by higher expenses from continued
investment in digital capabilities and associated depreciation and
amortisation charges, net of productivity savings.
Corporate Functions and Other
Cash earnings decreased by $323 million mainly due to higher
expenses from redundancy costs recognised centrally and higher
collective provision overlays within the Australian portfolio. This was
combined with lower income from capital management, funding and
risk management activities within Treasury and non-recurring asset
sales in the 2016 financial year.
Group Balance Sheet Review
Assets
Cash and liquid assets
Due from other banks
Trading derivatives
Trading securities
Debt instruments at fair value through other comprehensive
income
Other financial assets at fair value
Loans and advances
Due from customers on acceptances
All other assets
Total assets
Liabilities
Due to other banks
Trading derivatives
Other financial liabilities at fair value
Deposits and other borrowings
Bonds, notes and subordinated debt
Other debt issues
All other liabilities
Total liabilities
Total equity
Total liabilities and equity
Group
2017
$m
2016
$m
43,826
37,066
29,137
50,954
42,131
16,058
30,630
45,236
43,146
45,971
40,689
21,496
540,125
510,045
6,786
22,242
12,205
27,292
788,325
776,710
36,683
27,187
29,631
500,604
124,871
6,187
11,845
43,903
41,559
33,224
459,714
127,942
6,248
12,805
737,008
725,395
51,317
51,315
788,325
776,710
2017 Annual Financial Report
7
Report of the Directors
Operating and financial review (continued)
September 2017 v September 2016
Total assets increased by $11,615 million or 1.5%. The increase was
mainly due to net growth in cash and liquid assets, due from other
banks and trading securities of $10,009 million or 8.2% reflecting the
Group’s management of liquidity during the period. In addition, there
was an increase in loans and advances due to growth in housing
lending in both Australia and New Zealand, combined with growth in
non-housing lending reflecting the Group’s focus on priority business
segments. These increases were partially offset by a decrease in
trading derivative assets of $14,009 million or 32.5% predominantly
driven by foreign exchange rate and interest rate yield movements
during the period.
Total liabilities increased by $11,613 million or 1.6%. The increase was
due to growth in deposits and other borrowings mainly to support the
increase in the lending and liquidity portfolios. This increase was
partially offset by a decrease in trading derivative liabilities of $14,372
million or 34.6% in line with the decrease in trading derivative assets
above. Total equity was largely flat during the period.
Capital Management and Funding Review
Balance Sheet Management Overview
The Group aims to maintain a strong capital, funding and liquidity
position, in line with its ongoing commitment to balance sheet strength.
This includes:
• Seeking to maintain a well-diversified wholesale funding portfolio
which accesses a range of funding and capital options across
various senior, subordinated, secured and hybrid markets.
• Continuing to assess its position in order to accommodate changing
market conditions and regulatory requirements.
Regulatory Reform
The Group remains focussed on areas of regulatory change. Key
reforms that may affect its capital and funding include:
Federal Government’s Financial System Inquiry (FSI):
•
In July 2017, APRA announced changes to its approach in setting
capital standards such that capital ratios are deemed to be
‘unquestionably strong’. APRA has advised that the major
Australian banks, including NAB, are expected to have Common
Equity Tier 1 capital ratios of at least 10.5 per cent to meet the
‘unquestionably strong’ benchmark by 1 January 2020. An APRA
consultation on draft capital standards is expected in the near
future.
Basel III:
• The September 2017 Leverage Ratio is disclosed within NAB’s
September 2017 Pillar 3 Report. The minimum Leverage Ratio is
yet to be determined by APRA.
• The Basel Committee on Banking Supervision (BCBS) has
announced its revised market risk framework, which is due to come
into effect from 2019 globally. APRA has advised domestic
implementation is not expected prior to 2021. The Credit Valuation
Adjustment (CVA) framework is currently in BCBS consultation.
In December 2016, APRA released an amended Prudential
Standard APS 210 "Liquidity", which includes the Net Stable
Funding Ratio (NSFR) requirement. A ratio of at least 100% is
required on both a Level 1 and Level 2 basis from 1 January 2018.
•
Total Loss-Absorbing Capacity:
• The Financial Stability Board (FSB) issued the Total Loss-
Absorbing Capacity (TLAC) standard in November 2015 for global
systemically important banks (G-SIBs). In line with the
recommendations in the FSI, APRA could implement a loss-
8
NATIONAL AUSTRALIA BANK
absorbing capacity framework in accordance with emerging
international practice. At this stage, APRA has not yet issued
guidance on how TLAC might be implemented.
Revised BCBS standards:
• Themes driving the BCBS's revision of standards include improving
transparency, consistency and credibility of internal ratings based
(IRB) models. Draft proposals include revisions to the standardised
approaches for calculating regulatory capital for credit risk and
operational risk, revisions to IRB approaches for credit risk and the
introduction of a capital floor framework. Final BCBS Standards are
expected in the near future, with APRA's response expected
sometime thereafter.
In April 2016, the BCBS released the revised interest rate risk in the
banking book (IRRBB) framework, which is due to come into effect
internationally by 2018.
•
Other regulatory changes
Other regulatory changes of note include:
• On 1 April 2017, the Group transitioned to a revised Level 2 Group
structure, which had an immaterial impact on the Group’s capital
position. Remaining transitional arrangements arising from debt
issued directly by National Wealth Management Holdings Limited
(NWMH) are no longer required.
• APRA's revisions to Prudential Standard APS 120 "Securitisation"
bring together proposals to simplify securitisation for originating
Authorised Deposit-taking Institutions (ADIs) and the updated
BCBS securitisation framework. The revised APS 120 will take
effect from 1 January 2018.
• APRA’s consultation on the standardised approach to counterparty
credit risk (SA-CCR) introduces the new Prudential Standard APS
180 "Counterparty Credit Risk". These requirements will not take
effect until January 2019 at the earliest.
• APRA's standards on the non-capital components of the
supervision of conglomerate groups (Level 3 framework) took effect
on 1 July 2017. Level 3 capital requirements are expected to be
determined following the finalisation of other domestic and
international policy initiatives, with APRA advising that
implementation will be no earlier than 2019.
In March 2017, the RBNZ announced a review of the framework for
New Zealand banks’ capital requirements. The review is in the
initial consultation phase. The RBNZ has signalled its intention to
conclude the review in early 2018.
•
Capital Management
The Group’s capital management strategy is focused on adequacy,
efficiency and flexibility. The capital adequacy objective seeks to
ensure sufficient capital is held in excess of internal risk-based
required capital assessments and regulatory requirements, and is
within the Group’s balance sheet risk appetite. This approach is
consistent across the Group’s subsidiaries.
The Group’s capital ratio operating targets are regularly reviewed in
the context of the external economic and regulatory outlook with the
objective of maintaining balance sheet strength. The Group expects
that it can meet the new 'unquestionably strong' capital requirements in
an orderly manner by 1 January 2020.
Report of the Directors
Operating and financial review (continued)
Funding
The Group continues to pursue opportunities to enhance and diversify
its funding sources.
Funding Indices
The Group employs a range of NAB Board approved metrics to set its
risk appetite and measure balance sheet strength. A key structural
measure used is the Stable Funding Index (SFI), which is made up of
the Customer Funding Index (CFI) and the Term Funding Index (TFI).
The CFI represents the proportion of the Group’s core assets that are
funded by customer deposits. Similarly, the TFI represents the
proportion of the Group’s core assets that are funded by term
wholesale funding with a remaining term to maturity of greater than 12
months.
The SFI increased over the September 2017 full year from 91% to
93%. The TFI has strengthened to 23% at the September 2017 full
year supported by term wholesale funding issuance of $36.8bn. Term
wholesale funding issuance over the September 2017 full year has
been executed in excess of term wholesale funding maturities. The
CFI increased to 70% with the focus on improving the quality of the
deposit portfolio.
The Group has continued to focus on managing its funding profile over
the September 2017 full year in preparation for compliance with the
Net Stable Funding Ratio (NSFR) which applies from 1 January 2018.
The Group's NSFR at 30 September 2017 was 108%.
Customer Funding
The Group has continued to grow deposits over the September 2017
full year. NAB’s deposit strategy is to grow a stable and reliable deposit
base informed by market conditions, funding requirements and
customer relationships.
The Monthly Banking Statistics published by APRA show that for the
12 months ended 30 September 2017, NAB has grown Australian
domestic household deposits by 5.7% (0.9x system), business
deposits (excluding deposits from financial corporations) by 4.4% (0.6x
system) and deposits from financial institutions by 7.0% (0.8x system).
Term Wholesale Funding
Global funding conditions remained supportive of term wholesale
funding issuance across all major markets during the September 2017
full year, despite some periods of instability driven by global events.
Credit spreads widened at the start of the September 2017 full year as
the market cautiously monitored the lead up to the US presidential
elections. Post the election, market conditions and credit spreads
globally have continued to improve. Whilst current conditions are
reasonably stable, markets remain sensitive to ongoing
macroeconomic, geo-political and financial risks. Despite being
downgraded, along with the other major banks, by Moody’s Investor
Services, the Group continued to see strong investor demand for its
debt.
The Group maintains a well-diversified funding profile based across
issuance type, currency, investor location and tenor, and raised $36.8
billion during the September 2017 full year.
to the first call date. The weighted average remaining maturity of the
Group’s term wholesale funding portfolio is 3.4 years.
Short-term Wholesale Funding
The Group maintained consistent access to international and domestic
short-term wholesale funding markets during the September 2017 full
year.
Reliance on offshore short term wholesale funding reduced slightly
over the September 2017 full year to 7.3% of total funding and equity.
In addition, repurchase agreements are primarily utilised to support
markets and trading activities. Repurchase agreements entered into
are materially offset by reverse repurchase agreements with similar
tenors and are not used to fund NAB's core activities.
Liquid Asset Portfolio
The Group maintains well-diversified and high quality liquid asset
portfolios to support regulatory and internal requirements in the various
countries in which it operates. The market value of total liquid assets
held as at 30 September 2017 was $124 billion excluding contingent
liquidity. This represents a reduction of $7 billion from 31 March 2017
and increase of $6 billion from 30 September 2016.
Liquid asset holdings include $108 billion of regulatory liquid assets
(consisting of both High Quality Liquid Assets (HQLA) and Committed
Liquidity Facility (CLF) eligible assets) as at 30 September 2017.
In addition, the Group holds internal securitisation pools of Residential
Mortgage Backed Securities (RMBS) as a source of contingent liquidity
and to support the CLF. Unencumbered internal RMBS held at
30 September 2017 was $44 billion (post applicable central bank
deduction).
Liquid assets that qualify for inclusion in the Group’s LCR and Internal
RMBS (net of applicable regulatory deductions) were on average $136
billion for the quarter ending 30 September 2017 resulting in an
average Group LCR of 123%.
Credit Ratings
The Group closely monitors rating agency developments and regularly
communicates with the rating agencies. Entities in the Group are rated
by S&P Global Ratings (S&P), Moody’s Investors Service (Moody’s)
and Fitch Ratings (Fitch).
The Group’s current long-term debt ratings are: NAB AA-/Aa3/AA-
(S&P/Moody’s/Fitch); BNZ AA-/A1/AA- and NWMH A (S&P).
On 19 June 2017, Moody’s revised its Australian Macro Profile to
“Strong +” from “Very Strong --” reflecting Moody’s view of elevated
risks in the household sector. As a result, Moody’s revised Baseline
Credit Assessments and Counterparty Risk Assessments for 12
Australian banks and their affiliates. Moody’s also downgraded the
long term ratings of the four major Australian banks, including NAB.
NAB’s long term rating was downgraded to Aa3 from Aa2 and Baseline
Credit Assessment to a2 from a1. NAB’s short-term rating was affirmed
at P-1. On 19 June 2017, Moody’s revised long-term ratings of four
major New Zealand Banks, including BNZ, in line with their parents, to
A1 from Aa3.
NAB raised $31.9 billion, including $26.7 billion senior unsecured, $3.9
billion of secured funding (comprised of covered bonds) and $1.3
billion of Tier 2 subordinated debt. BNZ raised $4.9 billion during the
September 2017 full year.
On 4 September 2017, S&P revised its long term rating of NWMH from
A+ to A, and removed it from CreditWatch. The change reflects S&P’s
view of NWMH following the completion of the divestment of Wealth's
life insurance business.
The weighted average maturity of term wholesale funding raised by the
Group over the September 2017 full year was approximately 4.8 years
2017 Annual Financial Report
9
Report of the Directors
Operating and financial review (continued)
Dividends
The directors have declared a final dividend of 99 cents per fully paid
ordinary share, 100% franked, payable on 13 December 2017. The
proposed payment amounts to approximately $2,659 million. The
Group periodically adjusts the Dividend Reinvestment Plan (DRP) to
reflect the capital position and outlook. The Group will offer a 1.5%
discount on the DRP, with no participation limit.
Dividends paid since the end of the previous financial year:
• The final dividend for the year ended 30 September 2016 of 99
cents per fully paid ordinary share, 100% franked, paid on
13 December 2016. The payment amount was $2,630 million.
• The interim dividend for the year ended 30 September 2017 of 99
cents per fully paid ordinary share, 100% franked, paid on 5 July
2017. The payment amount was $2,649 million.
Information on the dividends paid and declared to date is contained in
Note 29 Dividends and distributions in the Financial report. The
franked portion of these dividends carries Australian franking credits at
a tax rate of 30%, reflecting the current Australian company tax rate of
30%. New Zealand imputation credits have also been attached to the
dividend at a rate of NZ$0.10 per share. The extent to which future
dividends will be franked, for Australian taxation purposes, will depend
on a number of factors, including the proportion of the Group’s profits
that will be subject to Australian income tax and any future changes to
Australia’s business tax system.
Review of, and Outlook for, Group Operating Environment
Global Business Environment
Global economic growth improved towards the end of calendar year
2016 and, after a pause early in calendar year 2017, lifted again in
mid-2017. As a result growth is heading back to its trend pace. The
improvement has been led by advanced economies:
• The US economy continues to show moderate growth.
• The economic recovery in the Euro-zone is now firmly established.
• Fears of a sharp downturn in China’s economy have receded but it
remains on a longer-term slowing trend.
• Brazil and Russia have moved out of recession but growth in the
Indian economy has slowed.
The upturn in activity was initially accompanied by a solid recovery in
commodity prices over calendar year 2016 and into early calendar
year 2017, although they have subsequently eased.
The focus of major advanced economy central banks has generally
shifted away from easing monetary policy to when to tighten it.
• The US Federal Reserve has been raising rates, and has started
the process of winding back its balance sheet.
• The European Central Bank has removed its interest rate easing
bias and it will reduce the size of its monthly net asset purchases
from January 2018.
• The Bank of England has raised Bank Rate and is flagging further
gradual rate rises.
• The Bank of Japan, despite struggling to meet its inflation target, is
not providing any indications that it will further loosen policy.
Risks around the global outlook now centre on a range of geo-political
risks. However, the global economy has been resilient in recent years
and the outlook is for global growth to show a further modest lift in
calendar year 2018.
Australian Economy
The Australian economy grew by 1.8% over the year to the June
quarter 2017, and while Australia has now gone 26 years without a
recession, this represents the weakest annual growth rate since the
10 NATIONAL AUSTRALIA BANK
global financial crisis in 2009. However, activity picked up in the June
quarter, with GDP up 0.8% on the previous quarter. The modest
annual growth rate reflects:
• A fall in dwelling construction over the year to the June quarter
2017; however, the construction pipeline remains at a high level.
• Below average consumer spending, despite households lowering
their savings to fund spending.
• Strong government investment.
• A detraction from net exports with weather disruptions negatively
affecting exports and import growth strong.
• Falling business investment, principally reflecting weakness in non-
dwelling construction driven by the mining sector. However, the
worst of the fall-off may have passed with underlying private
business investment increasing in the last three quarters, while
non-mining business investment intentions have improved.
Nominal income growth, which has been modest by historical
standards in recent years, strengthened over the year to the March
quarter 2017, before easing in the June quarter, similar to the pattern
in commodity prices. In world price terms, the RBA commodity price
index rose by 60% between January 2016 and February 2017,
although subsequently prices eased again, giving up around one-third
of this gain by October. The gains in national income are reflected in
increased corporate profits, but household disposable income growth
remains subdued.
Growth is expected to be stronger in the second half of calendar year
2017 as LNG exports continue to increase and coal and iron ore
exports return to normal levels. Growth is expected to tail off somewhat
through the following two years as LNG exports and dwelling
construction peak at high levels and no longer contribute to growth. In
year-average terms growth is expected to be 2.4% in calendar year
2017 and 2.8% in calendar year 2018. Within these national
aggregates there continues to be a wide disparity in conditions across
industries and geographies.
Agricultural prices are mixed but recent data has been lower overall.
NAB’s Rural Commodities Index was down 7.8% in AUD terms over
the year to October 2017. After a good season last year, parts of
Australia (especially in NSW and Queensland) have experienced
tough growing conditions. Yields are likely to disappoint in these areas
and livestock producers may face a shortage of feed.
The labour market has been improving although wages growth
remains subdued:
• Employment growth has strengthened.
• The unemployment rate has eased from 5.9% in March 2017 to
5.5% in September 2017. However, there is still is a high level of
underemployment.
• Wages pressure remains limited. Growth in the wage price index
has been slowing since 2012, and it only grew by 1.9% over the
year to the June quarter 2017.
Dwelling prices in Australian capital cities continue to rise:
• The CoreLogic hedonic dwelling price index for the eight capital
cities grew by 7.0% over the year to October 2017, down from the
peak seen earlier in the year.
• Annual price growth has been strongest in Melbourne and Hobart.
Sydney dwelling prices in October were 7.7% higher than a year
ago, but have fallen over the last three months. Prices have also
fallen in Perth and Darwin over the last year.
Total system credit growth remains modest by historical standards.
• Overall annual housing credit growth has been steady since
mid-2016. In recent months the momentum of investor housing
credit growth has slowed, likely due to prudential measures
Report of the Directors
Operating and financial review (continued)
announced in March 2017, but this has been largely offset by
stronger owner-occupier credit.
• Annual business credit growth has slowed since April 2016,
although it has shown improvement in recent months, while other
personal credit is falling.
Underlying consumer price inflation in the September quarter 2017
was slightly below the RBA's 2-3% target band. However, if the
expected growth in the economy is realised, the unemployment rate
should ease further and give the RBA confidence that inflation will
move to within the target band over time. This would provide the basis
for the RBA to raise rates in the second half of calendar year 2018.
New Zealand Economy
While the outlook for the New Zealand (NZ) economy remains broadly
positive, and the economy has been performing strongly, analysts are
now assessing the impact of the change in government on economic
policies and outcomes. It will take time to assess the full implications of
the new government's policies as and when fuller details emerge. Prior
to the election, GDP growth had already eased to 2.5% over the year
to the June quarter 2017 but growth remained within the range
experienced since calendar year 2014.
Over the year to the June quarter 2017 consumption and government
spending growth was strong. Business investment growth was also
solid and business investment intentions are robust.
Residential building investment in the June quarter 2017 was a little
lower than a year ago. However, as a percentage of GDP it remains
robust and the number of building consents have rebounded from their
recent lows.
Factors that have been supporting economic growth include:
• Strong population growth due to high net inward migration.
• Tourism, with short-term visitor arrivals for the year to September
2017 8.6% higher than in the year to September 2016.
• Low interest rates. The official cash rate is currently at an
historically low 1.75%.
• A recovery in commodity prices, which has helped take the
merchandise terms of trade back to around record levels.
Commodity export prices increased between April 2016 and
September 2017, but have since levelled out and remain below
previous highs.
• Between April 2016 and September 2017 commodity export prices
grew by around 30% in world price terms and by over 20% in NZ
dollar terms. However, in world price terms they were still below
their early 2014 peak.
• Dairy export prices in September 2017 were almost 60% higher
than in April 2016 (world price terms) but are still more than 30%
below their peak. Fonterra's 2016/17 farmgate milk price was NZ
$6.12 per kg milk solids, well above the 2015/16 season price of NZ
$3.90. A further moderate improvement in the farmgate milk price
for the 2017/18 season is expected. Non-dairy commodity export
prices generally remain mixed-to-strong.
The housing market has been cooling:
• The REINZ's House Price Index grew by only 2.1% between
September 2016 and September 2017. House prices in Auckland
have eased a little from their 2016 peak but have stabilised in
recent months. In the rest of the country annual house price growth
has slowed.
• The number of house sales has fallen across much of the country.
• According to the RBNZ, the slowdown in house price growth is due
to loan-to-value restrictions, tighter credit conditions and
affordability constraints. The recent election process may have
slowed property market activity more generally.
The labour market continues to strengthen.
• The unemployment rate has gradually trended down since 2012,
and was 4.6% in the September quarter 2017, its lowest rate since
2008.
• Wages growth remains moderate but has started to improve.
The relatively low unemployment rate highlights the headwind to
growth from emerging domestic capacity constraints. Other measures
also suggest growing supply constraints.
Private sector resident credit growth has eased.
• Credit growth was 5.8% over the year to September 2017, down
from its most recent peak of 7.8% over the year to October 2016.
• This reflects a slowing in agriculture, other business and housing
credit growth. In contrast, consumer credit growth strengthened
over this period.
Outlook
The outlook for the Group’s financial performance and outcomes is
closely linked to the levels of economic activity in each of the Group’s
key markets as outlined above.
Disclosure on Risk Factors
Risks specific to the Group, including those related to general
banking, economic and financial conditions
Set out below are the principal risks and uncertainties associated with
the Company and its controlled entities (the Group). These risks and
uncertainties are not listed in order of significance and it is not possible
to determine the likelihood of any such risks occurring. In the event
that one or more of these risks occur, the Group’s business,
operations, financial condition and future performance could be
materially and adversely impacted.
There may be other risks faced by the Group that are currently
unknown or are deemed immaterial, but which may subsequently
become known or become material. These may individually or in
aggregate adversely impact the Group. Accordingly, no assurances or
guarantees of future performance, profitability, distributions or returns
of capital are given by the Group.
Risks specific to the banking and financial services industry
The nature and impact of these external risks are generally not
predictable and are often beyond the Group’s direct control.
The Group may be adversely impacted by macro-economic and
geopolitical risks and financial market conditions.
The majority of the Group's businesses operate in Australia and New
Zealand (NZ), with branches located in Asia, the United Kingdom (UK)
and the United States (US). The business activities of the Group are
dependent on the nature and extent of banking and financial services
and products required by its customers globally. In particular, levels of
borrowing are heavily dependent on customer confidence, employment
trends, market interest rates, economic and financial market conditions
and forecasts.
Domestic and international economic conditions and forecasts are
influenced by a number of macro-economic factors, such as: economic
growth rates, cost and availability of capital, central bank intervention,
inflation and deflation rates, and market volatility and uncertainty. This
may lead to:
•
Increased cost of funding or lack of available funding.
2017 Annual Financial Report
11
Report of the Directors
Operating and financial review (continued)
• Deterioration in the value and liquidity of assets (including
collateral).
• An inability to price certain assets.
•
Increased likelihood of customer or counterparty default and credit
losses (including the purchase and sale of protection as part of
hedging strategies).
• Higher provisions for bad and doubtful debts.
• Mark-to-market losses in equity and trading positions.
• A lack of available or suitable derivative instruments for hedging
purposes.
• Lower growth in business revenues and earnings. In particular, the
Group’s wealth business earnings are highly dependent on asset
values, particularly the value of listed equities.
Increased cost of insurance, lack of available or suitable insurance,
or failure of the insurance underwriter.
•
Economic conditions may also be impacted by climate change and
major shock events, such as: natural disasters, war and terrorism,
political and social unrest, and sovereign debt restructuring and
defaults.
The following are examples of macro-economic and financial market
conditions that are currently relevant to the Group and may adversely
impact its financial performance and position:
• Subdued growth in several large economies in recent years as the
pace of expansion was curbed by weak household income growth,
as well as a sluggish recovery in business investment from the
deep recession of 2008. Rapid expansion in China and India, large
emerging market economies, highlights the dependence of the
global economic upturn on developments in a small number of key
economies.
• Historically low interest rates limit the extent to which monetary
policy can be used to reduce the impact of cyclical downturn in
economic conditions. In addition, high levels of public debt relative
to GDP could complicate efforts in many economies, which are part
of the Organisation for Economic Cooperation and Development, to
use fiscal policy (tax cuts or increased public spending) to stabilise
economic activity in the face of an economic downturn.
• Without sustained economic growth, existing high household debt
ratios present ongoing risks particularly in the event of any cyclical
economic downturns. Even in the absence of a downturn, high debt
levels may constrain future credit growth. Structural changes in the
economy that could affect wages growth and the distribution of
income may also impact future credit growth and asset quality.
• Higher government debt ratios in many advanced economies may
also impact sovereign credit ratings and the terms and availability of
market funding for government debt. Decreases in the sovereign
credit rating of Australia may have an adverse impact on the
Australian banks, including the Company and NZ banks owned by
Australian parent banks. Likewise, decreases in NZ’s sovereign
credit rating would be expected to impact credit ratings for the
Group’s businesses based in NZ.
• Weaknesses continue to exist in a number of European banks, and
non-performing loans as a percentage of total assets remain high.
The inter-connectedness of the global banking system means
European banking system problems have the potential to create
disruptions in global financial markets, raising questions over the
stability of particular banks around the world. In the past this has
reduced market liquidity, which may negatively impact the Group’s
access to wholesale funding.
• As interest rates in developed economies are expected to gradually
rise from historical lows, there is a risk that the valuation of a wide
range of assets, from housing to government bonds, could fall
sharply. In some countries, key assets like houses and sovereign
12 NATIONAL AUSTRALIA BANK
bonds have been trading at high valuations by historical standards.
Liquidity in markets can also decrease unexpectedly, and market
volatility may increase following a shock to financial markets and
economic conditions. Previous periods of tightening monetary
policy in the US were associated with greater volatility in the volume
and pricing of capital flows in emerging market economies. Capital
importing economies, including Australia and NZ, are generally
vulnerable to a sudden or marked change in global interest rates
and broader financial conditions.
• Continued economic growth in China is important to Australia and
NZ, with ongoing concerns that its rapid pace of growth could slow
sharply. Due to its export mix, Australia’s economy is exposed to a
sudden downturn in Chinese investment, or a substantial or
sustained decline in the Chinese economy. In addition, the
increasing level of bad debts in China poses a risk to its banking
system with potential flow-on impacts to credit availability and
liquidity and to the broader Chinese economy.
• As commodity exporting economies, Australia and NZ are exposed
to shifts in global commodity prices that can be sudden, sizeable
and difficult to predict. Swings in commodity markets can affect key
economic variables like national income, tax receipts and exchange
rates. Previous sharp declines in commodity prices in Australia and
NZ were driven by sub-trend global growth constraining demand,
combined with increases in commodity supply. Commodity price
volatility remains substantial and the Group has sizeable exposures
to commodity producing and trading businesses.
• Changes in the political environment raise the risk that growth-
promoting reforms may become more difficult to implement as well
as increasing market uncertainty, volatility and adverse economic
conditions. Uncertainty remains over: key economic policies of the
US administration, the evolving situation in the Korean peninsula,
Brexit (where the details of any agreement on the terms of UK
access to the European Union market is unclear), and the impact of
several elections in European countries – notably, the Italian
election scheduled in early 2018 – which could lead to changes in
government and shifts in economic policy. The outcome of political
uncertainty in the Spanish region of Catalonia is also unclear. In
NZ, the change of government is expected to result in changes in
economic policies that could affect the business environment and
market conditions. The extent, implementation and outcome of
policy changes resulting from these political events, and their
impact on global trade, the broader economies of the affected
countries and global financial markets, are all uncertain.
The Group is subject to extensive regulation. Regulatory changes
may adversely impact the Group’s operations, and financial
performance and position.
The Group is highly regulated in Australia and in the other jurisdictions
in which it operates, trades or raises funds, and is subject to
supervision by a number of regulatory authorities and industry codes of
practice.
Regulations vary across jurisdictions and are designed to protect the
interests of depositors, policy holders, security holders, and the
banking and financial services system as a whole. Changes to laws
and regulations or changes to regulatory policy or interpretation can be
unpredictable, are beyond the Group’s control, and may not be
harmonised across the jurisdictions in which the Group operates.
Regulatory change may result in significant capital and compliance
costs, changes to corporate structure and increasing demands on
management, employees and information technology systems.
Examples of current and potential regulatory changes impacting the
Group are set out below.
Report of the Directors
Operating and financial review (continued)
The non-capital components of the APRA framework for the
supervision of conglomerate groups, including the Group, became
effective on 1 July 2017. APRA deferred finalising the capital
components of the framework, with implementation not expected prior
to 2019.
Implementation of the Basel Committee on Banking Supervision’s
(BCBS) reforms will continue over the coming years in Australia and
the Group’s other jurisdictions. APRA has introduced prudential
standards for BCBS Basel III requirements in Australia. These reforms
increase the quality and ratio of capital to risk weighted assets that the
Group is required to maintain, and the quality and proportion of assets
that the Group is required to hold as high-quality liquid assets. Other
BCBS key changes impacting the Group that APRA is progressing
include:
• Updated standard on liquidity, incorporating the net stable funding
ratio that will take effect on 1 January 2018. This may impact the
funding profiles and associated costs of participants in the
Australian Banking industry, and NZ banks owned by Australian
parent banks.
• Revised securitisation framework that will take effect from
1 January 2018. This may impact the amount of regulatory capital
held industry-wide for securitisation exposures.
• The BCBS’ revised market risk framework, which is due to come
into effect from 2019 globally. Domestically, APRA has advised the
new market risk standard will not take effect before 2021. This may
impact trading book capital requirements.
• Consultation on the standardised approach to counterparty credit
risk. Requirements will take effect from January 2019 at the
earliest. This may impact the amount of regulatory capital held for
counterparty credit risk exposures.
• Consultation on a revised Large Exposures framework, with final
requirements expected to take effect from 2019. This may impact
large exposure limits, measurement and reporting.
• Signalling an intent to implement a minimum leverage ratio
requirement for Authorised Deposit-taking Institutions (ADIs) which
is not expected prior to 1 January 2018. The NAB leverage ratio of
5.5% at 30 September 2017 is above the current Basel
minimum. The minimum leverage ratio requirement is not expected
to be a binding constraint on the Group.
In NZ, the Reserve Bank of New Zealand (RBNZ) is currently
reviewing the previously implemented Basel III Capital Adequacy
Framework. This review may result in a departure from the framework,
and lead to potential capital constraints and compromised efficiency of
capital structures.
Regulatory changes continue to be made by the BCBS as it focuses
on improved consistency and comparability in banks’ regulatory capital
ratios. Draft proposals include revisions to the internal ratings-based
and standardised approaches for calculating regulatory capital and the
introduction of a capital floor framework, with consultation on sovereign
risk expected. The BCBS also released the revised interest rate risk in
the banking book framework and is expected to implement revisions to
the operational risk capital framework. The full impact of the changes
will not be known until the BCBS requirements are implemented by
APRA or by other regulators. This may intersect with measures
adopted as a result of the Australian Financial System Inquiry (FSI),
which recommended measures supported by the Australian
Government, on improving resilience, efficiency and fairness of the
banking system. APRA has responsibility for implementing FSI
recommendations in relation to strengthening the resilience of the
financial system.
The following FSI recommendations have taken effect, or are in
consultation:
• From July 2016, APRA commenced raising the risk weight for
Australian residential mortgages from approximately 16% to an
intended average of 25% for ADIs accredited to use internal
models.
• On 19 July 2017, APRA released a paper outlining the amount and
timing of capital increases required for ADIs to achieve
“unquestionably strong” capital ratios. APRA advised that the major
Australian banks, including the Company, are expected to have
Common Equity Tier 1 (CET1) capital ratios of at least 10.5% by
1 January 2020. Implementation of this and further
recommendations may result in impacts to regulation and
legislation, risk weighted assets or capital ratios.
In March 2017, the Australian Government Treasury consulted on
whether the Australian Securities and Investments Commission
(ASIC) should be given additional powers on the design and
distribution obligations for financial products. This would allow ASIC
to temporarily intervene in product design and distribution if it
believes there is significant consumer harm.
•
• On 1 July 2017, the new ASIC Industry Funding Model came into
effect, resulting in regulated entities being charged for ASIC’s
regulatory services.
The Financial Stability Board issued the total loss-absorbing capacity
(TLAC) standard in November 2015 for global systemically important
banks (G-SIBs). APRA could implement a loss absorbing capacity
framework in accordance with emerging international practice. At this
stage, APRA has not yet issued guidance on how TLAC might be
implemented. This may have implications on the level of capital the
Group is required to hold.
The Australian Government Treasury also recently consulted on a
number of proposed major regulatory reforms, including:
• The Banking Executive Accountability Regime that is designed to
enhance the responsibility and accountability of ADIs and their
directors and senior executives.
• Superannuation reform, specifically draft legislation on improving
accountability and member outcomes, together with proposed
changes to the superannuation prudential framework to lift
operational governance practices of APRA-regulated
superannuation trustees.
• Draft legislation to extend the powers of APRA to address any crisis
affecting the Company. The extension of the powers may increase
the risk of regulatory action that imposes losses on the holders of
regulatory capital securities.
• The introduction of an Open Banking regime in Australia designed
to increase access to banking product and customer data by
consumers and third parties.
Other areas of ongoing regulatory change and review include:
• Global reform initiatives including US Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010, and Over The
Counter derivative market reforms.
• The Productivity Commission’s inquiries into competition in the
Australian financial system and the competitiveness and efficiency
of the superannuation industry. Together with the Australian
Government Treasury’s Open Banking review, these inquiries cover
almost the entirety of the banking and financial services sector and
any outcomes from them will be considered by the Government as
part of its ongoing focus on improving customer outcomes.
• Supervisory actions to reinforce sound residential mortgage lending
practices, including restrictions on investor and interest only
lending. More broadly, the Australian Competition and Consumer
Commission is conducting an inquiry into residential mortgage
2017 Annual Financial Report
13
Report of the Directors
Operating and financial review (continued)
product pricing. This may require the Company to explain any
changes or proposed changes to fees, charges or interest rates
applicable to residential mortgage products.
• Changes to financial benchmarks, payments and privacy laws,
accounting and reporting requirements, tax legislation and bank
specific tax levies. This includes the major bank levy which became
effective from 1 July 2017, and similar levies that Australian State
and Territory Governments may introduce.
Increasing supervision and regulation on anti-bribery and
corruption, anti-money laundering, counter-terrorism financing and
trade sanctions.
•
• An ongoing focus on financial advice, data quality and controls,
conduct, governance and culture, conflicts of interest and
management of life insurance claims.
The RBNZ issued its revised Outsourcing Policy which focuses on
banking services provided by parent banks offshore. Implementation
of, and compliance with, the final policy may impact the Group’s
operations.
The full scope, timeline and impact of these current and potential
inquiries and regulatory reforms, or how they will be implemented (if at
all in some cases), is not known. Depending on the specific nature of
requirements and how they are enforced, they may have an adverse
impact on the Group’s business, operations, structure, compliance
costs or capital requirements, and ultimately its financial performance
and prospects.
The Group faces intense competition, which may adversely
impact its financial performance and competitive position.
There is substantial competition across the markets in which the Group
operates. Increasing competition for customers can lead to
compression in profit margins or loss of market share. The Group
faces competition from established financial services providers as well
as new market entrants, including foreign banks and non-bank
competitors with lower costs and new operating models. Evolving
industry trends and anticipated rapid changes in technology are likely
to impact on customer needs and preferences. The Group may not
predict these changes accurately or quickly enough, or have the
resources and flexibility to adapt in sufficient time to keep pace with
industry developments and to meet customer expectations. As a result,
the Group’s financial performance and competitive position may be
adversely affected.
Risks specific to the Group
There are a number of risks which arise directly from the operations of
the Group as a major participant in the banking and financial services
industry and from the specific structure of the Group. The Group’s
financial performance and position are, and in the future may continue
to be, impacted by these risks, as set out below.
The Group is exposed to credit risk, which may adversely impact
its financial performance and position.
Credit risk is the potential that a counterparty or customer will fail to
meet its obligations to the Group in accordance with agreed terms.
Lending activities account for most of the Group’s credit risk. However,
other sources of credit risk also exist in: banking and trading books,
other financial instruments and loans, extension of commitments and
guarantees, and transaction settlements.
Major sub-segments within the Group’s lending portfolio include
residential housing loans, a material component of the Group’s total
gross loans and acceptances, and commercial real estate loans, the
majority of these domiciled across Australia and NZ. Adverse business
or economic conditions, including deterioration in property valuations
14 NATIONAL AUSTRALIA BANK
or prices of residential and commercial property, decline in
employment markets, political environment volatility, or high levels of
household debt in Australia and NZ may result in increased credit risk.
The Group may also be exposed to the increased risk of counterparty
or customer default should interest rates rise above the record or near
record lows of recent years. In particular, the Group’s portfolio of
interest-only loans across retail and non-retail segments and the
residential investor mortgage portfolio, may be susceptible to losses in
the event of a rise in interest rates or a decline in property prices. The
Group may also be exposed to counterparty default in the event of
deterioration in the market for apartments, through retail lending and
non-retail lending to property developers.
The Group’s large business lending market share in Australia and NZ
exposes it to potential losses should adverse conditions be
experienced across this sector. Similarly, the Group has a large market
share in the Australian and NZ agricultural sectors, particularly the
dairy sector in NZ. Volatility in commodity prices, foreign exchange rate
movements, disease and introduction of pathogens and pests, export
and quarantine restrictions and other risks may adversely impact these
sectors and the Group’s financial performance and position.
The NZ dairy market has been under financial pressure due to lower
milk solid payouts in 2015/16. While the outlook for milk prices has
recently improved, it is expected that some level of financial pressure
will continue for a period of time across this sector. The Australian
dairy industry has also faced lower milk prices and industry disruption.
The mining, oil and gas industries in Australia, as well as a number of
sectors that service them, were impacted by a slowdown in investment
and a period of low commodity prices in key segments. This continues
to present the risk of an increase in bad and doubtful debts.
Climate change may present risks arising from: extreme weather
events that affect property or business operations, effect of new laws
and Government policies designed to mitigate climate change, and
impacts on certain customer segments as the economy transitions to
renewable and low-emission technology. A consequence of these
factors includes the risk of the Group and its customers holding
stranded assets.
The Group provides for losses in relation to loans, advances and other
assets. Estimating losses in the loan portfolio is, by its very nature,
uncertain. The accuracy of these estimates depends on many factors,
including general economic conditions, forecasts and assumptions,
and involves complex modelling and judgements. If the information or
the assumptions upon which assessments are made prove to be
inaccurate, the provisions for credit impairment may need to be
revised. This may adversely impact the Group’s financial performance
and position.
The Group may suffer losses due to its exposure to operational
risks.
Operational risk is the risk of loss resulting from inadequate internal
processes and controls, people and systems or from external events.
This includes legal risk but excludes strategic and reputational risk.
Operational risks are a core component of doing business arising from
the day-to-day operational activities of the Group as well as strategic
projects and business change initiatives. Given that operational risks
cannot be fully mitigated, the Group determines an appropriate
balance between accepting potential losses and incurring costs of
mitigation.
An operational risk event may give rise to substantial losses, including
financial loss, fines, penalties, personal injuries, reputational damage,
Report of the Directors
Operating and financial review (continued)
loss of market share, theft of property, customer redress and litigation.
Losses from operational risk events may adversely impact the Group’s
reputation, and financial performance and position.
Examples of operational risk events include:
• Fraudulent or unauthorised acts by employees, contractors and
external parties.
• Systems, technology and infrastructure failures, cyber incidents,
including denial of service and malicious software attacks, or
unauthorised access to customer or sensitive data.
• Process errors or failures arising from human error or inadequate
design of processes or controls.
• Operational failures by third parties (including off-shored and
outsourced service providers).
• Weaknesses in employment practices, including those with respect
to diversity, discrimination and workplace health and safety.
• Deficiencies in product design or maintenance.
• Business disruption and property damage arising from events such
as natural disasters, climate change, biological hazards or acts of
terrorism.
In addition, the Group is dependent on its ability to retain and attract
key management and operating personnel. The unexpected loss of
key resources, or the inability to attract personnel with suitable
experience, may adversely impact the Group’s ability to operate
effectively and efficiently, or to meet strategic objectives.
Models are used extensively in the conduct of the Group’s business,
for example, in calculating capital requirements and measuring and
stressing exposures. If the models used prove to be inadequate or are
based on incorrect or invalid assumptions, judgements or inputs, this
may adversely affect the Group’s financial performance and position.
The Group may be exposed to risk from non-compliance with
laws or standards and other forms of misconduct, which may
adversely impact its reputation, and financial performance and
position.
The Group is exposed to risk arising from failure or inability to comply
with applicable laws, regulations, licence conditions, regulatory
standards, industry codes of conduct and Group policies and
procedures. This may include detrimental practices, such as:
• Selling or unduly influencing customers to purchase inappropriate
products and services.
• Conducting inappropriate market practices or being a party to
fraudulent transactions.
• Non-adherence to fiduciary requirements or provision of financial
advice which is inappropriate or not in the best interests of
customers.
If the Group’s compliance controls were to fail significantly, be set
inappropriately, or not meet legal or regulatory expectations, then the
Group may be exposed to: fines, public censure, litigation, settlements,
restitution to customers, regulators or other stakeholders,
unenforceability of contracts such as loans, guarantees and other
security documents, enforced suspension of operations, or loss of
licence to operate all or part of the Group’s businesses. This may
adversely impact the Group’s reputation, and financial performance
and position.
The Group has ongoing discussions with key regulators on industry-
wide issues and matters specific to the Group. Significant regulatory
change and public scrutiny of the global financial services industry by
conduct based regulators, and at times government, is driving
increased minimum standards and customer expectations. This has
led to a number of international firms facing high profile enforcement
actions, including substantial fines, for breaches of laws or
regulations. Refer to ‘Notes to the Consolidated Financial Statements’,
Note 32 Contingent liabilities and credit commitments on page 106 in
the Financial report for details on regulatory compliance investigations
and reviews, and court proceedings brought by regulators against the
Group. The potential outcome of these court proceedings,
investigations and reviews remain uncertain at this time, and it is
possible that class actions could arise in relation to these matters.
In addition to matters disclosed in the Financial report (as referenced
above), ASIC is also conducting the following investigations and
reviews:
•
In January 2017, the Group’s superannuation trustee, NULIS
Nominees (Australia) Ltd (NULIS), commissioned an independent
assurance review in accordance with additional conditions on its
financial service licence. As agreed with ASIC, the scope of the
review covered NULIS’ risk management procedures, processes for
implementing product changes, disclosure and reporting to
members, and conflicts management procedures. The first phase
Interim Review findings and NULIS’ responses were submitted to
ASIC. The review is ongoing.
• Conduct-related issues, including responsible lending, the
consumer credit insurance sales process and seeking further
industry action in relation to loan contracts for small businesses
under the Unfair Contract Terms regime. ASIC has reviewed
lending practices in the home loan sector and commenced legal
proceedings in March 2017 against another Australian bank for
alleged contraventions of the responsible lending provisions of the
National Consumer Credit Protection Act 2009.
Provisions held for conduct and litigation matters are based on a
number of assumptions derived from a combination of past
experience, forecasts, industry comparison and the exercise of
subjective judgement based on (where appropriate) external
professional advice. Risks and uncertainties remain in relation to these
assumptions and the ultimate costs of redress to the Group. These
factors mean that the eventual costs of conduct and compliance-
related matters may differ materially from those estimated and further
provisions may be required, adversely impacting the Group’s
reputation, and financial performance and position.
Disruption of technology systems or breaches of data security
may adversely impact the Group’s operations, reputation, and
financial performance and position.
Most of the day-to-day operations of the Group are computer-based,
and therefore the reliability and security of the Group’s information
technology systems and infrastructure are essential to its business.
Technology risk may arise from an array of factors including:
complexity within the technology environment, a failure of these
systems to operate effectively, an inability to restore or recover such
systems in acceptable timeframes, failure to keep technology up-to-
date, a breach of data security, or other forms of cyber-attack or
physical attack. These factors may be wholly or partially beyond the
control of the Group. Such events may result in disruption to
operations, adverse impact on speed and agility in the delivery of
change and innovation, reputation damage, litigation, loss or theft of
customer data, or regulatory investigations and penalties. These risks
may adversely impact the Group’s reputation, and financial
performance and position.
The rapid evolution of technology in the financial services industry and
the increased expectation of customers for internet and mobile
services on demand, expose the Group to new challenges in these
areas.
2017 Annual Financial Report
15
Report of the Directors
Operating and financial review (continued)
The Group processes, stores and transmits large amounts of personal
and confidential information through its computer systems and
networks. The Group invests significant resources in protecting the
confidentiality and integrity of this information. However, threats to
information security are constantly evolving and techniques used to
perpetrate cyber-attacks are increasingly sophisticated. The Group
may not be able to anticipate a security threat, or be able to implement
effective measures to prevent or minimise the resulting damage. An
information security breach may result in operational disruption,
regulatory enforcement actions, financial losses, theft or loss of
customer data, or breach of privacy laws, all of which may adversely
impact the Group’s reputation, and financial performance and position.
As with other business activities, the Group uses select external
providers (both in Australia and overseas) to continue to develop and
provide its technology solutions. There is increasing regulatory and
public scrutiny of outsourced and off-shored activities and their
associated risks, such as the appropriate management and control of
confidential data. The failure of any external providers to perform their
obligations to the Group or the failure of the Group to appropriately
manage those providers, may adversely impact the Group’s reputation,
and financial performance and position.
Transformation and change programs across the Group may not
deliver some or all of their anticipated benefits.
The Group invests significantly in change across the organisation,
including technology, infrastructure and cultural transformation. There
is a risk that these programs may not realise some or all of the
anticipated benefits. The Group also continues to pursue business
process improvement initiatives and invest in technology to achieve its
strategic objectives, meet changing customer expectations and
respond to competitive pressures. These process changes may
increase operational and compliance risks, which may adversely
impact the Group’s reputation, and financial performance and position.
The Group may be exposed to losses if critical accounting
judgements and estimates are subsequently found to be
incorrect.
Preparation of the Group’s financial statements requires management
to make estimates and assumptions and to exercise judgement in
applying relevant accounting policies, each of which may directly
impact the reported amounts of assets, liabilities, income and
expenses. Some areas involving a higher degree of judgement, or
where assumptions are significant to the financial statements,
include the estimates used in the calculation of provisions (including
those pertaining to conduct-related matters), the valuation of goodwill
and intangible assets, and the fair value of financial instruments.
If the judgements, estimates and assumptions used by the Group in
preparing consolidated financial statements are subsequently found to
be incorrect, there could be a significant loss to the Group beyond that
anticipated or provided for, which may adversely impact the Group’s
financial performance and position.
Litigation and contingent liabilities arising from the Group’s
business conduct may adversely impact its reputation, and
financial performance and position.
Entities within the Group may be involved from time to time in legal
proceedings arising from the conduct of their business. The aggregate
potential liability and costs in respect thereof cannot be accurately
assessed.
Refer to ‘Notes to the Consolidated Financial Statements’, Note 32
Contingent liabilities and credit commitments on page 106 in the
16 NATIONAL AUSTRALIA BANK
Financial report for details in relation to the Group’s material legal
proceedings and contingent liabilities.
Insufficient capital may adversely impact the Group’s operations
and financial performance and position.
Capital risk is the risk that the Group does not have sufficient capital
and reserves to meet prudential requirements, achieve strategic plans
and objectives, cover the risks to which it is exposed, or protect
against unexpected losses. The Group is required in all jurisdictions in
which it undertakes regulated activities to maintain minimum levels of
capital and reserves relative to the balance sheet size and risk profile
of its operations.
Prudential capital requirements and proposed changes to these
requirements may:
• Limit the Group’s ability to manage capital across the entities within
the Group.
• Limit payment of dividends or distributions on shares and hybrid
instruments.
• Require the Group to raise or use more capital of higher quality, or
to restrict balance sheet growth.
Additionally, if the information or the assumptions upon which
assessments of capital requirements are made prove to be inaccurate,
this may adversely impact the Group’s operations, and financial
performance and position.
The Group’s funding and liquidity position may be adversely
impacted by dislocation in global capital markets.
Funding risk is the risk that the Group is unable to raise short and long-
term funding to support its ongoing operations, strategic plans and
objectives. The Group accesses domestic and global capital markets
as well as raising customer deposits to help fund its businesses.
Dislocation in any of these capital markets, or reduced investor and
customer appetite to hold the Group’s securities or place deposit
funds, may adversely affect the Group’s ability to access funds or
require access to funds at a higher cost or on unfavourable terms.
Liquidity risk is the risk that the Group is unable to meet its financial
obligations as they fall due. These obligations include the repayment of
deposits on demand or at their contractual maturity, the repayment of
borrowings and loan capital as they mature, the payment of interest on
borrowings and the payment of operating expenses and taxes.
Any significant deterioration in the Group’s liquidity position may lead
to an increase in the Group’s funding costs, constrain the volume of
new lending, or result in the Group drawing upon its committed liquidity
facility with the Reserve Bank of Australia. This may adversely impact
the Group’s financial performance and position.
A significant downgrade in the Group’s credit ratings may
adversely impact its cost of funds, market access and
competitive position.
Credit ratings are an opinion on the general creditworthiness of a
borrower and may be an important reference for market participants in
evaluating the Group and its products, services and securities.
Credit rating agencies conduct ongoing review activities which can
result in changes to credit rating settings and outlooks for the Group,
or for sovereign governments in countries in which the Group conducts
business. Credit ratings may be affected by operational and market
factors, and changes in the rating methodologies used by the
agencies.
A downgrade in the credit ratings within the Group or of the Group’s
securities, or a downgrade in the sovereign rating of one or more of the
Report of the Directors
Operating and financial review (continued)
countries in which the Group operates, may increase the Group’s cost
of funds or limit its access to the capital markets. This may also cause
a deterioration of the liquidity position and trigger additional collateral
requirements in derivative contracts and other secured funding
arrangements. A downgrade to the Group’s credit ratings relative to
peers could also adversely impact the Group’s competitive position.
Changes in interest rates may adversely impact the Group’s
financial performance and position.
Interest rate risk is the risk to the Group’s financial performance and
position caused by changes in interest rates. As interest rates and
yield curves change over time, including negative interest rates in
countries in which the Group operates, the Group may be exposed to a
loss in earnings and economic value due to the interest rate profile of
its balance sheet. In the banking industry, such exposure commonly
arises from the mismatch between the maturity profile of a bank’s
lending portfolio compared to its deposit portfolio (and other funding
sources). Interest rate risk also includes the risk arising out of
customers’ demands for interest rate-related products with various
repricing profiles. It is also possible that both short and long-term
interest rates may change in a way that the Group has not correctly
anticipated.
The Group is exposed to foreign exchange and translation risk,
which may adversely impact its financial performance and
position.
Foreign exchange and translation risk arises from the impact of
currency movements on the value of the Group’s cash flows, profits
and losses, and assets and liabilities due to participation in global
financial markets and international operations.
The Group’s ownership structure includes investment in overseas
subsidiaries and associates and exposures from known foreign
currency transactions (such as repatriation of capital and dividends
from off-shore subsidiaries). The Group also conducts business
outside of Australia and transacts with customers, banks and other
counterparties in a number of different currencies. The Group’s
businesses may therefore be affected by a change in currency
exchange rates, a full or partial break-up of the Eurozone, or a change
in the reserve status of any of these currencies. Any unfavourable
movement in foreign exchange rates may adversely impact the
Group’s financial performance and position.
The Group’s financial statements are prepared and presented in
Australian dollars, and any fluctuations in the Australian dollar against
other currencies in which the Group invests or transacts and generates
profits (or incurs losses) may adversely impact its financial
performance and position.
The Group may suffer significant losses from its trading
activities.
Traded market risk is the risk of losses arising from trading activities,
including proprietary trading, undertaken by the Group. Losses can
arise from a change in the value of positions in financial instruments or
their hedges due to adverse movements in market prices. Any
significant losses from such trading activities may adversely impact the
Group’s financial performance and position.
Damage to the Group’s reputation may adversely impact its
financial performance and position.
The Group’s reputation may be damaged by the actions, behaviour or
performance of the Group, its employees, affiliates, suppliers,
intermediaries, counterparties or customers, or the financial services
industry generally. Together with ongoing political and media scrutiny
of the Australian banking industry, reputational damage has the
potential to lead to further government intervention into the sector. For
example, the Federal Opposition (Labor) has committed to establish a
Royal Commission (a formal public inquiry that can only be instigated
by the executive branch of the Australian Government and is directed
by a terms of reference set by the Government) into the banking and
financial services sector. Recommendations from this inquiry, if
legislated, could affect many of the Group’s interests.
A risk event, such as a compliance breach, fraud or an operational or
technology failure, may expose the Group to losses as a result of
litigation, fines and penalties, remediation costs or loss of key
personnel, and potentially impact the Company’s share price. In
addition, the event may adversely affect the perceptions of the Group
held by the public, shareholders, investors, customers, regulators or
ratings agencies. The risk of reputational damage may be heightened
by the continuing growth and use of social media.
Reputational damage may adversely impact the Group’s ability to
attract and retain customers or employees in the short and long-term
and the ability to pursue new business opportunities. It may result in a
higher risk premium being applied to the Group, and impact the cost of
funding, its operations, or its financial condition. It may also result in
regulators requiring the Group to hold additional capital, pay fines or
incur additional costs, including costs to undertake remedial action.
Failure to sell down underwriting risk may result in losses to the
Group.
As financial intermediaries, members of the Group underwrite or
guarantee many different types of transactions, risks and outcomes,
including the placement of listed and unlisted debt, equity-linked and
equity securities. The underwriting obligation or guarantee may be
over the pricing and placement of these securities, and the Group may
therefore suffer losses if it fails to sell down some or all of this risk to
other market participants.
A failure of the Group’s risk management framework
may adversely impact its reputation, and financial performance
and position.
The Group operates within a risk management framework that is
based on a Three Lines of Defence model. This model is the totality of
systems, structures, policies, processes and people that manage all
material internal and external sources of identified material risk.
As with any risk management strategy, there is no guarantee that this
framework is sufficient to mitigate known risks or to identify or address
changing or new and emerging risks.
Certain strategic decisions, including acquisitions or
divestments, may adversely impact the Group’s reputation, and
financial performance and position.
There is a risk that the assumptions underlying the Group’s strategic
decisions are (or prove to be) incorrect, or that the conditions
underpinning those strategic decisions may change. The Group may
not have the resources or flexibility to adapt quickly (or at all) to such
change. In addition, any one or more of the Group’s strategic initiatives
may prove to be too difficult or costly to execute effectively.
The Group regularly considers a range of corporate opportunities
including acquisitions, divestments and joint ventures. Opportunities
that are pursued may change the Group’s risk profile and capital
structure, and inherently come with transaction risks including over-
valuation of an acquisition (or under-valuation of a divestment), and
exposure to reputational and financial risks.
2017 Annual Financial Report
17
Report of the Directors
Operating and financial review (continued)
Risks may arise through the integration or separation of a business,
including failure to realise expected synergies, disruption to operations,
diversion of management resources or higher than expected costs. In
addition, the Group may have ongoing exposures to divested
businesses, including through the provision of continued services and
infrastructure (such as the transitional services being provided to
CYBG PLC (CYBG) and MLC Limited) or the retention of liabilities,
including through warranties and indemnities in sale agreements such
as the Conduct Indemnity Deed with CYBG. Refer to ‘Notes to the
Consolidated Financial Statements’, Note 32 Contingent liabilities and
credit commitments on page 106 in the Financial report under the
heading UK conduct issues and the Conduct Indemnity Deed.
Risks specific to the NAB Wealth (MLC Limited) life insurance
transaction.
In addition to the risks described above, a number of specific risks
exist in connection with the MLC life insurance transaction.
In connection with the sale of 80% of MLC Limited to Nippon Life
Insurance Company (Nippon Life), the Company gave certain
covenants, warranties and indemnities in favour of Nippon Life, a
breach or triggering of which may result in the Company being liable to
Nippon Life. The Company also entered into long term agreements in
relation to the distribution of life insurance products and the continued
use of the MLC brand by MLC Limited. The duration and nature of
these agreements give rise to certain risks, including that changes in
the regulatory or commercial environment may impact the commercial
attractiveness of these agreements and limit future opportunities for
the Company through non-compete arrangements.
The Company agreed to take certain actions to establish MLC Limited
as a standalone entity, including data migration and the development
of technology systems. As this work has yet to be completed, there is a
risk that implementation costs may ultimately prove higher than
anticipated.
18 NATIONAL AUSTRALIA BANK
Report of the Directors
Directors’ information
Directors
Details of NAB directors in office at the date of this report (or holding
office during the year), and each director’s qualifications, experience
and other directorships and interests are below.
The Board acknowledges that directors benefit from being involved in
a broad range of governance roles and support such activities
provided directors have the capacity to devote sufficient time and effort
to fulfil their NAB responsibilities in a thorough manner. The Chairman,
with the assistance of the Nomination & Governance Committee, has
determined that each director has the capacity to devote sufficient time
and effort to fulfil their NAB responsibilities taking into account their
other commitments.
Dr Kenneth R Henry AC, BComm (Hons), PhD, DB h.c, FASSA,
FAIIA
Age: 59
Term of office: Director since November 2011. Chairman since
December 2015. Chairman of the Board's Nomination & Governance
Committee.
Independent: Yes
Skills & Experience: Over 30 years of experience in economics,
policy and regulation, governance and leadership. Dr Henry served as
the Secretary of the Department of the Treasury from 2001 to 2011.
From June 2011 until November 2012, he was special advisor to the
Prime Minister with responsibility for leading the development of the
White Paper on Australia in the Asian Century. He is a former member
of the Board of the Reserve Bank of Australia, the Board of Taxation,
the Council of Financial Regulators, the Council of Infrastructure
Australia and was Chair of both the Howard Government’s Taxation
Taskforce (‘A New Tax System’, 1997-1998) and the Review into
Australia’s Future Tax System (the ‘Henry Tax Review’) commissioned
by the Rudd Government (2008-09). He was made a Companion of
the Order of Australia in 2007 and received the Centenary Medal in
2001. He is Co-Chair of NAB's Indigenous Advisory Group.
Directorships of listed entities:
ASX Limited (since February 2013)
Dr Henry’s other directorships and interests include Sir Roland Wilson
Foundation (Chairman), Cape York Partnership, Committee of
Economic Development of Australia (Governor), John Grill Centre for
Project Leadership’s Advisory Board and Australia-China Senior
Business Leaders Forum.
Mr Andrew G Thorburn BCom, MBA
Age: 52
Term of office: Director since August 2014.
Independent: No
Skills & Experience: Over 30 years of experience in banking and
finance. Mr Thorburn joined NAB in January 2005 as Head of Retail
Banking, was appointed Managing Director and CEO of the Bank of
New Zealand (BNZ) in 2008 and joined the NAB Group Executive
Committee in January 2009. In August 2014, he was appointed to his
current role as Group Chief Executive Officer and Managing Director.
Mr Thorburn is Chairman of Australian Bankers' Association Inc. His
term as Chairman ends in December 2017.
Mr David H Armstrong BBus, FCA, MAICD
Age: 59
Term of office: Director since August 2014. Chairman of the Board's
Audit Committee and a Member of the Risk Committee.
Independent: Yes
Skills & Experience: Over 30 years of experience in professional
services, including as a partner at PricewaterhouseCoopers (PwC). Mr
Armstrong has significant knowledge and understanding of banking
and capital markets, real estate and infrastructure and is well versed in
the reporting, regulatory and risk challenges faced by the industry.
Mr Armstrong's other directorships and interests include The George
Institute for Global Health, Opera Australia Capital Fund Limited,
Australian Museum and Lizard Island Reef Research Foundation.
Mr Philip W Chronican BCom (Hons), MBA (Dist), GAICD, SF Fin
Age: 61
Term of office: Director since May 2016. Chairman of the Board's
Risk Committee and a Member of the Remuneration Committee.
Director of BNZ (a subsidiary of NAB).
Independent: Yes
Skills & Experience: Over 35 years of experience in banking and
finance in Australia and New Zealand. In his most recent executive
role, Mr Chronican was responsible for Australia and New Zealand
Banking Group Limited's (ANZ) Australia division, with specific
responsibility for ANZ's Retail and Commercial businesses. Prior to
joining ANZ, he had a long career at Westpac Banking Corporation
(Westpac), where he established his reputation as one of Australia’s
leading banking executives, in executive roles including Group
Executive Westpac Institutional Bank and Chief Financial Officer. He
has broad experience in M&A activity and post-merger integration. In
addition, he has taken an active and public role in advocating for
greater transparency and ethics in banking and promoting workforce
diversity.
Mr Chronican's other directorships include NSW Treasury Corporation
(TCorp) (Chairman), JDRF Australia and Banking + Finance Oath.
Mr Peeyush K Gupta BA, MBA, AMP (Harvard), FAICD
Age: 58
Term of office: Director since November 2014. Member of the Board's
Risk, Remuneration and Nomination & Governance Committees.
Director of certain NAB Wealth and BNZ subsidiaries.
Independent: Yes
Skills & Experience: Over 30 years of experience in wealth
management. Mr Gupta was a co-founder and the inaugural CEO of
IPAC Securities, a pre-eminent wealth management firm spanning
financial advice and institutional portfolio management, which was
acquired by AXA. He has extensive corporate governance experience,
having served as a director on many corporate, not-for-profit, trustee
and responsible entity boards since the 1990s.
Directorships of listed entities:
Link Administration Holdings Limited (Link Group) (since November
2016)
Charter Hall WALE Limited (since May 2016)
Mr Gupta’s other directorships include Insurance & Care NSW (iCare),
Special Broadcasting Service Corporation and Charter Hall Direct
Property Management Limited (Chairman).
2017 Annual Financial Report
19
Report of the Directors
Directors’ information (continued)
Ms Anne J Loveridge BA (Hons), FCA, GAICD
Age: 56
Term of office: Director since December 2015. Chairman of the
Board's Remuneration Committee and a Member of the Nomination &
Governance Committee.
Independent: Yes
Skills & Experience: Over 30 years of experience in the Financial
Services practice at PwC, with a range of clients in banking, property,
private equity and wealth management sectors. Ms Loveridge has
extensive knowledge of financial and regulatory reporting, risk
management, controls and compliance frameworks. While at PwC, she
held various senior leadership positions in the firm, including Deputy
Chairman of PwC Australia, managing financial results, risk and quality
matters, people and partner development, remuneration and diversity
initiatives.
Directorships of listed entities:
nib Holdings Limited (since February 2017)
Platinum Asset Management Limited (since September 2016)
Ms Loveridge's other directorships and interests include The Bell
Shakespeare Company Limited (Chairman) and International
Federation of Accountants Nomination Committee.
Ms Geraldine C McBride BSc
Age: 56
Directorships of listed entities:
Genesis Energy Limited (since June 2014)
Former director, Ryman Healthcare Limited (from September 2014 to
July 2017)
Mr McKay's other directorships and interests include Eden Park Trust
(Chairman) and IAG New Zealand Limited and its parent company.
Ms Ann C Sherry AO, BA, Grad Dip IR, FAICD, FIPAA
Age: 63
Term of office: Director since November 2017. Member of the Board's
Remuneration Committee.
Independent: Yes
Skills & Experience: Over 20 years of experience in roles within the
banking, tourism and transport industries in Australia and New
Zealand, together with significant experience in government and public
service. Ms Sherry is currently Executive Chairman of Carnival
Australia, the largest cruise ship operator in Australasia, which she
joined in 2007. Prior to joining Carnival Australia, she had 12 years’
experience with Westpac where she held executive roles including
CEO, Westpac New Zealand, CEO, Bank of Melbourne and Group
Executive, People & Performance. Until recently, she was on the
supervisory board of ING Group (Amsterdam) and was a director on
the board of ING Direct (Australia). She was made an Officer of the
Order of Australia in 2004.
Term of office: Director since March 2014. Member of the Board's
Audit Committee.
Directorships of listed entities:
Sydney Airport (since May 2014)
Ms Sherry’s other directorships and interests include Palladium Group,
Cape York Partnership, Museum of Contemporary Art, Infrastructure
Victoria, Australian Rugby Union, Trans-Tasman Business Council’s
ANZ Leadership Forum (Australian Chairman) and Tourism &
Transport Forum.
Mr Anthony K T Yuen B.Soc.Scs
Age: 67
Term of office: Director since March 2010. Member of the Board's
Audit and Risk Committees.
Independent: Yes
Skills & Experience: Over 40 years of experience in international
banking and finance. Prior to taking on a strategic investment
management role on behalf of The Royal Bank of Scotland plc with
Bank of China in 2006, Mr Yuen held senior executive roles, having
Asia wide regional responsibility with Bank of America Corporation,
National Westminster Bank plc and The Royal Bank of Scotland plc.
Mr Yuen's other interests include Committees of Hong Kong Red
Cross and ABF Hong Kong Bond Index Fund.
Independent: Yes
Skills & Experience: Over 27 years of experience in the technology
industry and international business. Ms McBride is a former President
of global software company SAP for North America and also held
executive positions with SAP in Asia Pacific and Japan, as well as
roles with Dell and IBM.
Ms McBride is the founder and chief executive officer of MyWave.
MyWave is an IT company that develops artificial intelligence based
technology platforms for businesses.
Directorships of listed entities:
Sky Network Television Limited (since August 2013)
Fisher and Paykel Healthcare Corporation Limited (since July 2013)
Mr Douglas A McKay ONZM, BA, AMP (Harvard), CMInstD (NZ)
Age: 62
Term of office: Director since February 2016. Member of the Board's
Audit and Nomination & Governance Committees. Chairman of BNZ (a
subsidiary of NAB).
Independent: Yes
Skills & Experience: Over 30 years of senior commercial and
operational experience, together with marketing and private equity
experience. Mr McKay has a deep understanding of New Zealand and
Australian markets having held CEO and Managing Director positions
within major trans-Tasman companies and organisations including
Auckland Council, Lion Nathan, Carter Holt Harvey, Goodman Fielder,
Seaford and Independent Liquor.
20 NATIONAL AUSTRALIA BANK
Report of the Directors
Directors’ information (continued)
Board Changes
Ms Sherry was appointed to the Board in November 2017.
Ms Segal and Mr Gilbert retired from the Board in December 2016.
Ms Jillian S Segal AM, BA, LLB, LLM (Harvard), FAICD
Age: 62
administrative or investigatory nature, in which the officer becomes
involved because of that capacity;
• Legal costs incurred in connection with any investigation or inquiry
of any nature (including, without limitation, a royal commission) in
which the officer becomes involved (including, without limitation,
appearing as a witness or producing documents) because of that
capacity; and
Term of office: Director from September 2004 to December 2016.
• Legal costs incurred in good faith in obtaining legal advice on
Independent: Yes
Skills & Experience: Over 20 years of experience as a lawyer and
regulator. From 1997 to 2002, Ms Segal was a commissioner of ASIC
and Deputy Chairman of ASIC from 2000 to 2002. She was Chairman
of the Banking & Financial Services Ombudsman Board from 2002 to
2004. Prior to that she was an environment and corporate partner and
consultant at Allen Allen & Hemsley and worked for Davis Polk &
Wardwell in New York.
Directorships of listed entities:
Former director, ASX Limited (from July 2003 to September 2015)
Mr Daniel T Gilbert AM, LLB
Age: 65
Term of office: Director from September 2004 to December 2016.
Independent: Yes
Skills & Experience: Over 40 years of experience in commercial law.
Mr Gilbert is Managing Partner of corporate law firm Gilbert + Tobin,
which he co-founded in 1988.
Company Secretaries
Details of company secretaries of NAB in office at the date of this
report (or holding office during the year) and each company secretary’s
qualifications and experience are below:
Mrs Louise Thomson BBus (Distinction), FGIA joined the Group in
2000 and was appointed Group Company Secretary in May 2013. She
has experience in a wide range of finance, risk, regulatory and
governance matters. The Group Company Secretary advises and
supports the Board to enable the Board to fulfil its role.
Ms Elizabeth Melville-Jones BA, LLB, MBA joined the Group in 2015
and was appointed as an assistant company secretary in September
2015. She is the Secretary to the Board Audit Committee and supports
the Group Company Secretary in the structure and operation of NAB’s
corporate governance framework and compliance obligations,
including managing the Australian Secretariat.
Ms Penelope MacRae BA (Hons), LLB (Hons) joined the Group in
2011 as a Senior Corporate Lawyer and was appointed as an assistant
company secretary in December 2016. She is the Secretary of the
Board Risk Committee and manages the NAB Group’s Risk
Management Committees. She has experience in a wide range of
corporate, legal, governance, risk and regulatory matters.
Directors' and officers' indemnity
NAB’s constitution
Article 20.1 of NAB's constitution provides that, to the maximum extent
permitted by law, NAB may indemnify any current or former officer out
of the property of NAB against:
• Any liability incurred by the person in the capacity as an officer
(except a liability for legal costs);
• Legal costs incurred in defending or resisting (or otherwise in
connection with) proceedings, whether civil or criminal or of an
issues relevant to the performance of their functions and discharge
of their duties as an officer, if that expenditure has been approved
in accordance with the Board’s charter,
except to the extent that:
• NAB is forbidden by law to indemnify the person against the liability
or legal costs; or
• An indemnity by NAB of the person against the liability or legal
costs, if given, would be made void by law.
Under Article 20.2, NAB may pay or agree to pay, whether directly or
through an interposed entity, a premium for a contract insuring a
person who is or has been an officer against liability incurred by the
person in that capacity, including a liability for legal costs, unless:
• NAB is forbidden by law to pay or agree to pay the premium; or
• The contract would, if NAB paid the premium, be made void by law.
NAB may enter into an agreement with a person referred to in Articles
20.1 and 20.2 with respect to the subject matter of those Articles. Such
an agreement may include provisions relating to rights of access to the
books of NAB. In the context of Article 20, ‘officer’ means a director,
secretary or senior manager of NAB or of a related body corporate of
NAB.
NAB has executed deeds of indemnity in favour of each director of
NAB and certain directors of related bodies corporate of NAB. Some
companies within the Group have extended equivalent deeds of
indemnity in favour of directors of those companies.
Directors' and officers' insurance
During the year, NAB, pursuant to Article 20, paid a premium for a
contract insuring all directors, secretaries, executive officers and
officers of NAB and of each related body corporate of NAB. The
contract does not provide cover for the independent auditors of NAB or
of a related body corporate of NAB. In accordance with usual
commercial practice, the insurance contract prohibits disclosure of
details of the nature of the liabilities covered.
2017 Annual Financial Report
21
Report of the Directors
Directors’ information (continued)
Directors attendances at meetings
The table below shows the number of directors’ meetings held (including meetings of Board Committees noted below) and the number of meetings
attended by each of the directors of NAB during the year.
Directors
Ken Henry
David Armstrong
Philip Chronican
Peeyush Gupta
Geraldine McBride
Doug McKay
Anne Loveridge
Andrew Thorburn
Anthony Yuen
Daniel Gilbert (3)
Jillian Segal (3)
Board
Audit
Committee
Risk
Committee
A
14
14
14
14
14
14
14
14
14
6
6
B
14
14
14
14
14
14
14
14
14
6
6
A
3
12*
4
4
11*
12*
6**
3
12*
2
2
B
3
12
4
4
11
12
6
3
12
2
2
A
3
14*
14*
14*
3
7
3
12
14*
2
4
B
3
14
14
14
3
7
3
12
14
2
4
Nomination
&
Governance
Committee
A
4*
-
-
4*
-
4*
4*
-
-
-
-
B
4
-
-
4
-
4
4
-
-
-
-
Remuneration
Committee
B
A
Directors’
meetings
of controlled
Entities (1)
B
A
Additional
meetings (2)
Attended
13
-
13*
13*
-
3
10*
8
2
5*
5*
13
-
13
13
-
3
10
8
2
5
5
3
3
21
41
3
33
3
3
3
2
2
3
3
21
41
3
35
3
3
3
2
2
10
9
16
5
-
5
2
2
5
1
1
* Indicates that the director is a member of the Committee.
**Indicates the director was a member of the Committee during the period but, as at 30 September 2017, is no longer a member.
(A) Number of meetings (including meetings of Board committees) attended during the period.
(B) Number of directors’ meetings (including meetings of Board committees) held during the year. Some meetings were joint meeting of Committees or the Board and a Committee. In such
cases, the meetings have been included in both columns. Where a director is not a member of a committee but was in attendance at a meeting, due to a joint meeting or by choice, this
column reflects the number of meetings attended.
(1) Where a controlled entity holds board meetings in a country other than the country of residence of the director, or where there may be a potential conflict of interest, then the number of meetings held is the
(2)
number of meetings the director was expected to attend, which may not be every board meeting held by the controlled entity during the year.
Reflects the number of additional formal meetings attended during the year by each director, including committee meetings (other than Audit Committee, Risk Committee, Remuneration Committee or
Nomination & Governance Committee) where any two directors are required to form a quorum.
(3) Mr Gilbert and Ms Segal retired effective 16 December 2016.
For more information on Board Committee memberships, please refer to NAB's 2017 Corporate Governance Statement which is available online at
www.nab.com.au/about-us/corporate-governance.
22 NATIONAL AUSTRALIA BANK
Report of the Directors
Directors’ information (continued)
Directors' and executives' interests
The tables below show the relevant interests of each director and senior executive in the issued ordinary shares and National Income Securities of NAB,
and in registered schemes made available by the Group as at the date of this Report. No director or senior executive held an interest in Trust Preferred
Securities of NAB.
Directors
KR Henry (Chairman)
DH Armstrong
PW Chronican
PK Gupta
AJ Loveridge
GC McBride
DA McKay
AC Sherry
AG Thorburn
AKT Yuen
Senior executives
MB Baird
AJ Cahill
SJ Cook
AD Gall
AP Hagger
AJ Healy
GA Lennon
A Mentis
LN Murphy
PF Wright
National Income
Securities
No.
Performance rights
over NAB fully paid
ordinary shares(1)
No.
-
-
982
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
881,674
-
-
233,992
-
194,317
413,918
260,363
127,316
235,118
54,917
-
NAB fully paid
ordinary shares(2)
No.
10,360
10,480
31,000
7,480
10,000
5,960
10,000
7,831
165,124
12,464
2,000
32,957
2,000
93,269
27,976
44,642
53,765
50,264
34,072
2,000
(1)
(2)
Further details of performance rights are set out in Note 39 Shares and performance rights in the Financial report and Section 6.8 of the Remuneration report.
Information on shareholdings is disclosed in Section 6.9 of the Remuneration report for the Group CEO and senior executives and in Section 7.4 of the Remuneration report for non-executive directors.
The directors from time-to-time invest in various debentures, registered schemes and securities offered by NAB and certain subsidiaries of NAB. The
level of interests held directly and indirectly by a director as at 30 September 2017 were:
Directors
DH Armstrong
AC Sherry
PK Gupta
PK Gupta
PK Gupta
Nature of product
Convertible Preference Shares II (NABPB)
Convertible Preference Shares (NABPA)
MLC Private Equity Co-Investment Fund I
MLC Private Equity Co-Investment Fund II
MLC PIC-Wholesale Inflation Plus Assertive portfolio Fund
Relevant interest (Units)
900
1,500
600,000
700,000
578,438
There are no contracts, other than those disclosed in the level of interests held table immediately above, to which directors are a party, or under which
the directors are entitled to a benefit and that confer the right to call for, or deliver shares in, debentures of, or interests in, a registered scheme made
available by NAB or a related body corporate. All of the directors have disclosed interests in organisations not related to the Group and are to be
regarded as interested in any contract or proposed contract that may be made between NAB and any such organisations.
2017 Annual Financial Report
23
Report of the Directors
Directors’ information (continued)
Executive performance rights
Performance rights are granted by NAB under the National Australia Bank Performance Rights Plan (performance rights plan). The performance rights
plan was approved by shareholders at the 2002 Annual General Meeting. Each performance right entitles the holder to one NAB fully paid ordinary
share subject to the satisfaction of certain conditions.
All performance rights that have not expired are detailed below.
The number and terms of performance rights granted by NAB during 2017 under the performance rights plan, including the number of performance
rights exercised during 2017, are shown in the following table:
Exercise period (1)
Performance rights (2)
4 June 2015 - 4 December 2016
22 May 2016 - 22 November 2016
4 June 2016 - 4 December 2016
4 November 2016 - 4 May 2017
18 November 2016 - 18 February 2017
17 December 2016 - 15 March 2017
19 December 2016 - 19 June 2018
22 May 2017 - 22 November 2017
17 June 2017 - 15 September 2017
19 June 2017 - 19 December 2017
19 June 2017 - 19 December 2018
16 November 2017 - 16 February 2018
18 November 2017 - 18 February 2018
20 December 2017 - 15 March 2018
20 December 2017 - 20 June 2019
20 June 2018 - 20 December 2019
16 November 2018 - 16 February 2019
20 December 2018 - 15 March 2019
21 December 2018 - 15 March 2020
21 June 2019 - 15 September 2020
21 December 2019 - 15 March 2020
20 December 2020 - 15 March 2021
Number held at
30 September 2017
Number exercised
from 1 October 2016
to 30 September 2017
Number granted
since 1 October 2016
-
-
-
-
-
-
1,397,066
-
-
-
-
131,743
124,905
24,579
613,634
60,204
112,606
29,190
919,144
67,589
858,902
548,106
-
1,674
-
3,374
121,514
109,566
-
8,171
15,016
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
134,310
-
-
-
-
112,606
36,488
-
-
-
548,106
(1)
(2)
Performance rights will expire if not exercised by the last day of their exercise period.
Further details of performance rights are set out in Note 39 Shares and performance rights in the Financial report. All shares issued or transferred on exercise of performance rights are NAB fully paid
ordinary shares. No exercise price is payable for performance rights.
Performance rights on issue and number exercised
There are currently 4,881,151 performance rights which are exercisable, or may become exercisable in the future under the performance rights plan.
There are currently 142 holders of performance rights.
NAB has issued no fully paid ordinary shares since 30 September 2017 to the date of this report, as a result of performance rights granted being
exercised for no consideration.
For the period 1 October 2016 to the date of this report, 1,674 performance rights expired as they were not exercised before their expiry date and
612,851 performance rights lapsed.
Persons holding performance rights are entitled to participate in certain capital actions by NAB (such as rights issues and bonus issues) in accordance
with the terms of the ASX Listing Rules which govern participation in such actions by holders of options and rights granted by listed entities. The terms
of the performance rights reflect the requirements of the ASX Listing Rules in this regard.
24 NATIONAL AUSTRALIA BANK
Report of the Directors
Other matters
Litigation and disputes
Entities within the Group may be involved from time to time in legal
proceedings arising from the conduct of their business. The aggregate
potential liability and costs in respect thereof cannot be accurately
assessed. Any material legal proceedings may adversely impact the
Group's reputation and financial performance and position.
Refer to Note 32 Contingent liabilities and credit commitments on page
106 in the Financial report for details in relation to the Group's material
legal proceedings and contingent liabilities.
Future Developments
In the opinion of the directors, discussion or disclosure of any further
future developments including the Group’s business strategies and its
prospects for future financial years would be likely to result in
unreasonable prejudice to the interests of the Group.
Proceedings on behalf of NAB
There are no proceedings brought or intervened in, or applications to
bring or intervene in proceedings, on behalf of NAB by a member or
other person entitled to do so under section 237 of the Corporations
Act 2001 (Cth).
Events subsequent to reporting date
On 27 October 2017, the Group announced it had agreed a settlement
with the Australian Securities and Investments Commission (ASIC) of
the Bank Bill Swap Rate (BBSW) legal action. As part of the settlement
the Group has agreed to a $10 million penalty, and to pay ASIC’s costs
of $20 million. The Group will also make a donation of $20 million to a
financial consumer protection fund nominated by ASIC. The financial
impact of this settlement has been reflected in the Group’s results for
the 2017 financial year.
On 2 November 2017, the Group announced an acceleration of its
strategic agenda to enhance the customer experience and simplify the
bank. A restructuring provision of between $500 million and $800
million is expected to be raised in the Group’s interim financial report
for the first half of the 2018 Financial year.
Other than the matters noted above, there are no other items,
transactions or events of a material or unusual nature that have arisen
in the interval between 30 September 2017 to the date of this report
that, in the opinion of the directors, have significantly affected or may
significantly affect the operations of the Group, the results of those
operations or the state of affairs of the Group in future years.
Integrity of reporting
The directors of NAB have a responsibility with respect to the integrity
of external reporting. This involves reviewing and monitoring, with the
assistance of the Board Audit Committee and management, the
processes, controls and procedures which are in place to maintain the
integrity of the Group’s financial statements.
Further details on the role of the Board and its committees can be
found in NAB's 2017 Corporate Governance Statement which is
available online at www.nab.com.au/about-us/corporate-governance.
Environmental and social regulation, risk and
opportunities
The operations of the Group are not subject to any site specific
environmental licences or permits which would be considered
particular or significant environmental regulation under the laws of the
Australian Commonwealth Government or of an Australian state or
territory.
The operations of the Group are subject to the National Greenhouse
and Energy Reporting Act 2007 (Cth) (NGER Act) as part of the
legislative response to climate change in Australia. While this
legislation is not particular to the Group or significant in its impact, the
Group complied with its requirements. The NGER Act requires the
Group to report on the period from 1 July to 30 June (the
environmental reporting year). The Group’s Australian vehicle fleet and
building related net energy use reported under the NGER Act for the
2017 environmental reporting year was 618,969 gigajoules (GJ) (2016:
611,625 GJ), which is approximately 82% of the Group’s measured
total energy use. The associated total greenhouse gas (GHG)
emissions from fuel combustion (Scope 1) and from electricity use
(Scope 2) were 114,048 tCO2-e (2016: 128,436 tCO2-e).
During the 2017 environmental reporting year, the Group’s total GHG
emissions (Scope 1, 2 and 3 (1)), after accounting for use of certified
renewable energy in the UK and generated renewable energy in
Australia, were 185,344 tCO2-e (2016: 218,918 tCO2-e). The Group
continues to implement an energy efficiency program, including energy
efficiency opportunity assessments and sustainable building design.
This helps to produce GHG emissions savings and contributes to the
Group’s carbon neutral status and delivery of the Group's climate
change strategy. From 1 July 2006 to 30 June 2017, the Group
identified 1230 energy efficiency and 15 renewable energy
opportunities in Australia alone. Implemented initiatives are estimated
to provide more than 352,907 GJ (2016: 345,675 GJ) of ongoing
annual energy savings. This equated to avoided costs of over $19.5
million in the 2017 environmental reporting year (2016: $16.7 million in
avoided costs). A further 16 energy efficiency and 3 renewable energy
opportunities are in progress or approved to proceed.
The Group’s main Melbourne-based data centre is subject to the
reporting requirements of the National Environment Protection
Measure (National Pollutant Inventory) (NPI) in Australia. The NPI
provides a public database of emissions and transfers of specified NPI
substances from various facilities. The Group is required to report on
these emissions because the volume of natural gas used to run the tri-
generation plant at this facility triggers the NPI threshold. The Group
has complied with this requirement.
In the United Kingdom, the Group is a participant in the Carbon
Reduction Commitment Energy Efficiency Scheme (CRC EE Scheme).
The Group’s UK-based GHG emissions reportable under the CRC EE
Scheme for the 2016/2017 compliance year (year ended 31 March
2017) totalled 0 tCO2-e (2016: 0 tCO2-e), because the Group's UK
operations no longer have any reportable energy supplies (the Group
occupies leased offices where the landlord pays the energy bills and
includes a recharge in the lease outgoings). The Group’s regulatory
return was filed in July 2017 as required by the CRC EE Scheme
Order 2010. This year, the Group was not required to purchase and
surrender Carbon Reduction Commitment Allowances.
In 2014, the Group’s UK-based operations became subject to the
Energy Savings Opportunities Scheme (ESOS), which was introduced
by the ESOS Regulations 2014 which came into force in July 2014.
The ESOS requires mandatory energy assessments (audits) of
organisations’ buildings and transport to be conducted every four
years. In 2016, the Group met the requirements of the UK Environment
Agency to carry out ESOS assessments and notify the regulator by
5 December 2015. The Group has no ESOS requirements to meet in
2017.
(1) Scope 3 relates to all other indirect emissions that occur outside the boundary of the organisation as a result of the activities of the organisation, excluding emissions from
electricity use which is Scope 2.
2017 Annual Financial Report
25
Report of the Directors
Other matters (continued)
As a lender, the Group may incur environmental liabilities in
circumstances where it takes possession of a borrower’s assets and
those assets have associated environmental risks. The Group has
developed and implemented credit policies to ensure that this risk is
minimised and managed appropriately.
Climate Change
The Group recognises that climate change is a significant risk and a
major challenge for the global economy and society. The Group
supports the transition to a low carbon economy consistent with the
global agreement reached in Paris to limit global warming to less than
2 degrees above pre-industrial levels (the Paris Agreement).
In addition to responding to relevant regulatory requirements, as a
global provider of financial products and services, the Group seeks to
play a key role in financing the low carbon transition and green
growth (1), and in doing so, make a contribution to the environmental
sustainability of the communities in which it operates. Recognising the
impact of climate change on the Group, its customers and the
community, and building consideration of climate change into the
Group's strategy, is consistent with the Group's goal of long-term value
creation. Therefore, the Group is actively helping its customers through
this transition. The following provides a high level summary of the
Group’s approach to climate change governance, strategy, risk
management, and metrics and targets consistent with the
recommendations of the Taskforce on Climate-Related Financial
Disclosures.
Governance
The Board retains ultimate oversight for Environmental, Social and
Governance risks and issues (ESG Risks), including climate change,
which is one of three designated focus areas in the Group’s
Environmental Agenda – in addition to natural value and resource
scarcity. The Board receives regular reports on a range of climate-
change related issues including progress against the Group’s climate
change strategy, commitments and initiatives, environmental
operational performance, carbon neutral status, and concerns from
stakeholders. The Board also receives updates on regulatory change
and greenhouse and energy reporting returns that require noting by
the Board before submission to regulators.
Risk Management
ESG Risks, including climate change, are identified, measured,
monitored, reported and overseen in accordance with the Group’s Risk
Management Framework (as described in the Group’s Risk
Management Strategy). The Group Regulatory, Compliance and
Operational Risk Committee (GRCORC) has oversight of these risks
and the Group’s environmental performance and Environmental
Agenda, including climate change. Matters are escalated to the Group
Risk Return Management Committee, Board Committees and Board
as required. In 2016, the Group formed a Climate Change Working
Group (CCWG), with management representatives from across the
Group, to review the key risks and opportunities facing the Group and
its customers arising from the Paris Agreement. The findings of this
working group are reported through to management, executives and
the Board.
In the 2017 financial year, the CCWG made recommendations that are
being integrated into risk appetite and activities and business strategy
of the Group. The Group used the Bank of England’s categories of
physical, transition and liability risk in its internal climate change risk
assessment process to review the risks faced by the Group and its
customers as a result of climate change. Key risk actions arising from
the CCWG’s work were to:
• participate in a UN Environmental Program Finance Initiative
(UNEP FI) pilot project with other UNEP FI member banks to test
recommendations made by the Financial Stability Board’s Taskforce
on Climate-related Financial Disclosures. This project aims to
develop scenarios and stress test participating bank loan books and
will help the Group meet the commitment it made in 2014 to expand
and improve the Group's carbon-related disclosure; and
• undertake a phased review of the Group's risk appetite for carbon
intensive, low carbon and climate sensitive sectors.
Strategy
Current and future business opportunities, including those related to
climate change (for example financing clean technology), are identified
and prioritised through strategic planning processes, both at a Group
and business line level. During the 2017 financial year, the CCWG
refreshed the Group's climate change strategy and considered further
opportunities to reduce the Group's own carbon footprint and assist its
customers through the low carbon transition and help them to adapt
and build resilience to its physical impacts. The Group anticipates the
global low carbon transition will see structural changes in energy
markets with fossil fuel-based energy use materially declining over
time, and increased use of renewable energy. This in turn will be
reflected in the make-up of the Group's loan book and investment
portfolio.
In addition to the five climate change commitments the Group made
prior to the 2015 Paris Climate Conference (COP21), the CCWG’s
assessment of growing climate change related opportunities has led to
the Group committing to:
•
increase its current environmental financing commitment from $18
billion by 2022 to $55 billion by 2025 (between 1 October 2015 –
30 September 2025) to assist the low carbon transition. This
includes:
• $20 billion to support green infrastructure, capital markets and
asset finance (in the 2017 financial year this reached $4.9
billion); and
• $35 billion in new mortgage lending flow for 6 Star residential
housing in Australia (in the 2017 financial year this reached
$8.52 billion);
•
increase the Group’s sourcing of Australian electricity from
renewable energy from 10% by 2018, to 50% by 2025; and
• play an active role in addressing climate change through seeking to
innovate across the Group's key sectors and markets and
supporting low carbon opportunities for the Group's customers.
These commitments have been integrated into the Group’s business
strategy. The Group will use its experience in clean energy financing
and natural value to provide innovative, low-carbon solutions for
customers across all of the Group’s key sectors and markets. Further
details on all of the Group’s climate change commitments can be found
on the Group’s website at www.nab.com.au/about-us/corporate-
responsibility/environment/climate-change.
Metrics and targets
In addition to the Group’s environmental financing commitment, the
Group is monitoring exposure to both carbon intensive and low carbon
sectors. Some of this data is reported to investors in half year and full
year results presentations, as well as in the Group's annual
Sustainability Report. With respect to the Group's own operations, the
Group continues to:
(1) Green growth describes a path of economic growth that uses natural resources in a sustainable manner.
26 NATIONAL AUSTRALIA BANK
Report of the Directors
Other matters (continued)
•
report on progress against its science-based emissions reduction
target (the Group achieved a 7% reduction in emissions in the 2017
environmental reporting year);
install solar panels on its buildings (in the 2017 environmental
reporting year the Group reached a total of 677 kW of installed
capacity across 34 facilities); and
• maintain its carbon neutral status.
•
Further information about the Group’s Environmental Agenda, climate
change strategy and commitments, greenhouse reduction and
resource efficiency targets and management approach is outlined in
the Group’s 2017 Annual Review and 2017 Sustainability Report
available online at www.nab.com.au/annualreports.
Modern Slavery
In October 2015, the UK Government’s Modern Slavery Act 2015
came into effect. The Group has prepared a Modern Slavery Act
statement which sets out actions taken by the Group during the 2017
financial year to ensure that its business operations, and its supply
chain, are free from slavery and human trafficking. It is available online
at www.nab.com.au/modernslaverystatement in accordance with the
Act.
2017 Annual Financial Report
27
Report of the Directors
Other matters (continued)
Past employment with external auditor
Ernst & Young has been NAB’s external auditor since 31 January 2005. There is no person who has acted as an officer of the Group during the 2017
financial year who has previously been a partner at Ernst & Young when that firm conducted NAB’s audit.
Non-audit services
Ernst & Young provided non-audit services to the Group during 2017. The fees paid or due and payable to Ernst & Young for these services during the
year to 30 September 2017 are as follows:
Audit related services
Comfort letters
Regulatory
Non-regulatory
Total audit related services
All other services
Tax framework and policy reviews
Project assurance and due diligence
Cyber security and risk assessments
Other services
Total all other services
Total non-audit services
Group
2017
$’000
567
4,942
660
6,169
1,119
577
191
191
2,078
8,247
As set out in Note 38 Remuneration of external auditor, total fees paid or due and payable for audit and non-audit services provided by Ernst & Young to
the Group during 2017 amount to $22.7 million.
Ernst & Young also provides audit and non-audit services to non-consolidated trusts of which a Group entity is trustee, manager or responsible entity
and non-consolidated Group superannuation funds. The fees paid or due and payable to Ernst & Young for these services during the year to
30 September 2017 total $3.5 million.
In accordance with advice received from the Board Audit Committee, the directors are satisfied that the provision of non-audit services during the year to
30 September 2017 by Ernst & Young is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001
(Cth). The directors are satisfied because the Board Audit Committee or its delegate has assessed each service, having regard to auditor independence
requirements of applicable laws, rules and regulations, and concluded in respect of each non-audit service or type of non-audit service that the provision
of that service or type of service would not impair the independence of Ernst & Young.
A description of the Board Audit Committee’s pre-approval policies and procedures is set out in the NAB 2017 Corporate Governance Statement which
is available online at www.nab.com.au/about-us/corporate-governance. Details of the services provided by Ernst & Young to the Group during 2017 and
the fees paid or due and payable for those services are set out in Note 38 Remuneration of external auditor of the Financial report. A copy of Ernst &
Young’s independence declaration is set out on the following page.
28 NATIONAL AUSTRALIA BANK
2017 Annual Financial Report
29
Report of the Directors
Remuneration report
Letter from the Remuneration Committee Chairman
Dear Shareholder,
On behalf of the Remuneration Committee (the Committee), I thank you for reading NAB’s 2017 Remuneration report. We understand these reports are
a challenging read, and this year have tried to simplify how we explain our executive remuneration framework and practices.
At the 2016 Annual General Meeting, our Board Chairman committed to a review of our executive remuneration framework and practices. The Board is
committed to responsible remuneration practices that appropriately balance securing the right talent, rewarding in line with execution of our strategy and
creating incremental, sustainable shareholder value. The review found that there is good alignment between our framework and our goals although
there is opportunity to work on the simplicity and transparency of the framework. While some changes have been implemented, given the
announcement of the Banking Executive Accountability Regime (BEAR), the Committee decided not to make significant changes in 2018 without having
final clarity on BEAR. The Committee will build upon the extensive review work completed during 2017 to consider further fit for purpose changes to our
remuneration arrangements for 2019 onwards.
Changes made this year to improve transparency and simplicity as well as address some of the concerns regarding quantum of maximum potential
remuneration while remaining market competitive, include:
• Determining the number of deferred Short-Term Incentive (STI) and Long-Term Incentive (LTI) performance rights in early October to include in this
report. Bringing forward the valuation date for these awards to the end of September means we can disclose the basis of the fair and face value of
the equity awards for the Group Chief Executive Officer (CEO) and other senior executives in this Remuneration report. Shareholders can vote on
the Remuneration report and the Group CEO’s equity awards with a clear understanding of the value of those awards;
• Changing the allocation methodology for LTI from fair to face value for the Group CEO resulting in a reduction of potential earnings and increasing
simplicity. The LTI allocation for the other senior executives remains based on fair value methodology until the BEAR legislation is enacted; and
• Capping the STI maximum potential for the Group CEO at 150% versus 175% of fixed remuneration for 2018, further reducing potential earnings.
Throughout 2017, the Committee has also focused on:
Executive Performance
The Committee actively monitors the performance of the executive leadership team throughout the year. These executives are responsible for setting
the culture for the organisation and are expected to live and demonstrate NAB’s values. In a challenging, highly competitive and politicised environment
with increasing regulatory requirements, the leadership team has advanced NAB’s strategic agenda during 2017. As a result, senior executives’
performance outcomes ranged from achieved to highly achieved. The STI pool was funded at 90% based on the Board's consideration of achievement
of financial goals, quality of earnings and a number of qualitative outcomes, including customer advocacy, risk management and regulatory compliance.
Additionally, the 2012 LTI was tested in December 2016. The four year relative Total Shareholder Return performance hurdles for this award were not
met, providing no vesting of LTI for executives in 2017.
We also undertook global searches for the best talent to execute our strategy. We have provided market competitive remuneration to attract the right
individuals for three significant senior executive leadership team appointments. Our annual review of executive leadership team remuneration found that
we continue to provide market competitive remuneration for all executive leadership team roles.
Incentive Changes
NAB has refined its Group incentive plan principles aimed at improving NAB’s culture, better protecting our customers and consistent with the Australian
Bankers' Association Retail Banking Remuneration Review (the Review) recommendations. NAB continues to lead the industry reforms and has
committed to fully implement the Review recommendations by 2020. The Committee is monitoring NAB’s implementation of the Review
recommendations, which for 2018 include:
• Retail banking managers, assistant managers and direct consumer team leaders have moved to a more customer-outcome focused incentive plan
and will no longer receive at-risk remuneration based on a sales incentive plan. Instead they participate in the Group STI Plan, significantly reducing
the link between sales and remuneration.
• Scorecards for retail employees have been refined to ensure all balanced scorecard measures are customer-centric, product neutral and contain
both quantitative and qualitative measures to drive improved quantity and quality of customer conversations, with no more than 33% weighted to
financial measures.
Consequence Management
The Committee regularly monitors consequence management outcomes to ensure management is addressing poor conduct and risk management
issues and taking appropriate action. In 2017, there were 1,613 Code of Conduct outcomes, managed by the Workplace Relations team, 307 resulted in
employees exiting the business, and 1,306 cases resulted in coaching or other remedial actions, including loss of performance-based compensation.
The value of equity forfeitures, as a result of consequence management during 2017, was $1.3 million.
As we strive to continually improve this report for our customers, our shareholders and our employees, I hope you find this report to be simpler, more
informative and more transparent. We welcome your feedback.
Yours sincerely,
Anne Loveridge
Remuneration Committee Chairman
30 NATIONAL AUSTRALIA BANK
Report of the Directors
Remuneration report (continued)
Table of contents
Section 1 - Executive summary
Section 2 - Key Management Personnel
Section 3 - Executive remuneration strategy and framework
Section 4 - Performance and remuneration outcomes
Section 5 - Remuneration governance
Section 6 - Executive remuneration disclosures in detail
Section 7 - Non-executive director remuneration
Section 8 - Loans and other transactions
32
35
36
38
42
43
51
53
2017 Annual Financial Report
31
Report of the Directors
Remuneration report (continued)
Section 1 - Executive summary
1.1. Linking business performance to remuneration outcomes
Our purpose
Back the bold who move Australia forward
Our vision
To be Australia and New Zealand's most respected bank
How do we do this?
Through our strategy to:
- Turn our cusomers into advocates
- Create a high performing culture through a team of engaged people with aligned values
- Generate attractive returns
- Do the right thing by taking the right risk, with the right controls for the right return
How did we perform?
-14
59%
20.1%
priority segments net promoter score (1)
employee engagement score (2)
total shareholder return (TSR)
1 point increase from August 2016 to August 2017,
ranked #2 amongst major Australian banks
14.0%
cash return on equity (cash ROE) (3) (4)
30 basis points decrease
from 2016
compared to top quartile global benchmark of 67%
ranked #1 amongst major Australian banks
$6.642bn
cash earnings (3) (4)
14.7%
cash return on total allocated equity (ROTAE)
2.5% increase from 2016
exceeded plan
Risk management
•
Improved overall performance against the Board approved risk appetite through sustained progress on risk management priorities and remediation
of risk and compliance issues
Identified ongoing need to relentlessly raise standards across the Group to meet community and regulator expectations
•
What did this deliver to senior executives?
• Group STI pool formed at 90% based on the Board's consideration of achievement of financial
goals, quality of earnings and qualitative outcomes
• The Group CEO’s annual incentive outcome was 49% of maximum STI opportunity (2016: 69%)
• For the senior executive team (excluding the Group CEO) the annual incentive outcome on
average was 49% of maximum STI opportunity (2016: average 62%)
• The 2012 LTI tested in 2017, did not vest - delivering no value to senior executives
• The Group CEO’s 2017 realised remuneration was $4.1m (2016: $4.1m)
• For the other senior executives, average realised remuneration for 2017 was $1.8m (2016:
average $1.7m)
Other Outcomes
• No increases to fixed remuneration for the Group CEO and senior executives as a result of the 2017 annual review. After the review, a
remuneration increase has been approved by the Board for the recently announced Chief Customer Officer - Business & Private Banking
appointment.
• Group CEO LTI allocation methodology changed from fair value to face value for 2017 grant.
• Reduction in the STI maximum opportunity for the Group CEO from 175% to 150% of fixed remuneration from 2018.
• No increases to non-executive director Board or Committee fees.
(1)
(2)
(3)
(4)
Net Promoter® and NPS® are registered trademarks and Net Promoter Score and Net Promoter System are trademarks of Bain & Company, Satmetrix Systems and Fred Reichheld. Priority segments Net
Promoter Score (NPS) is a simple average of the NPS scores of four priority segments: NAB defined Home Owners and Investors, as well as Small Business ($0.1m-<$5m) and Medium Business ($5m-<
$50m). The Priority segments NPS data is based on six month moving averages from Roy Morgan Research and DBM BFSM Research as at 31 August 2017. Group CEO and senior executive NPS 2017
targets and performance were measured over the period August 2016 to August 2017.
2017 Employee Engagement Survey conducted by Aon Hewitt. The engagement score indicates the percentage of employees at NAB that are strong advocates (SAY), demonstrate a commitment to NAB
(STAY) and exerts discretionary effort (STRIVE).
Information is presented on a continuing operations basis.
The Glossary of the Financial report contains a definition of cash earnings and Note 6 - Earnings per share in the Financial report details the calculation of basic earnings per share. Refer to the Financial
report for details of statutory net profit attributable to owners of NAB, and to Note 2 Segment information in the Financial report for a reconciliation between cash earnings and statutory net profit attributable
to owners of NAB.
32 NATIONAL AUSTRALIA BANK
Report of the Directors
Remuneration report (continued)
1.2. Overview of changes to the executive remuneration framework
During 2017, the Board undertook a critical review of the Group’s executive remuneration framework, assessing the structure against its objectives of
attracting and retaining high performers, aligning remuneration with delivery of NAB’s strategy, and encouraging sustainable long-term performance. As
part of this process, the Committee engaged with various stakeholders, including shareholders and proxy advisers. Following these consultations, the
Board identified several key areas for improvement in terms of transparency and simplicity and has approved a number of changes:
Our changes
Group CEO's maximum
remuneration opportunity
reduced
Our approach
The Board has reviewed the Group CEO’s remuneration during 2017 and determined:
Fixed Remuneration (FR): No change.
When
2017/2018
STI: Reduction of the STI maximum opportunity from 175% to 150% of FR from 2018. Continue allocation on a fair value methodology.
LTI: Face value allocation (using a 5 day weighted average share price) for LTI based on a maximum grant value of 130% of FR. A dividend
equivalent payment (1) to be provided on any vested LTI.
The Group CEO’s maximum potential opportunity will be reduced by an estimated total of $2.59 million over the next two years, (excluding any
dividend equivalent payment on vested LTI). The STI and LTI changes reduce the Group CEO's maximum opportunity while ensuring that
overall remuneration remains fair and market competitive.
Maximum potential opportunity (2)
Move to face value for
allocating LTI
performance rights to the
Group CEO
The Group CEO’s LTI grant for 2017 will use face value rather than fair value to determine the number of performance rights. Details of the LTI
grant and the number of performance rights are provided in the 2017 Notice of Meeting and this report (see Section 6.7).
2017
The maximum face value of the Group CEO’s LTI has been set at 130% of fixed remuneration ($2.99 million). If any portion of the award vests,
the Group CEO will also receive a dividend equivalent payment(1) on any vested portion of the award. Including a dividend equivalent payment
strengthens alignment of the CEO’s remuneration with shareholder experience over the term of the grant.
For other senior executives a fair value allocation methodology will be used, subject to the same maximum limit applied in 2016 to the number
of LTI performance rights granted (see Section 6.2).
Improved transparency of
STI and LTI value
The number of STI and LTI performance rights for senior executives has been determined in early October 2017 and has been included in this
report (see Section 6.7).
2017
Improved transparency on
performance outcomes
For the Group CEO the number of STI and LTI performance rights and information on how they have been calculated has been included in the
2017 Notice of Meeting and this report (see Section 6.7).
More detail has been included on senior executives 2017 performance outcomes in this report (see Section 4.3(b)).
2017
(1)
(2)
A cash amount equivalent to the gross value of any dividends (including payment for the value of imputation credits which applied to the dividends) which would have been paid to the Group CEO if he had
held a number of shares equivalent to any LTI performance rights that may vest, during the period 1 October 2017 to the end of the LTI restriction period (December 2021). The dividend equivalent payment
may be adjusted for any bonus and rights issues, aggregations and reconstructions in relation to NAB shares during the period from 1 October 2017 to the end of the LTI restriction period.
All components of the Group CEO's maximum potential earnings is shown on a face value basis for comparison purposes. The amounts have been calculated as:
a) Fixed remuneration is annualised salary and superannuation.
b) STI cash is 50% of the maximum STI opportunity of 175% (2018: 150%) of fixed remuneration.
c) The STI deferral amounts are 50% of the maximum STI opportunity of 175% (2018: 150%) of fixed remuneration converted to face value using the grant date WASP for 2016 and 2017 allocation.
Note: The 2017 grant date WASP has been used for the 2018 STI deferral calculation. The fair value for allocation purposes was 2016 and 2017: $2.01m, 2018: $1.73m.
d) The 2016 LTI allocation fair value was $2.99m. The amount shown is the face value of the award at grant date, after application of the maximum WASP discount policy (see Section 6.2).
2017 Annual Financial Report
33
Report of the Directors
Remuneration report (continued)
1.3. Realised remuneration
The following table is a voluntary non-statutory disclosure that shows the realised remuneration senior executives received (or were entitled to receive)
during 2017 while they were senior executives. The amounts shown include fixed remuneration, cash STI to be paid under the 2017 STI, the previous
years’ deferred STI which vested, and other equity awards that vested during the year. The value of equity awards is calculated using the closing share
price of NAB shares on the vesting date. Not all amounts have been prepared in accordance with accounting standards and this information differs to
the statutory remuneration table (Section 6.1) which shows the expense for vested and unvested awards in accordance with accounting standards.
Other
Remuneration
$
Total
remuneration
realised
during year
$
Name
Executive director
AG Thorburn
Other senior executives
MB Baird (for part year)
AJ Cahill
SJ Cook (for part year)
AD Gall
AP Hagger
AJ Healy
GA Lennon
A Mentis
LN Murphy
PF Wright (for part year) (5)
Former senior executives
CA Carver (for part year)
MR Lawrance (for part year)
Fixed
remuneration(1) Cash STI(2)
$
$
Deferred STI
vested
during year(3)
$
2,287,372
977,500
798,872
558,239
1,237,316
394,400
1,509,601
1,218,999
1,001,052
1,022,299
1,193,388
943,567
876,777
373,796
335,985
227,754
510,000
92,779
331,500
480,000
582,075
425,000
660,000
340,000
552,500
472,555
235,002
-
392,871
-
254,877
489,209
337,925
251,894
369,691
-
-
-
230,520
Equity
related
amounts
during year(4)
$
798
-
36,398
-
-
633,897
970
13,750
36,398
357,293
-
1,130,533
1,052,623
21,076
-
-
-
-
-
-
-
-
-
-
-
-
4,064,542
785,993
2,176,585
487,179
2,095,978
2,822,105
1,922,022
1,712,943
2,259,477
1,640,860
2,559,810
1,898,974
822,583
(1)
(2)
(3)
(4)
(5)
Fixed remuneration includes cash salary, cash value of non-monetary benefits and superannuation consistent with the statutory remuneration table in Section 6.1.
The cash component of the STI received in respect of 2017 is scheduled to be paid on 15 November 2017 in Australia and 30 November 2017 in NZ. The amount reflects 50% of the STI to be provided to
eligible current senior executives and the Group CEO. The amount reflects 75% of the STI to be provided to eligible former senior executives. The remaining portion of the STI for 2017 is deferred.
Deferred STI amounts from the 2014 Tranche 2 and 2015 Tranche 1 STI program fully vested in December 2016 and November 2016 respectively.
Equity related amounts provided to senior executives during 2017 while in a senior executive role. This includes equity-based programs from prior years (other than the deferred STI equity referred to in (3))
that have vested during 2017. The amounts shown for Ms Murphy and Ms Carver include commencement shares, and for Mr Hagger includes retention shares that vested during the year. No LTI vested
during 2017. Dividends received by senior executives during 2017 for any unvested share awards are also included. The amount is calculated for the 2016 final dividend of 99 cents (record date of
9 November 2016) and the 2017 interim dividend of 99 cents (record date of 18 May 2017). Both dividends were fully franked.
To compensate for awards from his prior employer which were forfeited as a result of joining NAB, Mr Wright received a commencement award of US$605,950 (A$801,627) paid on commencement in May
2017 and a second instalment of US$260,000 (A$328,906) paid in September 2017. Full details of Mr Wright’s commencement award are provided in Section 6.4.
34 NATIONAL AUSTRALIA BANK
Report of the Directors
Remuneration report (continued)
Section 2 - Key Management Personnel
(a) Key Management Personnel in 2017
Key Management Personnel (KMP) are the Directors of NAB and those employees of the Group who have authority and responsibility for planning,
directing and controlling the activities of both NAB and the Group. KMP during 2017 were:
Non-executive directors
Chairman
Kenneth R Henry
David H Armstrong
Philip W Chronican
Peeyush K Gupta
Anne J Loveridge
Geraldine C McBride
Douglas A McKay
Anthony KT Yuen
Daniel T Gilbert (retired 16 December 2016)
Jillian S Segal (retired 16 December 2016)
Senior executives
Executive Director and Group Chief Executive Officer (Group CEO)
Andrew G Thorburn
Chief Customer Officer - Corporate and Institutional Banking
Cathryn A Carver (acting to 20 April 2017)
Michael B Baird (from 21 April 2017)
Chief Operating Officer
Antony J Cahill
Chief Legal and Commercial Counsel
Sharon J Cook (from 18 April 2017)
Chief Risk Officer
A David Gall
Chief Customer Officer - Consumer Banking and Wealth
Andrew P Hagger
Chief Executive Officer Bank of New Zealand
Anthony J Healy
Chief Financial Officer
Gary A Lennon
Chief Customer Officer - Business and Private Banking
Angela Mentis
Chief People Officer
Lorraine N Murphy
Chief Technology and Operations Officer
Matthew R Lawrance (acting to 25 April 2017)
Patrick F Wright (from 26 April 2017)
(b) KMP changes after 30 September 2017
Ms Ann Sherry was appointed as a non-executive director to the Board, effective 8 November 2017. Ms Sherry will be a member of the Remuneration
Committee.
2017 Annual Financial Report
35
Report of the Directors
Remuneration report (continued)
Section 3 - Executive remuneration strategy and framework
3.1. A remuneration policy that supports the Group’s approach to risk management and strategy
The Group’s remuneration policy is designed to support NAB’s strategy through building a strong culture that encourages the right behaviours to deliver
sustainable customer, shareholder and business outcomes. This is reinforced through appropriate consequences being applied when there is
inappropriate risk taking or poor behaviours demonstrated.
Our purpose
Back the bold who move Australia forward
Our vision
To be Australia and New Zealand's most respected bank
Our remuneration policy is designed to support our vision:
- Attracting, retaining and rewarding high performers to drive company performance without encouraging poor customer outcomes.
- Aligning the interests of senior executives and shareholders through ownership of NAB securities.
- Complying with jurisdictional remuneration regulations and Group diversity, inclusion and pay equity commitments.
Fixed Remuneration
STI
LTI
Attract, retain and reward a high performing team to
deliver on NAB’s strategy and the Group’s performance
Align delivery of NAB’s strategy and shareholder
outcomes with annual incentives
Encourage sustainable long-term performance
• Cash and benefits (including superannuation)
• Set with consideration of role complexity and
responsibilities; capabilities; experience and
knowledge; business and individual
performance; internal and external market role
relativities
• Adjustments are only made to senior
executive remuneration when they are not
market competitive and not for annual cost of
living adjustments
• Market data includes a peer group of 18 ASX-
listed companies, including NAB’s major
competitors
Maximum opportunity
Maximum opportunity
• 175% of FR for all senior executives in 2017
• 150% of FR for the Group CEO in 2018
Allocation methodology
• Fair value for all senior executives
Group performance
• 130% of FR (Group CEO)
• 100% of FR (most senior executives)
• 70% of FR (Chief Risk Officer and Chief Legal
& Commercial Counsel)
Allocation methodology
• Group CEO based on face value (previously
• Cash earnings (40%) / cash ROE (30%) /
fair value)
ROTAE (30%)
• Adjusted based on risk management,
shareholder expectations and the quality of
financial results
• Fair value for other senior executives, subject
to a policy that limits the total number of
performance rights allocated (refer to
Section 6.2)
Individual performance
LTI performance
• 4 equally weighted objectives: customer, risk,
financial and strategy
• Conduct Gate: Amber reduces STI by 25%;
Red reduces STI to zero and prior years’
unvested STI is forfeited
• Demonstrated values and behaviours
• Four year performance period
• Measured against: relative Cash ROE growth
(50%) and relative TSR (50%)
• Conduct Gate: Amber reduces LTI by 25%;
Red reduces LTI to zero and prior years’
unvested LTI is forfeited
STI reward
LTI reward
• STI outcomes may range from 0% to the
maximum opportunity above
• 50% provided as cash and 50% deferred and
provided as performance rights
• Deferred STI vests only if service and
performance conditions are met, subject to
Board discretion
• LTI outcomes may range from 0% to 100% of
the allocation value
• 100% provided as performance rights
• Group CEO: Dividend equivalent payment for
the period 1 October 2017 to the end of the
restriction period (December 2021) on any
vested LTI
• LTI vests only if performance conditions are
met, subject to Board discretion
Mandatory shareholding requirements
Senior executives are required to accumulate and retain NAB equity over a five year period from commencement as KMP to an amount equal to:
• Two times Fixed Remuneration for the Group CEO.
• One times Fixed Remuneration for other senior executives.
36 NATIONAL AUSTRALIA BANK
Report of the Directors
Remuneration report (continued)
Senior executive remuneration is structured to be paid over four years to link current year remuneration with longer-term outcomes of the Group. At-risk
remuneration awarded to senior executives for 2017 may be provided at various times out to December 2021, subject to achievement of relevant
performance and services conditions.
For the Group CEO, 69% of variable remuneration (at maximum opportunity) is deferred and for the other senior executives 68% to 70% of variable
remuneration (at maximum opportunity) is deferred, based on fair value.
3.2. A remuneration mix to encourage performance
The weighting of the at-risk remuneration components reflects the Board’s commitment to performance-based reward. The graphs below illustrate the
mix of remuneration components as a proportion of total remuneration used when structuring the annual remuneration for senior executives. Section 4
describes 2017 performance outcomes relative to the performance measures under the STI and LTI, and how this has impacted remuneration outcomes
for the 2017 financial year.
The Chief Risk Officer and Chief Legal & Commercial Counsel play an important role in the oversight of the financial and risk performance of the Group
and its employees. The reward mix set for these roles is structured to recognise these responsibilities and to support the independence required of
these roles through providing a higher proportion of fixed remuneration than other senior executives and placing a greater emphasis on the LTI rather
than the STI component of their variable reward.
3.3. Remuneration plan governance
• Conduct standards: All variable reward is subject to compliance with NAB's Code of Conduct (NAB's Code of Conduct is found online at:
www.nab.com.au/about-us/corporate-governance/national-australia-bank-limited-code-of-conduct).
• Cessation of employment: If an executive resigns, any unvested STI and LTI will generally lapse or be forfeited, unless the Board determines
otherwise. Any unvested STI and LTI awards that are retained will remain subject to the original performance criteria and timetable.
• Malus and Board discretion: The Board has absolute discretion, subject to compliance with the law, to adjust variable reward down, or to zero, where
appropriate. This includes varying vesting of deferred STI and LTI awards. The Board may consider the Group's financial performance, management
of business risks, shareholder expectations and the quality of the financial results. Malus and Board discretion may apply to any employee across the
Group, by Division, by role and / or individual, depending on circumstances.
Insider trading and hedging policy: Directors and employees are prohibited from protecting the value of their equity awards by hedging. Further
details are available in the Group Securities Trading Policy, found online at: www.nab.com.au/content/dam/nabrwd/About-Us/group-securities-
trading-policy-nabgroup-version.pdf.
•
• Change of control: The Board generally has discretion to determine the treatment of unvested equity at the time a change of control event occurs.
2017 Annual Financial Report
37
Report of the Directors
Remuneration report (continued)
Section 4 - Performance and remuneration outcomes
4.1. Financial performance
The following table shows the Group's annual performance over the last five years. The table shows the impact of Group performance on shareholder
value, taking into account dividend payments, share price changes, and other capital adjustments during the period.
Financial performance measure
Basic earnings per share (cents) (1)
Cash earnings ($m) (1)
Dividends paid per share
Company share price at start of year
Company share price at end of year
Absolute TSR for the year
(1)
Information is presented on a continuing operations basis.
4.2. Turning customers into advocates
Link to the remuneration framework
Group STI pool; LTI ROE growth measure
LTI relative TSR measure
LTI relative TSR measure
LTI relative TSR measure
LTI relative TSR measure
2017
228.2
6,642
$1.98
$27.87
$31.50
20.1%
2016
242.4
6,483
$1.98
$29.98
$27.87
(0.7%)
2015
271.7
6,222
$1.98
$32.54
$29.98
(2.0%)
2014
214.1
5,055
$1.96
$34.32
$32.54
0.4%
2013
225.9
5,747
$1.83
$25.49
$34.32
42.9%
NAB is focused on improving customer advocacy, as measured through the Net Promoter System (1). Performance is measured against the other major
banks using the Net Promoter Score (NPS) for NAB’s priority customer segments. The Net Promoter System is used to develop a strong culture of
customer focus across the Group and is one of the measures used in assessing senior executives’ performance and determining STI (see Section
4.3(b)). The graph shows NAB’s Priority Segments NPS performance since December 2012 to August 2017.
4.3. STI outcomes
(a) Forming the pool to fund the STI
The pool is funded based on the Group’s achievement against three financial measures: cash earnings (40%), cash ROE (30%) and ROTAE (30%). The
Group’s policy on reward mix provides a variable remuneration component (including STI) for the majority of employees. The Committee, in consultation
with the Board Risk Committee, recommends the size of the Group STI pool to the Board, taking into account a qualitative overlay that reflects the
Group’s management of business risks, shareholder expectations and the quality of the financial results. The Board has absolute discretion to ensure
that the Group STI pool is properly aligned with, and reflects, the Group’s performance during the year. No STI pool is available in a year where Group
financial performance is not sufficient to form a pool and over the years, the pool has been set to align with Group performance. The level of funding of
the pool for the last 5 years has been:
In 2017, all funding measures were achieved. The Board exercised its discretion to set the size of the STI pool at 90% for 2017 based on the Board's
consideration of the quality of the financial results, risk management, regulatory compliance, customer outcomes, shareholder returns, diversity and
employee engagement. The 2017 pool is 6.1% of cash earnings and will be distributed to approximately 29,400 employees as well as the Group CEO
and senior executives.
(1) Net Promoter® and NPS® are registered trademarks and Net Promoter Score and Net Promoter System are trademarks of Bain & Company, Satmetrix Systems and Fred
Reichheld. Priority segments Net Promoter Score (NPS) is a simple average of the NPS of four priority segments: NAB defined Home Owners and Investors, as well as
Small Business ($0.1m-<$5m) and Medium Business ($5m-<$50m). The Priority segments NPS data is based on six month moving averages from Roy Morgan Research
and DBM BFSM Research as at 31 August 2017.
38 NATIONAL AUSTRALIA BANK
Report of the Directors
Remuneration report (continued)
(b) Individual outcomes
Individual performance is assessed holistically based on what has been achieved and how it has been achieved. This includes achievement of
objectives that support delivery of NAB’s strategy, conduct expectations of an individual's role, and demonstration of NAB’s values and behaviours.
NAB's values are a key part of achieving NAB's vision and strategic objectives. They are:
Overall performance is assessed using a five-point rating scale:
Performance Outcome
5 – Outstanding
Descriptor
Meeting the core role requirements of your job AND outstanding against goals, values and behaviours
4 – Highly Achieved
3 – Achieved
Meeting the core role requirements of your job AND high performance against goals, values and behaviours
Meeting the core role requirements of your job AND achieving all goals, values and behaviours
2 – Partially Achieved
Meeting the core role requirements of your job AND partially meeting goals, values and behaviours
1 – Not Achieved
Not meeting the core role requirements of your job OR not meeting the majority of goals, values and behaviours
The following provides a summary of the Board's assessment of senior executives' performance for 2017.
2017 range of performance
outcomes awarded to
senior executives
Partially achieved
Category Measures and results
Customer
(25%)
• NAB held the #2 rank in Priority Segments NPS with a score of -14 (August 2016 to August 2017). The
baseline score was -15 with a target of +3 improvement. NAB has partially achieved the stretch goal for
2017. (NAB's Priority Segments NPS score improved to -13 and NAB's rank to #1 as at end September
2017.)
• The Group is committed to using customer feedback to redesign customers' end-to-end experience.
Examples of outcomes delivered during 2017 include:
• Upgraded digital capabilities in NAB Labs and formed innovative partnerships with parties such as
Realestate.com.au.
• A new 10 minute digital onboarding for business customers with simple needs.
• A faster and easier application process for Everyday Accounts, reducing the application time to 7
minutes.
• A simplified digital Superannuation portal that helps customers better understand their retirement
options.
Risk
(25%)
• The Group continues to be subject to a number of regulatory investigations. There were also instances
of potential and actual breaches of compliance obligations during the year. While work progresses, the
outcome is not yet fully resolved or remediated to the target state.
• A simpler business and stronger control environment improved the risk profile and outlook for
Partially achieved to Achieved
operational risk, which will continue to be an area of focus.
• Key elements of the Group's risk management framework, particularly credit management, prudential
compliance and conduct obligations, were strengthened.
• Performance against risk appetite in credit risk, market risk, balance sheet and liquidity risk
management was strong.
• Despite an uplift in many aspects of compliance risk management, expectations and compliance
obligations increased and the risk and control environment will require further improvement and
investment.
Financial
(25%)
• Cash earnings were $6,642 million for 2017, up 2.5% compared to 2016, largely driven by higher net
interest income from increased volumes and repricing, partially offset by higher operating expenses
largely from continued investment in the business, net of productivity savings. The charge for bad and
doubtful debts rose slightly due to increased collective provision overlays.
• Revenue increased 2.7% for 2017 largely driven by higher net interest income from increased volumes
and repricing.
• Expenses rose by 2.6% driven by continued investment in technology and associated depreciation and
amortisation charges, higher redundancy costs and the impact of annual salary increases. These items
were partially offset by productivity benefits including workforce restructuring, digitisation, and reduction
in third party spend.
• Cash ROE decreased by 30 basis points to 14.0% compared to 2016. Continued to shift NAB's portfolio
towards business lines with higher returns where NAB has a strong capability to compete.
Achieved to Highly achieved
2017 Annual Financial Report
39
2017 range of performance
outcomes awarded to
senior executives
Achieved to Highly achieved
Report of the Directors
Remuneration report (continued)
Category Measures and results
• The Group remained well capitalised during 2017 and is operating above the Common Equity Tier 1
(CET1) target ratio 8.75% - 9.25% with a CET1 ratio of 10.06% as at 30 September 2017.
Strategy &
Leadership
(25%)
• Achieved productivity savings of $301m during the year as a result of a strategic drive for productivity
and efficiency, while focussing on simplifying and streamlining operations through automation and
operational excellence.
• TSR ranking of #1 against the other major banks was above the FY17 target of a rank of #3.
• Development, articulation and implementation of the Group's Purpose, reinforcing the Group's
sustainable customer-centric culture.
• Reshaping of incentives to support the right customer outcomes and align to Sedgwick review
recommendations.
• Achieved 4 of 5 of the 2017 gender diversity metrics.
• Employee engagement score of 59%, was below the Group's objective of top quartile performance –
67% (1). The top quartile benchmark was exceeded in a number of areas, including how our people
leaders individually coach, communicate and lead, careers and development, and commitment to
corporate responsibility.
• Continued enhancements to products and services through digitisation and innovation including:
• The expansion of the eligibility criteria of QuickBiz unsecured loans, enabling more small business
customers to access funding quickly.
• The launch of the Group's next generation HICAPS solution in partnership with Melbourne start-up
Medipass Solutions.
• The launch of an Application Programming Interface Developer Portal which provides the opportunity
for approved third party developers to share data with NAB to deliver more integrated experiences for
customers.
(1)
2017 Employee Engagement Survey conducted by Aon Hewitt. The engagement score indicates the percentage of employees at NAB that are strong advocates (SAY), demonstrate a commitment to NAB
(STAY) and exerts discretionary effort (STRIVE).
All senior executives were assessed with a Green Conduct Gate and to have demonstrated NAB’s values and the behaviours expected of their role. The
overall individual performance outcomes ranged from achieved to highly achieved. The following table provides the 2017 STI outcomes for the senior
executives based on fair value. Section 6.7 provides detail on both the fair and face value of the deferred STI awards at allocation.
Overall STI outcome: Group CEO: 49%
% of max. opportunity awarded
Other senior executives: 33% to
66%
Name
Executive director
AG Thorburn
Other senior executives
MB Baird (for part year)
AJ Cahill
SJ Cook (for part year)
AD Gall
AP Hagger
AJ Healy
GA Lennon
A Mentis
LN Murphy
PF Wright (for part year)
Former senior executives
CA Carver (for part year)
MR Lawrance (for part year)
Actual STI
as % of
STI
Deferred
STI
(approx. 1
Deferred
STI
(approx. 2
maximum STI actual
$
%
Cash STI(2)
year)(3)
year)(4)
$
$
$
STI
maximum(1)
$
4,025,000
937,808
2,100,000
382,027
1,365,000
2,100,000
1,771,532
1,750,000
2,100,000
1,400,000
2,275,000
1,489,266
958,438
49
49
49
49
49
46
66
49
63
49
49
42
33
1,955,000
977,500
488,750
488,750
455,506
1,020,000
185,557
663,000
960,000
1,164,149
850,000
1,320,000
680,000
1,105,000
630,074
313,336
227,754
510,000
92,779
331,500
480,000
582,075
425,000
660,000
340,000
552,500
472,555
235,002
113,876
255,000
46,389
165,750
240,000
291,037
212,500
330,000
170,000
276,250
157,519
78,334
113,876
255,000
46,389
165,750
240,000
291,037
212,500
330,000
170,000
276,250
-
-
(1)
(2)
(3)
(4)
The highest possible STI that could be awarded if the Group STI pool was funded at the maximum level and the individual received the highest possible performance outcome.
The amount reflects 50% of the STI to be provided to eligible current senior executives and the Group CEO. The amount reflects 75% of the STI to be provided to eligible former senior executives. The cash
component of the STI received in respect of 2017 is scheduled to be paid on 15 November 2017 in Australia and 30 November 2017 in NZ.
The amount reflects 25% of the STI to be provided to eligible senior executives and the Group CEO. The amount is provided in performance rights or shares (to former senior executives) to be allocated in
December 2017 and restricted until November 2018.
The amount reflects 25% of the STI to be provided to eligible current senior executives and the Group CEO. The amount is provided in performance rights to be allocated in December 2017 and restricted
until November 2019.
Deferred STI is provided as performance rights to current senior executives and the Group CEO, and as shares to former senior executives. The
deferred STI is restricted and may be fully or partially lapsed if service and performance conditions are not met or at the Board’s discretion.
40 NATIONAL AUSTRALIA BANK
Report of the Directors
Remuneration report (continued)
4.4. LTI outcomes
The table below shows the performance of the Group against the LTI performance hurdles for the 2012 LTI award which was tested during 2017. The
award has two TSR performance hurdles. Vesting for both hurdles is based on NAB’s TSR result against two TSR peer groups. The vesting schedule is:
50% vesting at the 50th percentile on a straight line scale up to 100% vesting at the 75th percentile. The performance hurdles were not achieved and
therefore none of the 2012 LTI vested. The performance rights are subject to a final test over a five year performance period (12 November 2012 to
12 November 2017) in November 2017.
Details of the LTI award granted in respect of 2012 can be found in NAB’s 2012 and Remuneration report which is contained in NAB’s 2012 Annual
Financial Report available online at www.nab.com.au/annualreports.
Performance hurdle
TSR relative to S&P/ASX50 (50%) (1)
Performance period
12/11/2012 to 12/11/2016
TSR relative to Top Financial Services (50%) (2)
12/11/2012 to 12/11/2016
Percentile
ranking
42nd
29th
% of rights
vested
-
-
% of rights
lapsed
-
-
% of rights
remaining
100
100
(1)
(2)
The peer group for this performance hurdle is the Standard & Poors / ASX capitalisation index comprised of the 50 largest companies by market capitalisation in Australia.
The peer group for this performance hurdle is: AMP Limited, Australia and New Zealand Banking Group Limited, Bank of Queensland Limited, Bendigo & Adelaide Bank Limited, Commonwealth Bank of
Australia, Suncorp Group Limited and Westpac Banking Corporation.
The graphs below show NAB’s relative TSR performance against the comparator peer groups for the 2012 LTI performance hurdles.
2017 Annual Financial Report
41
Report of the Directors
Remuneration report (continued)
Section 5 - Remuneration governance
The Committee is responsible for reviewing, assessing and recommending to the Board, remuneration policies and practices that enhance long-term
shareholder returns, nurture a strong culture and are in accordance with regional regulatory requirements and global regulatory trends. The Committee
considers the interests of other stakeholders, including customers and the communities in which the Group operates in fulfilling its responsibilities.
The remuneration governance framework is illustrated in the diagram below.
The Committee's remuneration decisions are based on an assessment of the Group's financial performance against the risk appetite framework. In
2017, activities included:
• A review of the global remuneration policy to maintain alignment with business and regulatory requirements.
• Monitoring of risk management and consequence management on a regular basis, covering incidents of behaviour that are inconsistent with the
Group’s risk management framework, desired culture, Code of Conduct or values, and the impact on incentive outcomes to ensure management is
addressing poor conduct.
• Commencement of a review of the Group's senior executive remuneration framework and changes to the Group CEO's remuneration.
• Reviewing a formal end of year report provided by the Group CEO, CRO and CFO to the Committee assessing the overall health of the Group’s
financial result against the risk management framework and Board approved risk appetite. This includes consideration of the Group's overall
risk profile, prudential compliance, breaches and incidents, timeliness of escalation and management of events and breaches. A joint meeting of the
Committee and the Board Risk Committee was held to review the findings. In light of outcomes, the Committee recommended overall 2017 incentive
outcomes for the Group.
• Consideration of individual risk performance assessments and the impact on senior executive’s incentive outcomes, and recommendations to the
Board on senior executives’ incentive and remuneration outcomes.
• Reviewing and making recommendations to the Board on the overall incentive and remuneration outcomes for risk, compliance, internal audit,
financial control employees and other identified roles which perform activities that may affect the financial soundness of the Group.
• Monitoring the implementation and transition approach related to the ABA Retail Banking Remuneration Review recommendations.
42 NATIONAL AUSTRALIA BANK
Report of the Directors
Remuneration report (continued)
Section 6 - Executive remuneration disclosures in detail
This section provides detailed information on all remuneration related items for the Group CEO and Senior Executives.
6.1. Statutory remuneration
The following table has been prepared in accordance with Australian Accounting Standards and Section 300A of the Corporations Act 2001 (Cth), using
the required table headings and definitions. The table shows details of the nature and amount of each element of remuneration paid or awarded for
services provided for the year while they were senior executives (including STI amounts in respect of performance during the year which are paid
following the end of the year). This table is different to the realised remuneration table on page 34, which is a voluntary non-statutory disclosure showing
remuneration realised in 2017.
In addition to the remuneration benefits below, NAB paid an insurance premium for a contract insuring all senior executives as officers. It is not possible
to allocate the benefit of this premium between individuals. In accordance with usual commercial practice, the insurance contract prohibits disclosure of
details of the premium paid.
Short-term benefits
Post-employment
benefits
Equity-based
benefits
Non-
monetary(3) Superannuation(4)
Name
Executive director
AG Thorburn
Other senior executives
MB Baird (for part year)
AJ Cahill
SJ Cook (for part year)
AD Gall
AP Hagger
AJ Healy
GA Lennon
A Mentis
LN Murphy
PF Wright (for part year)
Former senior executives
CA Carver (for part year)
CM Drummond (for part year)
MJ Healey (for part year)
MR Lawrance (for part year)
RA Melrose (for part year)
RM Roberts (for part year)
GR Slater (for part year)
Total senior executives
Total senior executives
Cash
salary(1)
$
Cash
STI(2)
$
2,216,311
977,500
2,362,779
1,380,000
535,766
1,190,793
1,028,323
375,843
1,229,156
1,204,456
1,154,125
1,043,257
897,146
894,030
981,472
502,412
1,100,800
1,108,671
752,193
419,916
647,019
358,361
118,959
598,239
674,401
316,390
45,500
32,790
796,646
897,729
227,754
510,000
600,000
92,779
331,500
432,000
480,000
660,000
582,075
486,777
425,000
274,809
660,000
600,000
340,000
650,000
552,500
472,555
133,325
-
704,008
235,002
36,870
21,069
828,244
819,962
11,755,375
5,886,665
11,728,108
7,627,064
2017
2016
2017
2017
2016
2017
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2017
2016
2016
2016
2017
2016
2016
2016
2016
2017
2016
$
2,534
3,021
6,931
11,545
18,947
4,691
231,723
243,026
24,863
65,367
20,475
11,224
5,479
3,045
52,419
40,359
165,534
179,718
227,465
-
-
2,495
5,661
55
7
486
11,409
5,639
753,714
590,404
Other
long-term
benefits(5) Shares(6) Rights (7)
$
$
$
Other
payments(8)
Total(9)
$
$
37,881
37,832
2,184
14,222
12,710
1,483
20,860
17,558
19,255
17,558
13,020
9,149
14,592
7,241
19,413
19,308
4,840
1,934
2,293
1,925
581
3,990
11,397
6,047
672
449
27,726
15,292
42
253
3,366,164
2,887,815
-
100,852
258,508
1,099,387
26,205
882,560
-
-
-
44,995
822,379
669,414
217,661
1,540,183
818,731
1,456,083
946
935
73,809
99,752
1,183,827
908,721
711,212
254,128
258,508
1,150,227
26,205
313,090
421,832
-
739,796
260,796
868,285
441,885
114,466
159,946
-
-
71,776
(784,609)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
6,631,078
6,709,667
886,845
3,105,211
2,589,991
532,174
2,663,480
2,598,303
3,456,843
4,082,068
2,767,900
2,378,522
2,232,320
1,153,895
3,262,123
2,684,074
2,038,542
1,804,469
2,796,294
4,385,517
-
-
-
1,586,147
515,421
(100,380)
-
845,034
631,801
2,890,884
304,437
43,750
37,692
13,821
7,140
5,274
-
-
-
919,174
129,283
75,728
218
551,692
1,353,187
3,587,443
-
1,165,925
1,077,395
4,000,089
$
30,646
37,967
13,358
20,756
21,246
12,383
27,862
31,849
20,756
21,072
70,411
67,686
20,756
12,508
20,756
21,246
21,000
16,603
-
13,510
1,760
7,729
18,582
13,493
1,402
1,839
18,321
18,147
285,687
297,957
158,015
2,166,797
10,664,807
2,796,294
34,467,354
183,397
1,778,216
9,831,928
3,062,383
35,099,457
(1)
(2)
(3)
(4)
(5)
(6)
Includes cash salary, cash allowances and short-term compensated absences, such as annual leave entitlements accrued but not taken during the year.
The cash component of the STI received in respect of 2017 is scheduled to be paid on 15 November 2017 in Australia and 30 November 2017 in NZ. The amount reflects 50% of the STI to be provided to
eligible current senior executives and the Group CEO. The amount reflects 75% of the STI to be provided to eligible former senior executives who were acting senior executives and remained on the
remuneration arrangements associated with their previous role. The cash component of the STI received in respect of 2016 was paid in full during 2017 for all senior executives as previously disclosed, with
no adjustment.
Includes any motor vehicle benefits, parking, relocation costs and other benefits. For international assignees this may include the provision of health fund benefits and personal tax advice. Any related fringe
benefits tax is included.
Includes company contributions to superannuation and allocations by employees made by way of salary sacrifice of fixed remuneration. Superannuation contributions are not required to be paid to individuals
based in NZ but such payments may be made as part of fixed remuneration.
Includes long service leave entitlements accrued but not taken during the year. The long service leave entitlements are recognised as accruing on an annual basis subject to an actuarial calculation.
The amount included in remuneration each year for share awards is the grant date fair value, amortised on a straight line basis over the vesting period. Refer to the Glossary for an explanation of the fair
value approach used to determine equity-based benefits. Amounts shown for 2017 include portions of shares allocated under employee programs as follows:
a) General Employee shares granted in December 2013, December 2014, March 2016, December 2016 and to be granted in December 2017, to eligible senior executives at the relevant offer time. The
shares vest after a three-year restriction period. In NZ the shares are subject to forfeiture conditions, including on resignation.
2017 Annual Financial Report
43
Report of the Directors
Remuneration report (continued)
b) Deferred STI shares granted in March 2016 in respect of performance in 2015 and restricted until November 2016, February 2017 in respect of performance in 2016 and restricted until November 2017,
and to be granted in February 2018 in respect of performance in 2017 and restricted until November 2018, subject to performance and service conditions.
c) Retention shares granted to Mr Hagger in May 2016. The shares were restricted for approximately 8 months and subject to achievement of key project deliverables and service conditions. The grant fully
vested in January 2017.
d) Customer Advocacy Incentive shares granted to Mr Lawrance and Mr Lennon in March 2016 for performance in prior roles. The shares are restricted until December 2017 and are subject to achievement
of 2017 NPS targets and service conditions which have been fully met. Customer Advocacy Incentive shares granted to Ms Carver and Mr Lawrance in February 2017. The shares are restricted until
December 2018 and are subject to achievement of 2018 NPS targets and service conditions.
e) Commencement shares allocated to Ms Carver in March 2016 with 39% fully vested in January 2017 and 32% scheduled to vest in January 2018, subject to performance and service hurdles. The
remaining 29% vested in July 2016 and is excluded as it was fully expensed prior to Ms Carver becoming a senior executive.
f) Commencement shares allocated to Ms Murphy in May 2016 with 35% vested in September 2016, 32.5% vested in September 2017 and 32.5% scheduled to vest in September 2018, subject to
performance and service hurdles.
g) Retention shares granted in August 2016 to Mr Cahill and Ms Mentis are restricted for approximately 24 months. The shares are subject to performance and service conditions.
h) Restricted share awards granted in August 2016 to Ms Carver and to Mr Lawrance in October 2016 were restricted for approximately 12 months. The shares fully vested in July 2017 for Ms Carver and
August 2017 for Mr Lawrance. The shares were subject to performance and service conditions.
The amount included in remuneration each year for performance rights is the grant date fair value, amortised on a straight line basis over the expected vesting period. Refer to the Glossary for an explanation
of fair value approach used to determine equity-based remuneration. Amounts shown for 2017 include portions of performance rights allocated under employee programs, as shown below:
a) Deferred STI rights granted in February 2015 in respect of performance in 2014, March 2016 in respect of performance in 2015, February 2017 in respect of performance in 2016, and to be granted in
December 2017 in respect of performance in 2017. The performance rights are granted with half of each grant restricted for approximately 14 months after the end of the performance year and the remaining
half for approximately 26 months after the end of the performance year.
b) LTI performance rights granted in December 2012, December 2013, December 2014 (and for the Group CEO in February 2015), December 2015 (and for the Group CEO in March 2016), December 2016
(and for the Group CEO in February 2017) and in December 2017 under the Group’s LTI program.
To compensate for awards from his prior employer which were forfeited as a result of joining NAB, Mr Wright received a commencement award of A$801,627 paid in cash on 3 May 2017 and A$328,906 paid
in cash on 6 September 2017. The remaining amount is scheduled to be paid in cash: A$717,042 in March 2018, A$607,629 in March 2019 and A$341,091 in March 2020. In accordance with accounting
standards the full amount of Mr Wright’s commencement award has been expensed in 2017. An exchange rate as at 30 September 2017 has been used to determine the value shown. The amounts shown in
2016 for Ms Healey, Ms Roberts and Mr Slater are termination payments related to the cessation of their employment with NAB on 30 September 2016 (see the 2016 Remuneration report for further details).
The percentage of 2017 total remuneration related to performance-based remuneration was: Mr Thorburn 66%, Mr Baird 37%, Mr Cahill 60%, Ms Cook 26%, Mr Gall 43%, Mr Hagger 65%, Mr Healy 64%, Mr
Lennon 54%, Ms Mentis 63%, Ms Murphy 54%, Mr Wright 16%, Ms Carver 76%, Mr Lawrance 63%.
(7)
(8)
(9)
44 NATIONAL AUSTRALIA BANK
Report of the Directors
Remuneration report (continued)
6.2. LTI to be granted in respect of 2017
Senior executives (including the Group CEO, subject to shareholder approval) will be granted LTI performance rights in December 2017. The key
features of the LTI award are:
Performance
hurdles
Tranche 1 - cash ROE growth
50% of the award is subject to cash ROE growth.
NAB’s cash ROE Growth is ranked against a peer group of:
- Australia and New Zealand Banking Group Limited
Tranche 2 - relative TSR
50% of the award is subject to Relative TSR performance relative to a financial
services peer group comprising:
- Australia and New Zealand Banking Group Limited
- Commonwealth Bank of Australia
- Westpac Banking Corporation
(ROE Peer Group)
The cash ROE movement is calculated by comparing the financial reporting year
2017 cash ROE (representing the opening period) and the average cash ROE of
the performance periods over the Performance period.
- Commonwealth Bank of Australia
- Westpac Banking Corporation
- AMP Limited
- Bank of Queensland Limited
- Bendigo & Adelaide Bank Limited
- Suncorp Group Limited
(TSR Peer Group).
Performance
period
Vesting
schedule
The financial reporting years 2018 to 2021. (ROE Measurement Period)
14 November 2017 to 14 November 2021
Vesting is based on NAB’s cash ROE growth ranking against the ROE Peer
Group: Ranking: 4th = 0%, 3rd = 25%, 2nd = 50%, 1st = 100%
Vesting based on NAB’s TSR result against the TSR Peer Group: 50% vesting at
the 50th percentile (or median) on a straight line scale up to 100% vesting at the
75th percentile
Instrument
Performance rights.
TSR is calculated by an independent external consultant based on the 30 day
volume weighted average share price up to and including the performance period
start and end dates.
Determining
the number of
performance
rights awarded
Maximum
WASP discount
limits
The Group CEO will receive a dividend equivalent payment (1) for any performance rights that vest.
The number of performance rights allocated depends on each executives LTI maximum opportunity (see Section 3.1).
Group CEO
The LTI opportunity is divided by the weighted average share price (WASP) for the period 25 September to 29 September 2017.
Other senior executives
50% of the LTI maximum opportunity (see Section 3.1) is divided by the Tranche 1 fair value and 50% of the LTI opportunity is divided by the Tranche 2 fair value.
Details of the fair values and the actual number of performance rights that will be granted to the Group CEO (subject to shareholder approval at the 2017 AGM) and the
other senior executives is shown in Section 6.7.
Consistent with 2016, a policy applies that limits the total number of performance rights allocated to senior executives under the fair value allocation methodology. The
policy limits the maximum discount applied in determining the number of LTI performance rights to be awarded to no more than:
• 25% of the WASP for Tranche 1 of the LTI award; and
• 50% of the WASP for Tranche 2 of the LTI award.
The price then used to determine the number of performance rights to be awarded for each tranche of the LTI award will be the greater of:
• the WASP calculation outlined above for the relevant tranche; and
• the fair value for the relevant tranche.
The maximum discount rate is different for each tranche as the fair value assumptions and inputs are different due to Tranche 1 being linked to an internal performance
hurdle and Tranche 2 linked to a market performance hurdle.
(1)
A cash amount equivalent to the gross value of any dividends (including payment for the value of imputation credits which applied to the dividends) which would have been paid to the Group CEO if he had
held a number of shares equivalent to any LTI performance rights that may vest, during the period 1 October 2017 to the end of the LTI restriction period (December 2021). The dividend equivalent payment
may be adjusted for any bonus and rights issues, aggregations and reconstructions in relation to NAB shares during the period from 1 October 2017 to the end of the LTI restriction period.
The Committee is closely monitoring the measurement and assumptions involved in calculating cash ROE for NAB and the peer group to ensure that
there are no unintended consequences resulting from the introduction of this performance hurdle in 2016. Reported cash ROE as disclosed in each
bank’s results announcement is used as the starting point for assessing the performance hurdle. The following principles have been adopted by the
Committee when considering adjustments:
• Adjustments are restricted to items that are not reflective of underlying business performance and are specifically disclosed as one-off or specified
items.
Items must be easily identifiable in published results.
•
• Decisions made for longer-term shareholder benefit should have their short-term impact adjusted (e.g. loss on sale of low returning business).
• Adjustments may be treated differently in the opening period i.e. full financial year 2017 (FY17) and the ROE Measurement Period. Adjustments to
the opening period may be required to ensure the opening period baseline is reported on a consistent basis.
• Materiality thresholds are applied to any potential adjustments.
A qualitative assessment is applied to any potential adjustments that meet the criteria above. This involves consideration of factors such as consistency
of adjustments across the ROE Peer Group and whether the adjustments impact the vesting outcome. An external firm will review any proposed
adjustments to headline cash ROE measures and provide the Committee with advice on whether they are in accordance with the principles outlined
above and have been calculated accurately.
2017 Annual Financial Report
45
Report of the Directors
Remuneration report (continued)
6.3. LTI in respect of 2016
For the LTI award allocated in December 2016 (and February 2017 for the Group CEO), the Committee has approved the following cash ROE opening
period for NAB and each of the ROE Peer Group:
Bank
NAB
ANZ
Disclosed
cash ROE
14.3%
Adjusted cash
ROE for
opening period
(FY16)
14.3%
Details of adjustments
• No adjustments
10.3%
12.1%
• 2016 cash earnings adjusted by $989m for 4 items disclosed by ANZ and considered to be ‘one-off’ in
nature:
• Software amortisation ($389m)
•
Impairment of carrying value of minority investment in Ambank ($260m), partially offset by gain on sale
of stake in Bank of Tianjin ($29m)
• Credit Valuation Adjustment Methodology change ($168m)
• Restructuring expenses for simplification of Institutional and Wealth businesses, restructure of Asia
Retail & Pacific and digitisation in Australia, New Zealand and Group Centre ($201m)
CBA
WBC
16.5%
14.0%
16.5%
14.0%
• No adjustments
• No adjustments
The Board has absolute discretion to adjust the disclosed cash ROE to ensure a fair and reasonable comparison over time.
6.4. Other awards granted during the year
During the year Patrick Wright, Chief Technology & Operations Officer commenced employment with NAB. Mr Wright has global experience as Chief
Operations & Technology Officer of Barclaycard, leading a significant workforce. He has extensive, proven experience in driving major transformations in
large financial services companies and innovating in fast-paced, competitive and highly-regulated markets. As the Group reshapes the business, Mr
Wright is key to the execution of the Group’s strategy and will lead the simplification, digitisation and automation agenda to deliver greater efficiency and
create a simpler and easier experience for customers and bankers.
In line with NAB’s objective to ‘be known for great leadership, talent and people’ and as the skills and experience required to fill this role were not
available in Australia, NAB looked to international markets. In order to provide a competitive remuneration package, the Board approved a cash
payment of US$2.136m as part of Mr Wright’s commencement arrangements to buy-out existing entitlements with his former employer that were
forfeited on his resignation. Mr Wright’s commencement award was agreed with regard to the quantum and timing of the entitlements Mr Wright forfeited
to join NAB. The first instalment of US$605,950 (A$801,627) was paid post commencement and a second instalment of US$260,000 (A$328,906) was
paid in September 2017. The remainder of the award is payable over the next three years: US$546,572 in March 2018, US$463,171 in March 2019 and
US$260,000 in March 2020.
6.5. Value of shares and performance rights
The following table shows the value of shares and performance rights that were granted, lapsed or vested for each senior executive during 2017. The
value shown is the full accounting value to be expensed over the vesting period, which is generally longer than the current year. Senior executives did
not pay any amounts for performance rights that vested and were exercised during 2017. The number of shares provided when the rights exercise is on
a one to one basis. There are no amounts unpaid on any of the shares exercised. There have been no changes to the terms and conditions of these
awards, or any other awards since the awards were granted.
For the awards allocated during 2017, the maximum number of shares or performance rights that may vest is shown for each senior executive. The
maximum value of the equity awards is the number of shares or performance rights subject to NAB’s share price at the time of vesting. The minimum
number of shares of performance rights and the value of the equity awards is zero if the equity is fully lapsed.
Name
Executive director
AG Thorburn
Other senior executives
AJ Cahill
AD Gall
General employee shares
Deferred STI rights
Deferred STI rights
LTI rights
Deferred STI rights
Deferred STI rights
Deferred STI rights
LTI rights
Deferred STI rights
Deferred STI rights
Deferred STI rights
LTI rights
Deferred STI rights
46 NATIONAL AUSTRALIA BANK
Granted(1) Grant date
No.
26
2,223
25,720
170,794
58,865
2,002
11,692
57,123
25,595
2,951
5,846
45,699
18,429
11/12/2013
18/02/2015
9/03/2016
22/02/2017
22/02/2017
18/02/2015
9/03/2016
14/12/2016
22/02/2017
18/02/2015
9/03/2016
14/12/2016
22/02/2017
Lapsed Vested (2)
No.
No.
Granted
$
Lapsed
$
Vested
$
-
-
-
-
-
-
-
-
-
-
-
-
-
26
2,223
25,720
-
-
-
-
-
2,989,988
1,379,980
2,002
11,692
-
-
-
-
1,000,016
600,027
2,951
5,846
-
-
-
-
800,024
432,033
-
-
-
-
-
-
-
-
-
-
-
-
-
884
64,978
659,975
-
-
58,518
300,017
-
-
86,258
150,008
-
-
Report of the Directors
Remuneration report (continued)
Name
Other senior executives
AP Hagger
Deferred STI rights
Deferred STI rights
Retention shares
LTI rights
Deferred STI rights
AJ Healy
General employee shares
GA Lennon
A Mentis
LN Murphy
Former senior executives
CA Carver
MR Lawrance
Deferred STI rights
Deferred STI rights
General employee shares
LTI rights
Deferred STI rights
Deferred STI rights
Deferred STI shares
LTI rights
Deferred STI rights
Deferred STI rights
Deferred STI rights
LTI rights
Deferred STI rights
Commencement shares
LTI rights
Deferred STI rights
Commencement shares
Restricted shares
General employee shares
Deferred STI shares
Customer Advocacy Incentive shares
Deferred STI rights
Deferred STI shares
Restricted shares
General employee shares
Deferred STI shares
Customer Advocacy Incentive shares
Granted(1) Grant date
No.
4,106
12,861
20,022
62,836
28,154
26
2,857
8,862
34
57,421
21,118
2,936
5,757
57,123
21,330
3,080
9,743
57,123
25,595
10,011
39,987
14,930
31,603
9,192
34
7,340
4,778
1,802
6,200
9,010
34
6,136
4,778
18/02/2015
9/03/2016
11/05/2016
14/12/2016
22/02/2017
11/12/2013
18/02/2015
9/03/2016
14/12/2016
14/12/2016
22/02/2017
18/02/2015
9/03/2016
14/12/2016
22/02/2017
18/02/2015
9/03/2016
14/12/2016
22/02/2017
11/05/2016
14/12/2016
22/02/2017
15/03/2016
24/08/2016
14/12/2016
22/02/2017
22/02/2017
18/02/2015
9/03/2016
28/10/2016
14/12/2016
22/02/2017
22/02/2017
Lapsed Vested (2)
No.
No.
Granted
$
Lapsed
$
Vested
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
4,106
12,861
20,022
-
-
26
2,857
8,862
-
-
-
1,100,033
660,017
-
-
-
-
-
-
992
1,005,238
495,072
2,936
5,757
-
-
-
-
1,000,016
500,042
3,080
9,743
-
-
-
-
1,000,016
600,027
10,011
-
-
31,603
9,192
-
-
-
1,802
6,200
9,010
-
-
-
-
700,028
350,006
-
-
992
192,602
150,029
-
-
250,028
992
161,009
150,029
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
120,018
330,013
550,004
-
-
884
83,510
227,399
-
-
-
85,819
143,004
-
-
90,028
250,005
-
-
275,002
-
-
785,019
250,022
-
-
-
52,672
154,008
250,028
-
-
-
(1)
(2)
The following securities have been granted during 2017:
a) General employee shares granted to Mr Healy, Ms Carver and Mr Lawrance, in December 2016.The shares vest after a three-year restriction period (In NZ the shares are subject to forfeiture conditions,
including resignation).
b) LTI rights granted to senior executives in December 2016 and February 2017 for Mr Thorburn under the Group’s LTI program. The total fair value of the award is disclosed in the table above. The fair value
for each LTI tranche is shown in Section 6.6. The face value of the LTI award was $29.17 based on the weighted average share price (WASP) at which NAB shares were traded on the ASX in the five trading
days from 5 to 9 December 2016 inclusive. The value of performance rights awarded to senior executives was $21.88 after applying the maximum WASP discount (fair value of $21.65) for tranche 1 and
$14.59 (fair value of $10.67) for tranche 2 in accordance with the Board’s policy to limit the number of LTI rights allocated to senior executives.
c) Deferred STI rights and shares granted in February 2017 (in respect of 2016). The performance rights are granted with half restricted for approximately 14 months after the end of the performance year
and the remaining half for approximately 26 months after the end of the performance year. The deferred STI shares are granted to former senior executives with 25% restricted for approximately 14 months
after the end of the performance year.
d) Restricted shares granted to Mr Lawrance in October 2016 are restricted for approximately 12 months. The shares are subject to performance and service conditions.
e) Customer Advocacy Incentive shares granted to Ms Carver and Mr Lawrance in February 2017. The shares are restricted until December 2018 and are subject to achievement of 2018 NPS targets and
service conditions.
The following securities have vested during 2017:
a) General Employee Shares granted to Mr Thorburn and Mr Healy in December 2013, fully vested in December 2016.
b) 2014 Tranche 2 deferred STI rights granted in February 2015, fully vested in December 2016.
c) 2015 Tranche 1 deferred STI rights and shares granted in March 2016, fully vested in November 2016.
d) Retention shares granted to Mr Hagger in May 2016 fully vested in January 2017.The shares were restricted for approximately 8 months and subject to achievement of key project deliverables and service
conditions which were fully met.
e) Tranche 2 Commencement shares granted to Ms Carver in March 2016, with 39% fully vested in January 2017 and 32% scheduled to vest in January 2018, subject to performance and service hurdles.
The remaining 29% vested in July 2016 prior to Ms Carver becoming a senior executive.
f) Restricted shares allocated to Ms Carver in August 2016 and Mr Lawrance in October 2016 fully vested in July 2017 and August 2017 respectively. The shares were subject to performance and service
conditions.
g) Tranche 2 Commencement award shares allocated to Ms Murphy in May 2016 fully vested in September 2017.
2017 Annual Financial Report
47
Report of the Directors
Remuneration report (continued)
6.6. Determining the value of equity remuneration
The fair value of shares and performance rights (at grant date) is set out below for grants provided to senior executives during 2017. The determination
of the fair value considers factors such as whether the grant has internal or market-based performance hurdles, the expected volatility of NAB's share
price, the risk-free interest rate and the expected dividend yield on NAB shares for the life of the grant. This may result in different fair values for awards
granted on the same day.
The grant date fair value of shares and performance rights is amortised on a straight line basis over the vesting period and included in each senior
executive’s disclosed remuneration in accordance with statutory accounting requirements. No performance options have been granted during the year.
Shares and performance rights granted during 2017 have a zero exercise price.
Shares
Performance rights
Type of allocation
Restricted Shares (4)
Grant date
28 October 2016
Fair
value
$
27.75
Restriction period
end
WASP
(face value)(1)
31 August 2017
General Employee Shares
14 December 2016
29.17
14 December 2019
Long-Term Incentive (5)
Long-Term Incentive (6)
Deferred Short-Term Incentive
Deferred Short-Term Incentive
14 December 2016
14 December 2016
22 February 2017
22 February 2017
Deferred Short-Term Incentive
22 February 2017
26.24
16 November 2017
Long-Term Incentive (5) (7)
Long-Term Incentive (6) (7)
22 February 2017
22 February 2017
Customer Advocacy Incentive (8)
22 February 2017
31.40
20 December 2018
Max.
WASP
discount
amount(2)
$
Fair
value
$
Exercise
period
From
Exercise
period
To(3)
21.65
10.67
24.34
22.61
21.65
10.67
21.88
14.59
20 December 2020
15 March 2021
20 December 2020
15 March 2021
16 November 2017
16 February 2018
16 November 2018
16 February 2019
21.88
14.59
20 December 2020
15 March 2021
20 December 2020
15 March 2021
$
29.17
29.17
26.24
26.24
29.17
29.17
(1)
(2)
(3)
(4)
(5)
(6)
(7)
The face value is the 5 day weighted average share price (at the time of the award) used to determine the fair value.
The maximum WASP discount amount is the unit value used to determine the number of performance rights allocated to each senior executive. Further detail is available in Section 6.2.
The end of the exercise period for each performance rights allocation is also the expiry date.
Restricted shares were provided to Mr Lawrance in respect of his appointment to an acting KMP role during 2016 and 2017. The shares are subject to performance and service conditions.
Relates to the 2016 LTI cash ROE growth performance hurdle.
Relates to the 2016 LTI relative TSR performance hurdle.
The Group CEO's LTI allocation was approved by shareholders at the December 2016 AGM.
(8) Ms Carver and Mr Lawrance received shares under the Customer Advocacy Incentive award. The shares are subject to achievement of NPS targets and service conditions.
6.7. Deferred STI and LTI grants to be awarded during 2018
NAB intends to grant deferred STI and LTI performance rights to senior executives (including the Group CEO, subject to shareholder approval) in
December 2017 after the 2017 AGM. The number of deferred STI rights and LTI performance rights allocated to each senior executive (excluding the
Group CEO’s LTI performance rights) is calculated using a fair value based on the five day WASP from 25 to 29 September 2017. The number of LTI
performance rights to be allocated to the Group CEO is calculated using the five day WASP from 25 to 29 September 2017 (or face value). Details of
the allocations are:
Type of allocation
Group CEO: Long-Term Incentive (4)
Long-Term Incentive - Tranche 1 (5)
Long-Term Incentive - Tranche 2 (6)
Deferred Short-Term Incentive - Tranche 1 (7)
Deferred Short-Term Incentive - Tranche 2 (7)
Intended grant
date
WASP
(face value)(1)
19 December 2017
19 December 2017
19 December 2017
19 December 2017
19 December 2017
$
31.39
31.39
31.39
31.39
31.39
Fair value
$
n/a
23.55
12.88
29.07
27.16
Max. WASP
discount
amount(2)
$
n/a
23.54
15.70
n/a
n/a
Exercise
period
From
20 December 2021
Exercise
period
To(3)
15 March 2022
20 December 2021
15 March 2022
20 December 2021
15 March 2022
15 November 2018
15 February 2019
15 November 2019
15 February 2020
(1)
(2)
(3)
(4)
(5)
(6)
(7)
The face value is the 5 day weighted average share price for 25 September to 29 September 2017. It is used to determine the fair value.
The maximum WASP discount amount is the unit value used to determine the number of performance rights allocated to each senior executive. Further detail is available in Section 6.2.
The end of the exercise period for each performance rights allocation is also the expiry date.
The number of LTI performance rights granted to the Group CEO (subject to approval by shareholders at the December 2017 AGM) is based on face value.
The number of LTI performance rights granted to the other senior executives for the cash ROE growth performance hurdle is based on the fair value.
The number of LTI performance rights granted to the other senior executives for the relative TSR performance hurdle is based on the maximum WASP discount amount.
The number of deferred STI rights granted to the other senior executives is based on the fair value.
48 NATIONAL AUSTRALIA BANK
Report of the Directors
Remuneration report (continued)
The number of deferred STI and LTI performance rights to be allocated to each senior executive (including the Group CEO, subject to shareholder
approval) in December 2017 and their total fair value and face value based on the 5 day WASP from 25 September to 29 September 2017 is:
Name
Executive director
AG Thorburn
Other senior executives
MB Baird
AJ Cahill
SJ Cook
AD Gall
AP Hagger
AJ Healy
GA Lennon
A Mentis
LN Murphy
PF Wright
Type of allocation
Deferred STI
LTI
Deferred STI
LTI
Deferred STI
LTI
Deferred STI
LTI
Deferred STI
LTI
Deferred STI
LTI
Deferred STI
LTI
Deferred STI
LTI
Deferred STI
LTI
Deferred STI
LTI
Deferred STI
LTI
Rights(1)
No.
34,807
95,252
8,111
63,695
18,161
63,695
3,304
29,725
11,805
48,302
17,093
63,695
20,720
53,710
15,135
53,080
23,503
63,695
12,108
42,464
19,675
69,003
Total award
fair value
$
977,469
n/a
227,778
1,092,242
510,007
1,092,242
92,785
509,724
331,515
828,285
480,015
1,092,242
581,870
921,019
425,029
910,216
660,024
1,092,242
340,023
728,177
552,524
1,183,261
Total award
face value
$
1,092,592
2,989,960
254,604
1,999,386
570,074
1,999,386
103,713
933,068
370,559
1,516,200
536,549
1,999,386
650,401
1,685,957
475,088
1,666,181
737,759
1,999,386
380,070
1,332,945
617,598
2,166,004
(1)
To be granted to senior executives and the Group CEO (subject to shareholder approval) in December 2017.
The actual value of the award for each senior executive will depend on the level of achievement against the performance hurdles, the corresponding
proportion of the award that vests and NAB’s share price at the time of vesting which is November 2018 and November 2019 for the deferred STI, and
December 2021 for the LTI. The minimum amount of the deferred STI and LTI is $0 if the award does not vest, and the maximum is the total award face
value shown in the table above, subject to NAB’s share price at the time of vesting.
6.8. Performance rights holdings
No performance options or performance rights are granted to the Group CEO's or other senior executives' related parties. No performance options are
currently held by the Group CEO or the other senior executives. No performance rights held by the Group CEO or other senior executives, were vested
but not exercisable at 30 September 2017.
Name
Executive director
AG Thorburn
Other senior executives
AJ Cahill
AD Gall
AP Hagger
AJ Healy
GA Lennon
A Mentis
LN Murphy
Former senior executives
MR Lawrance
Balance at
beginning
of year(1)
No.
Granted
during year as
remuneration
No.
Exercised
during
year
No.
Lapsed or
expired
during year
No.
Balance at
end of year(2)
No.
Vested
during
year
No.
Vested and
exercisable at
end of year
No.
679,958
229,659
(27,943)
164,968
138,986
339,895
193,543
51,799
165,223
-
32,583
82,718
64,128
90,990
78,539
78,453
82,718
54,917
(13,694)
(8,797)
(16,967)
(11,719)
(2,936)
(12,823)
-
-
(1,802)
-
-
-
-
-
-
-
-
-
881,674
27,943
233,992
194,317
413,918
260,363
127,316
235,118
54,917
13,694
8,797
16,967
11,719
2,936
12,823
-
30,781
1,802
-
-
-
-
-
-
-
-
-
(1)
(2)
Balance may include performance rights granted prior to individuals becoming KMP. For senior executives who became KMP during 2017, the balance is as at the date they became KMP.
For former senior executives, the balance is as at the date they cease being KMP.
2017 Annual Financial Report
49
Report of the Directors
Remuneration report (continued)
6.9. Senior executives' share ownership
The number of NAB shares held (directly and nominally) by each senior executive of NAB and the Group or their related parties (their close family
members or any entity they, or their close family members, control, jointly control or significantly influence) are set out below:
Name
Executive director
AG Thorburn
Other senior executives
AJ Cahill
AD Gall
AP Hagger
AJ Healy
GA Lennon
A Mentis
LN Murphy
Former senior executives
CA Carver
MR Lawrance
Balance at
beginning of
year(1)
No.
Granted
during year as
remuneration
No.
Received
during year on
exercise of
performance
rights
No.
117,990
58,146
91,269
139,009
30,889
48,829
35,441
30,944
66,963
53,833
-
-
-
-
34
-
-
-
12,152
19,958
27,943
13,694
8,797
16,967
11,719
2,936
12,823
-
-
1,802
Other changes
during year
No.
Balance at
end of year(2)
No.
9,191
155,124
(40,883)
(8,797)
(130,000)
-
-
-
1,128
(31,603)
-
30,957
91,269
25,976
42,642
51,765
48,264
32,072
47,512
75,593
(1)
(2)
Balance may include shares held prior to individuals becoming KMP. For senior executives who became KMP during 2017, the balance is as at the date they became KMP.
For former senior executives, the balance is as at the date they cease being KMP.
There are no other holdings or transactions involving equity instruments, other than equity-based compensation, with senior executives of NAB and the
Group or their related parties.
6.10. Senior executive contract terms
All senior executives are employed on contracts with no fixed term. The following table shows the position and contract terms for individuals who were
senior executives as at 30 September 2017.
Termination arrangements (1)
Name
Executive director
AG Thorburn
Other senior executives
Position
Group Chief Executive Officer
MB Baird
AJ Cahill
SJ Cook
AD Gall
AP Hagger
AJ Healy
GA Lennon
A Mentis
LN Murphy
PF Wright
Chief Customer Officer - Corporate and Institutional Banking
Chief Operating Officer
Chief Legal and Commercial Counsel
Chief Risk Officer
Chief Customer Officer - Consumer Banking and Wealth
Chief Executive Officer Bank of New Zealand
Chief Financial Officer
Chief Customer Officer - Business and Private Banking
Chief People Officer
Chief Technology and Operations Officer
Notice period (weeks)
Senior executive Company
26
1
4
1
12
4
13
4
4
2
1
26
26
26
26
26
26
13
26
26
26
26
Termination payment(2)
$
1,045,455
545,455
545,455
363,636
590,909
545,455
253,076
454,545
545,455
363,636
590,909
(1)
(2)
Employment may be terminated by either the senior executive or NAB giving the applicable notice. Recent employee notice periods reflect a commercial decision to not spend on excessive termination
payments when NAB has strong succession plans in place.
Calculated as the company notice period multiplied by either the current annualised fixed remuneration or Total Remuneration Package (TRP) (fixed remuneration less employer superannuation). These are
paid, subject to compliance with the law, if NAB terminates the senior executive's employment agreement on notice and without cause, and makes payment in lieu of notice. Termination payments are not
generally paid on resignation, summary termination or unsatisfactory performance, although the Board may determine exceptions to this. The retention or forfeiture of shares and performance rights on
cessation of employment depends on applicable law and the terms and conditions of each grant including Board discretion. The amount shown is the termination payment payable, based on the senior
executive's current fixed remuneration or TRP if NAB were to give notice. The value does not include any value for equity holdings which may be retained, or other statutory payments that would be payable
on termination.
50 NATIONAL AUSTRALIA BANK
Report of the Directors
Remuneration report (continued)
Section 7 - Non-executive director remuneration
7.1. Fee policy and pool
Non-executive directors receive fees to recognise their contribution to the work of the Board. Additional fees are paid, where applicable, for serving on
Board Committees, on Boards of controlled entities and internal advisory boards. Fees include NAB’s compulsory contributions to superannuation. To
ensure independence, non-executive directors are not paid any performance or incentive related remuneration.
The maximum aggregate fee pool for non-executive directors is $4.5 million per annum which was approved at NAB's February 2008 Annual General
Meeting.
Non-executive director fees are generally reviewed annually, including against fee levels paid to board members of other major Australian corporations.
As a result of the 2017 fee review, the Board decided not to increase non-executive director Board or Committee fees.
The following table shows the annual fees paid to the Chairman and non-executive directors on the Board, and to non-executive directors who
participate on Board committees.
Board
Audit Committee
Risk Committee
Remuneration Committee
Nomination & Governance Committee (1)
Chairman
($pa)
790,000
65,000
60,000
55,000
-
Non-
Executive
Director
($pa)
230,000
32,500
30,000
27,500
10,000
(1)
The Board established a fee for the Nomination & Governance Committee effective
17 December 2016. The Board Chairman’s fee is inclusive of Dr Henry’s participation as
Chairman of the Nomination & Governance Committee.
7.2. Statutory remuneration
The fees paid to the non-executive directors in relation to the 2017 financial year are set out below:
Short-term benefits Post-employment benefits
Cash salary and fees(1)
Superannuation(2)
Name
Non-executive directors
KR Henry (Chairman)
DH Armstrong
PW Chronican (3)
PK Gupta (4)
AJ Loveridge
GC McBride
DA McKay (5)
AKT Yuen
Former non-executive directors
DT Gilbert (for part year)
JS Segal (for part year)
MA Chaney (for part year)
PJ Rizzo (for part year)
Total
Total
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2016
2016
2017
2016
$
770,276
670,213
304,746
316,467
403,904
110,731
629,841
623,025
275,276
182,821
235,882
223,115
358,572
296,327
286,393
284,041
55,551
297,115
56,081
278,740
159,774
58,463
$
19,724
19,385
19,724
35,077
19,724
9,061
19,724
19,269
19,724
39,904
19,724
19,385
146,166
33,793
6,107
5,959
4,904
19,385
4,904
19,385
4,827
9,133
Total
$
790,000
689,598
324,470
351,544
423,628
119,792
649,565
642,294
295,000
222,725
255,606
242,500
504,738
330,120
292,500
290,000
60,455
316,500
60,985
298,125
164,601
67,596
3,376,522
3,500,832
280,425
234,563
3,656,947
3,735,395
(1)
(2)
The portion of fees in connection with their roles, duties and responsibilities as a non-executive director, and includes attendance at meetings of the Board, and of Board committees and boards of controlled
entities, received as cash. No non-monetary benefits were provided to the non-executive directors during 2017.
Reflects compulsory company contributions to superannuation and, where applicable, includes additional superannuation contributions made by NAB, in lieu of payment of fees, at the election of the non-
executive director.
(3) Mr Chronican received director fees in his capacity as a director on the board of Bank of New Zealand, which were paid in NZD.
(4) Mr Gupta received director fees in his capacity as a director on the board of a number of NAB Group subsidiaries.
(5) Mr McKay received director fees in his capacity as Chairman of Bank of New Zealand, which were paid in NZD.
2017 Annual Financial Report
51
Report of the Directors
Remuneration report (continued)
7.3. Minimum shareholding policy
Non-executive directors are required to hold, within five years of their appointment, NAB ordinary shares to the value of the annual base fee for non-
executive directors. To meet the minimum requirement, non-executive directors must:
• hold at least 2,000 NAB ordinary shares within six months of their appointment; and
• acquire NAB ordinary shares to the value of at least 20% of the annual base fee for non-executive directors each year until the minimum holding
requirement is met.
7.4. Non-executive directors' share ownership
The number of NAB shares held (directly and nominally) by each non-executive director of NAB and the Group or their related parties (their close family
members or any entity they, or their close family members, control, jointly control or significantly influence) are set out below. No performance options or
performance rights are granted to non-executive directors or their related parties.
Name
Non-executive directors
KR Henry
DH Armstrong
PW Chronican
PK Gupta
AJ Loveridge
GC McBride
DA McKay
AKT Yuen
Former non-executive directors
DT Gilbert
JS Segal
Balance at
beginning of
year(1)
No.
Acquired
No.
Other
changes
during year
No.
6,860
13,419
30,000
6,480
9,000
3,960
2,000
10,464
20,726
17,184
1,500
346
-
-
-
1,000
6,000
-
-
-
-
-
-
-
-
-
-
-
-
-
Balance at
end of year(2)
No.
8,360
13,765
30,000
6,480
9,000
4,960
8,000
10,464
20,726
17,184
(1)
(2)
Balance may include shares held prior to individuals becoming KMP. For non-executive directors who became KMP during 2017, the balance is as at the date they became KMP.
For former non-executive directors, the balance is as at the date they cease being KMP.
7.5. Other equity instrument holdings
Holdings and transactions involving equity instruments, other than equity-based compensations, with non-executive directors or their related parties and
NAB and the Group are set out below:
National Income Securities
Non-executive directors
PW Chronican
Former non-executive directors
DT Gilbert
JS Segal
(1)
(2)
Balance at beginning of the financial year (1 October 2016) or the date of commencement as a KMP.
Balance at end of the financial year (30 September 2017) or the date of cessation as a KMP.
Balance at
beginning of year(1)
No.
982
1,253
180
Changes
during year
No.
-
-
-
Balance at
end of year(2)
No.
982
1,253
180
52 NATIONAL AUSTRALIA BANK
Report of the Directors
Remuneration report (continued)
Section 8 - Loans and other transactions
8.1. Loans
Loans made to directors of NAB are made in the ordinary course of business on terms equivalent to those that prevail in arms’ length transactions.
Loans to other KMP of NAB and the Group may be made on similar terms and conditions generally available to other employees of the Group. Loans to
KMP of NAB and the Group may be subject to restrictions under applicable laws and regulations including the Corporations Act 2001 (Cth).
Aggregated loans to KMP and their related parties (1)
NAB and the Group
KMP
Other related parties (3)
Normal
Employee
Normal
Employee
Balance at
beginning of
year(1)
18,097,274
2,746,455
44,637,384
-
Interest
charged
447,281
89,485
557,161
-
Interest not
charged
-
Write-off
-
-
-
-
-
-
-
Balance at
end of year(2)
16,551,449
1,994,890
42,924,465
-
(1)
(2)
(3)
Balance at beginning of the financial year (1 October 2016) or the date of commencement as a KMP.
Balance at end of the financial year (30 September 2017) or the date of cessation as a KMP.
Includes the KMP's related parties, which includes their close family members or any entity they or their close family members control, jointly control or significantly influence.
Aggregate loans to KMP and their related parties above $100,000 at any time during 2017 (1)
NAB and the Group
Executive director
AG Thorburn
Other senior executives
MB Baird
AJ Cahill
SJ Cook
AD Gall
AJ Healy
GA Lennon
A Mentis
LN Murphy
Non-executive director
GC McBride
Former senior executives
CA Carver
MR Lawrance
Former non-executive director
DT Gilbert (5)
Terms and conditions
Employee
Normal
Employee
Normal
Employee
Normal
Normal
Normal
Normal
Employee
Normal
Employee
Normal
Employee
Normal
Balance at
beginning of
year(1)
$
1,840
-
25,086
4,565,000
1,480,642
1,937,800
16,902
6,140,733
2,080,834
1,206,947
6,233
12,319
2,881,467
19,621
2,696,538
Interest
charged(2)
$
21
9,977
644
92,625
47,432
57,386
16,393
208,847
92,010
41,389
20
-
120,224
-
88,970
Normal
1,182,060
27,944
Normal
Normal
-
2,908,159
18,246
50,147
Normal
38,306,793
221,479
Interest not
charged
$
Write-off
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Balance at
end of year(3)
KMP highest
indebtedness
during year(4)
$
3,203
-
1,702
4,520,806
980,000
594,092
1,215,250
5,966,992
1,963,221
988,759
5,367
14,283
2,050,826
2,375
2,453,479
$
31,956
3,847,872
3,457,034
1,286,266
2,606,446
23,952
1,231,947
2,586,134
2,736,538
1,151,661
1,211,992
2,393,343
2,880,053
529,559
2,945,376
34,252,740
450,000
(1)
(2)
(3)
(4)
(5)
Balance at beginning of the financial year (1 October 2016) or the date of commencement as a KMP.
The interest charged may include the impact of interest offset facilities.
Balance at end of the financial year (30 September 2017) or the date of cessation as a KMP.
Represents aggregate highest indebtedness of the KMP during 2017. All other items in this table relate to the KMP and their related parties.
Includes business loans to persons and entities other than Mr Gilbert but over which Mr Gilbert has significant influence including the law firm Gilbert + Tobin. In addition to this, the Group has provided bank
guarantees to Gilbert + Tobin with a total limit of $13 million. The loans and guarantees are provided on terms equivalent to those that prevail in an arm's length transaction.
(1) Loans to KMP of NAB and the Group at year end may, in some instances, be an estimate of the 30 September statement balances. Where estimates have been used at
the end of 2016, the balances at the beginning of 2017 reflects the actual opening balances and therefore may differ from prior year closing balance. Some balances have
been restated to include additional related party loans.
2017 Annual Financial Report
53
Report of the Directors
Remuneration report (continued)
8.2. Other transactions
From time to time various KMP and their related parties will hold investments in funds that are either managed, related to or controlled by the Group. All
such transactions with KMP and their related parties are made on terms equivalent to those that prevail in arm's length transactions.
All other transactions that have occurred with KMP are made on terms equivalent to those that prevail in arm's length transactions. These transactions
generally involve the provision of financial and investment services including services to eligible international assignees ensuring they are neither
financially advantaged nor disadvantaged by their relocation. All such transactions that have occurred with KMP and their related parties have been
trivial or domestic in nature. In this context, transactions are trivial in nature when they are considered of little or no interest to the users of the
Remuneration report in making and evaluating decisions about the allocation of scarce resources. Transactions are domestic in nature when they relate
to personal household activities.
54 NATIONAL AUSTRALIA BANK
Report of the Directors
Directors’ signatures
This report of directors signed in accordance with a resolution of the directors:
Dr Kenneth R Henry
Chairman
14 November 2017
Mr Andrew G Thorburn
Group Chief Executive Officer
14 November 2017
2017 Annual Financial Report
55
Corporate governance
Our approach
NAB is committed to the highest standards of corporate governance and has in place a governance framework that provides a foundation for effective
decision making and accountability, supporting the creation of value for our stakeholders.
Further details of corporate governance at NAB, and confirmation of NAB's compliance in 2017 with the 3rd edition of the ASX Corporate Governance
Principles and Recommendations, are contained in the 2017 Corporate Governance Statement and Appendix 4G which are published separately in the
corporate governance section of the website at www.nab.com.au/about-us/corporate-governance.
Board responsibilities and performance
The Board is responsible, and accountable to shareholders, for the overall governance of the Group. To support the Board in its role, it has four standing
committees that focus on specific areas. From time to time it also establishes other committees to assist it in particular areas. More information on the
functions and responsibilities of the Board and its Committees is contained in the 2017 Corporate Governance Statement. Details of the number of
meetings held by the Board and its Committees in 2017, and attendance by directors, are contained in the Report of the Directors.
The Board delegates authority for the day-today operation of the business to the Group CEO and other executive leaders. Delegations are actively
monitored, and regularly reviewed and reconfirmed.
Directors' independence and capacity are regularly assessed. The Board is satisfied that each non-executive director who has served during 2017
continued to be independent. After taking into consideration the existing workload of directors, the Board has concluded that each non-executive director
has sufficient capacity to undertake the duties expected of a director of NAB.
The Board conducts an annual assessment of its performance and effectiveness, as well as of its Committees and individual directors, to support
continuous improvement. The annual assessment was conducted in 2017.
Board composition and diversity
The Board, with the support of the Nomination & Governance Committee, actively reviews its composition to ensure it has an appropriate mix of skills,
experience and diversity for continuing effectiveness. Two long standing directors retired following the 2016 AGM, and as at 30 September 2017, there
are eight non-executive directors. Subsequent to the end of the reporting period, a new female non-executive director was appointed to the Board in
November 2017.
The Nomination & Governance Committee uses a matrix to assess the skills and experience of each director and the combined capability of the Board.
The skills matrix, and information about the Board's tenure, age profile and gender diversity, are contained in the 2017 Corporate Governance
Statement.
Shareholder engagement
NAB makes increasing use of technology to communicate with all stakeholders by webcasting significant market briefings and events and through the
Investor Relations mobile app. Shareholders will be invited to submit questions in advance of the 2017 Annual General Meeting to help the Board
understand and address areas of interest or concern.
56 NATIONAL AUSTRALIA BANK
Financial Report
2017 Annual Financial Report
57
Table of Contents
Financial Report
Income statements
Statements of comprehensive income
Balance sheets
Cash flow statements
Statements of changes in equity
Notes to the financial statements
59
60
61
62
63
21 Other debt issues
Other assets and liabilities
22 Goodwill and other intangible assets
23 Other assets
24 Provisions
25 Other liabilities
1 Principal accounting policies
65
Capital management
Financial performance
2 Segment information
3 Net interest income
4 Other income
5 Operating expenses
6 Earnings per share
Taxation
7 Income tax expense
8 Current tax liabilities
9 Deferred tax assets and liabilities
Financial assets and liabilities
10 Cash and cash equivalents
11 Trading derivative assets and liabilities
12 Trading securities
13 Debt instruments at fair value through other comprehensive income
14 Other financial assets at fair value
15 Hedge accounting, including hedging derivative assets and liabilities
16 Loans and advances
17 Provision for doubtful debts
18 Other financial liabilities at fair value
19 Deposits and other borrowings
20 Bonds, notes and subordinated debt
58 NATIONAL AUSTRALIA BANK
26 Contributed equity
27 Reserves
28 Retained profits
29 Dividends and distributions
Cash flow information
30 Notes to the cash flow statements
Group structure
31 Interest in subsidiaries and other entities
Unrecognised items
32 Contingent liabilities and credit commitments
33 Operating leases
Risk disclosures
34 Financial risk management
35 Fair value of financial instruments
36 Financial asset transfers and securitisations
Other information
37 Related party disclosures
38 Remuneration of external auditor
39 Shares and performance rights
40 Capital adequacy
41 Discontinued operations
42 Events subsequent to reporting date
70
73
74
75
77
78
79
79
80
81
81
82
82
82
88
89
91
92
92
94
95
96
97
97
98
99
100
101
102
103
106
110
111
131
136
137
138
139
141
142
142
Income statements
Group
Company
For the year ended 30 September
Note
2017(1)
$m
2016(1)
$m
Interest income
Interest expense
Net interest income
Other income
Operating expenses
Charge to provide for bad and doubtful debts
Profit before income tax
Income tax expense
Net profit for the year from continuing operations
Net (loss) after tax for the year from discontinued operations
Net profit for the year
Profit attributable to non-controlling interests
Net profit attributable to owners of NAB
Basic earnings per share
Diluted earnings per share
Basic earnings per share from continuing operations
Diluted earnings per share from continuing operations
(1)
Information is presented on a continuing operations basis.
3
3
4
5
5
7
41
6
6
6
6
27,403
(14,221)
13,182
27,629
(14,699)
12,930
4,842
(8,539)
(824)
8,661
(2,480)
6,181
(893)
5,288
3
5,285
cents
194.7
189.1
cents
228.2
220.1
5,192
(8,331)
(813)
8,978
(2,553)
6,425
(6,068)
357
5
352
cents
8.8
15.5
cents
242.4
232.7
2017
$m
26,101
(16,467)
9,634
5,023
(7,207)
(731)
6,719
(1,744)
4,975
-
4,975
-
4,975
2016
$m
26,724
(17,211)
9,513
5,798
(12,323)
(702)
2,286
(1,767)
519
-
519
-
519
2017 Annual Financial Report
59
Note
Group
Company
2017(1)
$m
6,181
2016(1)
$m
6,425
2017
$m
4,975
2016
$m
519
11
1
4
(1)
31
46
(115)
1
(273)
(10)
25
(3)
(1)
17
(359)
(313)
5,868
(893)
-
4,975
4,972
3
(113)
(1)
(183)
(51)
23
(325)
38
(6)
249
-
14
(16)
4
22
305
(20)
6,405
(6,068)
979
1,316
1,311
5
55
-
-
(8)
22
69
(70)
1
(32)
-
25
(3)
(1)
5
(75)
(6)
4,969
-
-
4,969
4,969
-
(131)
-
-
(52)
10
(173)
76
(6)
(49)
-
14
(16)
4
41
64
(109)
410
-
-
410
410
-
Statements of comprehensive income
For the year ended 30 September
Net profit for the year from continuing operations
Other comprehensive income
Items that will not be reclassified to profit or loss
Fair value changes on financial liabilities designated at fair value attributable to the Group's own credit risk
Revaluation of land and buildings
Currency adjustments on translation of other contributed equity
Equity instruments at fair value through other comprehensive income reserve:
Revaluation losses
Tax on items transferred directly to equity
Total items that will not be reclassified to profit or loss
Items that will be reclassified subsequently to profit or loss
Cash flow hedges:
(Losses) / gains on cash flow hedging instruments
Losses / (gains) transferred to the income statement
Foreign currency translation reserve:
Currency adjustments on translation of foreign operations, net of hedging
Transfer to the income statement on disposal of foreign operations
Debt instruments at fair value through other comprehensive income reserve:
Revaluation gains
Gains from sale transferred to the income statement
Change in loss allowance on debt instruments at fair value through other comprehensive income
Tax on items transferred directly to equity
Total items that will be reclassified subsequently to profit or loss
Other comprehensive income for the year, net of income tax
Total comprehensive income for the year from continuing operations
Net loss for the year from discontinued operations
41
Other comprehensive income for the year from discontinued operations, net of income tax
Total comprehensive income for the year
Attributable to owners of NAB
Attributable to non-controlling interests
(1)
Information is presented on a continuing operations basis.
60 NATIONAL AUSTRALIA BANK
Balance sheets
As at 30 September
Assets
Cash and liquid assets
Due from other banks
Trading derivatives (1)
Trading securities
Debt instruments at fair value through other comprehensive income
Other financial assets at fair value
Hedging derivatives (1)
Loans and advances
Due from customers on acceptances
Property, plant and equipment
Due from controlled entities
Investments in controlled entities
Goodwill and other intangible assets
Deferred tax assets
Other assets (1) (2)
Total assets
Liabilities
Due to other banks
Trading derivatives (1)
Other financial liabilities at fair value
Hedging derivatives (1)
Deposits and other borrowings
Current tax liabilities
Provisions
Due to controlled entities
Bonds, notes and subordinated debt
Other debt issues
Other liabilities (1)
Total liabilities
Net assets
Equity
Contributed equity
Reserves
Retained profits
Total equity (parent entity interest)
Non-controlling interest in controlled entities
Total equity
Group
Company
Note
2017
$m
2016
$m
10
10
11
12
13
14
15
16
31
22
9
23
10
11
18
15
19
8
24
20
21
25
26
27
28
540,125
510,045
468,277
43,826
37,066
29,137
50,954
42,131
16,058
3,892
30,630
45,236
43,146
45,971
40,689
21,496
6,741
6,786
1,315
-
-
5,601
1,988
9,446
788,325
36,683
27,187
29,631
1,674
12,205
1,423
-
-
5,302
1,925
11,901
776,710
43,903
41,559
33,224
3,402
2017
$m
42,152
35,030
30,383
45,637
42,029
11,825
3,816
6,786
476
109,163
8,673
2,361
1,242
6,666
2016
$m
28,717
43,359
42,467
41,513
40,580
14,831
6,319
441,321
12,205
520
119,414
9,493
2,093
1,172
9,395
814,516
813,399
35,201
27,065
5,930
3,859
42,649
38,901
5,408
6,701
500,604
459,714
450,010
416,241
230
1,961
-
297
1,432
-
124,871
127,942
6,187
7,980
737,008
51,317
6,248
7,674
725,395
51,315
34,627
237
16,442
51,306
11
34,285
629
16,378
51,292
23
71
1,734
107,601
121,315
6,187
6,942
765,915
48,601
32,866
190
15,545
48,601
-
51,317
51,315
48,601
248
1,157
117,399
123,226
6,248
6,669
764,847
48,552
32,524
309
15,719
48,552
-
48,552
(1)
(2)
The 2016 comparative information has been restated to reflect a change in presentation of interest accrual on certain derivative assets and derivative liabilities, which is now presented within derivative
assets and derivative liabilities (previously included in other assets and other liabilities).
The 2016 comparative information has been restated following a reclassification of investments relating to life insurance business into other assets.
2017 Annual Financial Report
61
Cash flow statements
For the year ended 30 September (1)
Cash flows from operating activities
Interest received
Interest paid
Dividends received
Life insurance:
Premiums and other revenue received
Investment revenue received
Policy payments and commission expense
Net trading income (paid) / received
Other operating income received
Operating expenses paid
Income tax paid
Cash flows from operating activities before changes in operating assets and liabilities
Changes in operating assets and liabilities arising from cash flow movements
Net (increase) / decrease in:
Deposits with central banks and other regulatory authorities
Trading securities
Other financial assets designated at fair value
Loans and advances
Due from customers on acceptances
Other assets
Net increase / (decrease) in:
Deposits and other borrowings
Other financial liabilities designated at fair value (2)
Other liabilities
Net movements in life insurance assets and liabilities
Net funds advanced to and receipts from other banks
Net movements in derivative assets and liabilities
Changes in operating assets and liabilities arising from cash flow movements
Net cash provided by operating activities
Cash flows from investing activities
Movement in debt instruments at fair value through other comprehensive income
Purchases
Proceeds from disposal and maturity
Movement in other debt and equity instruments
Purchases
Proceeds from disposal and maturity
Net movement in amounts due from controlled entities
Net movement in shares in controlled entities
Purchase of controlled entities and business combinations, net of cash acquired
Proceeds from sale of controlled entities, net of cash disposed
Proceeds on sale of associates and joint ventures, net of cash disposed
Purchase of property, plant, equipment and software
Proceeds from sale of property, plant, equipment and software, net of costs
Net cash (used in) / provided by investing activities
Cash flows from financing activities
Repayments of bonds‚ notes and subordinated debt (2)
Proceeds from issue of bonds‚ notes and subordinated debt‚ net of costs (2)
Repayments of other contributed equity, net of costs
Proceeds from other debt issues, net of costs
Repayments of other debt issues
Dividends and distributions paid (excluding dividend reinvestment plan)
Net cash (used in) / provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Effects of exchange rate changes on balance of cash held in foreign currencies
Cash and cash equivalents at end of year
Group
Company
Note
2017
$m
2016
$m
2017
$m
2016
$m
27,176
28,338
25,761
26,795
(14,315)
(15,592)
(16,459)
(17,413)
21
2,035
2,264
36
76
5
(42)
(3,198)
4,388
(7,868)
(2,544)
3,714
9,426
1,797
(9,490)
(3,351)
3,956
(10,543)
(3,148)
1,414
-
-
-
(2,471)
2,029
(5,858)
(1,825)
3,212
281
(6,488)
4,762
681
(4,197)
6,839
281
(5,677)
2,678
-
-
-
(1,583)
2,318
(6,490)
(2,812)
3,079
696
(3,554)
5,186
(33,401)
(45,882)
(27,714)
(30,861)
5,438
1,041
7,249
957
5,436
1,695
7,243
265
43,430
37,920
34,796
28,199
(6,575)
(1,721)
(1)
(902)
3,639
9,503
13,217
300
3,548
(480)
2,521
3,590
13,046
14,460
(46)
(1,850)
-
(881)
2,632
11,350
14,562
(958)
1,219
-
2,747
759
10,941
14,020
(23,392)
(20,077)
(23,337)
(19,959)
21,633
21,088
21,573
20,855
(4)
172
(2,007)
3,631
-
-
-
-
-
(2)
(7)
-
311
688
-
2,255
(11,780)
2,206
37
(1,028)
14
(313)
-
(875)
52
(9,970)
-
(739)
(1)
694
(1,876)
3,626
2,841
(695)
-
642
-
(594)
8
4,848
(32,426)
(29,543)
(29,868)
(26,427)
37,318
43,521
32,438
36,884
(400)
-
(73)
-
111
-
(4,750)
(4,593)
(331)
12,573
27,960
(733)
39,800
9,496
13,986
20,528
(6,554)
27,960
(400)
-
(73)
(4,707)
(2,610)
12,646
24,850
(665)
36,831
-
667
-
(4,633)
6,491
25,359
1,970
(2,479)
24,850
30(a)
30(b)
(1)
(2)
The cash flow statements include cash flows of discontinued operations for the period up to the date on which the Group lost control of those operations, and cash flows after the loss of control that are
directly related to the disposal. Details of these cash flows are included in Note 41 Discontinued operations.
Cash flows relating to bonds, notes and subordinated debt at fair value that occurred in the year ended 30 September 2016 have been reclassified from other financial liabilities designated at fair value, to
repayments of and proceeds from bonds, notes and subordinated debt.
62 NATIONAL AUSTRALIA BANK
Statements of changes in equity
Group
Year to 30 September 2016
Balance at 1 October 2015
Net profit for the year from continuing operations
Net loss for the year from discontinued operations
Other comprehensive income for the year from continuing operations
Other comprehensive income for the year from discontinued operations
Total comprehensive income for the year
Transactions with owners, recorded directly in equity:
Contributions by and distributions to owners
Issue of ordinary shares
Treasury shares adjustment relating to life insurance business (4)
Transfer from / (to) retained profits
Transfer from equity-based compensation reserve
Equity-based compensation
Dividends paid
Distributions on other equity instruments
Capital distribution on CYBG demerger
Released on divestment of discontinued operations
Changes in ownership interests (5)
Movement of non-controlling interest in controlled entities
Balance at 30 September 2016
Year to 30 September 2017
Net profit for the year from continuing operations
Net loss for the year from discontinued operations
Other comprehensive income for the year from continuing operations
Total comprehensive income for the year
Transactions with owners, recorded directly in equity:
Contributions by and distributions to owners
Issue of ordinary shares
Redemption of National Capital Instruments (6)
Transfer from / (to) retained profits
Transfer from equity-based compensation reserve
Equity-based compensation
Dividends paid
Distributions on other equity instruments
Changes in ownership interests (5)
Movement of non-controlling interest in controlled entities
Contributed
Retained
equity(1) Reserves(2)
profits(3)
$m
$m
$m
Non-controlling
interest in
controlled
entities
$m
Total
$m
34,651
(362)
-
-
-
-
-
596
1,517
-
166
-
-
-
(2,645)
-
-
34,285
-
-
-
-
569
(397)
-
170
-
-
-
-
-
-
96
955
1,051
-
-
(91)
(166)
203
-
-
-
(6)
-
629
-
-
(356)
(356)
-
-
(53)
(170)
187
-
-
-
21,205
6,420
55,494
6,420
(6,068)
(6,068)
(116)
24
260
(20)
979
1,311
-
-
91
-
-
596
1,517
-
-
203
(5,060)
(5,060)
(124)
-
6
-
(124)
(2,645)
-
-
16,378
51,292
6,178
(893)
43
5,328
-
(3)
53
6,178
(893)
(313)
4,972
569
(400)
-
-
-
187
(5,216)
(5,216)
(98)
(98)
-
-
Total
equity
$m
55,513
6,425
(6,068)
(20)
979
1,316
596
1,517
-
-
203
(5,065)
(124)
(2,645)
-
4
51,315
6,181
(893)
(313)
4,975
569
(400)
-
-
187
(5,221)
(98)
(10)
51,317
19
5
-
-
-
5
-
-
-
-
-
(5)
-
-
-
4
23
3
-
-
3
-
-
-
-
(5)
-
(10)
11
Balance at 30 September 2017
34,627
237
16,442
51,306
(1)
(2)
(3)
(4)
(5)
(6)
Refer to Note 26 Contributed equity for further details.
Refer to Note 27 Reserves for further details.
Refer to Note 28 Retained profits for further details.
Relates to shares in NAB previously held by Wealth’s life insurance business which are no longer held by a controlled entity of the Group.
Changes in ownership interests in controlled entities that does not result in a loss of control.
National capital instruments were fully redeemed on 4 October 2016.
2017 Annual Financial Report
63
Total
equity
$m
$m
20,470
55,217
519
(131)
388
-
90
-
-
-
(5,161)
(68)
15,719
4,975
77
5,052
-
(3)
53
-
(5,216)
(60)
15,545
519
(109)
410
596
-
-
(2,645)
203
(5,161)
(68)
48,552
4,975
(6)
4,969
569
(400)
-
-
187
(5,216)
(60)
48,601
Statements of changes in equity (continued)
Contributed
Retained
equity(1) Reserves(2)
profits(3)
Company
Year to 30 September 2016
Balance at 1 October 2015
Net profit for the year from continuing operations
Other comprehensive income for the year
Total comprehensive income for the year
Transactions with owners, recorded directly in equity:
Contributions by and distributions to owners
Issue of ordinary shares
Transfer from / (to) retained profits
Transfer from equity-based compensation reserve
Capital distribution on CYBG demerger
Equity-based compensation
Dividends paid
Distributions on other equity instruments
Balance at 30 September 2016
Year to 30 September 2017
Net profit for the year from continuing operations
Other comprehensive income for the year from continuing operations
Total comprehensive income for the year
Transactions with owners, recorded directly in equity:
Contributions by and distributions to owners
Issue of ordinary shares
Redemption of National Capital Instruments (4)
Transfer from / (to) retained profits
Transfer from equity-based compensation reserve
Equity-based compensation
Dividends paid
Distributions on other equity instruments
Balance at 30 September 2017
(1)
(2)
(3)
(4)
Refer to Note 26 Contributed equity for further details.
Refer to Note 27 Reserves for further details.
Refer to Note 28 Retained profits for further details.
National capital instruments were fully redeemed on 4 October 2016.
$m
34,407
-
-
-
596
-
166
(2,645)
-
-
-
32,524
-
-
-
569
(397)
-
170
-
-
-
32,866
$m
340
-
22
22
-
(90)
(166)
-
203
-
-
309
-
(83)
(83)
-
-
(53)
(170)
187
-
-
190
64 NATIONAL AUSTRALIA BANK
Notes to the financial statements
1 Principal accounting policies
The financial report of National Australia Bank Limited (Company)
together with its controlled entities (Group) for the year ended
30 September 2017 was authorised for issue on 14 November 2017 in
accordance with a resolution of the directors. The directors of the
Group have the power to amend and reissue the financial report.
balance sheet in a manner comparable to finance leases currently
accounted under AASB 117 "Leases". Lessor accounting remains
unchanged compared to AASB 117. The potential impact of this
standard is still being assessed, and is not applicable until 1 October
2019.
National Australia Bank Limited is a for-profit company limited by
shares, incorporated and domiciled in Australia, whose shares are
publicly traded on the Australian Securities Exchange.
Other amendments to existing standards that are not yet effective are
not expected to result in a material impact to the Group’s financial
report.
(a) Basis of preparation
(d) Rounding of amounts
This general purpose financial report has been prepared in accordance
with the requirements of the Corporations Act 2001 (Cth) and
accounting standards and interpretations issued by the Australian
Accounting Standards Board (AASB). The financial report has been
prepared under the historical cost convention, as modified by the
application of fair value measurements required or allowed by relevant
accounting standards. Accounting policies have been consistently
applied to all periods presented, unless otherwise stated, throughout
the Group.
The preparation of financial statements requires the use of certain
critical accounting estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses and the
disclosed amount of contingent liabilities. Areas involving a higher
degree of judgement or complexity, or areas where assumptions are
significant to the Group are discussed below in Note 1 (h)
Critical accounting assumptions and estimates.
Comparative information has been restated to accord with changes in
presentations made in the current year, except where otherwise stated.
The results of discontinued operations are presented separately in the
income statements and statements of comprehensive income with
comparative information restated accordingly. Balance sheets have not
been restated. Refer to Note 41 Discontinued operations for further
detail. Certain key terms used in this report are defined in the glossary.
The accounting policies for specific financial report items are disclosed
in the respective notes. Other significant accounting policies and
details of critical accounting assumptions and estimates are set out
below.
(b) Statement of compliance
The financial report of the Company and the Group complies with
Australian Accounting Standards as issued by the AASB and
International Financial Reporting Standards (IFRS) as issued by the
International Accounting Standards Board (IASB).
To comply with its obligations as an Australian Financial Services
Licence holder the Group includes the separate financial statements of
the Company in this financial report, which is permitted by Australian
Securities and Investments Commission Class Order 10/654 dated
26 July 2010.
In accordance with ASIC Corporations Instrument 2016/191, all
amounts have been rounded to the nearest million dollars, except
where indicated.
(e) Currency of presentation
All amounts are expressed in Australian dollars unless otherwise
stated.
(f) Foreign currency translation
(i) Functional and presentation currency
Items included in the financial statements of each of the Group’s
entities are measured using the currency of the primary economic
environment in which the entity operates (functional currency). The
consolidated financial report is presented in Australian dollars, which is
the Company’s functional and presentation currency.
Refer to Note 27 Reserves for details around the Group’s policy for
translation of its foreign operations.
(ii) Transactions and balances
Foreign currency transactions are translated into the functional
currency using the exchange rates prevailing at the dates of the
transactions. Foreign exchange gains and losses resulting from the
settlement of such transactions and from the translation at year end
exchange rates of monetary assets and liabilities denominated in
foreign currencies are normally recognised in the income statement.
Non-monetary items are translated using the exchange rate at the date
of the initial recognition of the asset or liability.
(g) Financial instruments
In 2014 the Group early adopted AASB 9 "Financial Instruments"
(2014). The Group elected an accounting policy choice under AASB 9
to continue to apply the hedge accounting requirements under AASB
139 "Financial Instruments: Recognition and measurement".
(i) Classification of financial instruments
The Group classifies its financial assets into the following
measurement categories:
•
those to be measured at fair value (either through other
comprehensive income, or through profit or loss); and
those to be measured at amortised cost.
(c) New accounting standards issued but not yet effective
•
The following issued, but not yet effective, new Australian Accounting
Standards have not been applied in preparing this financial report:
AASB 15 "Revenue from Contracts with Customers" introduces a
single principles-based five step model for recognising revenue, and
introduces the concept of recognising revenue when an obligation to a
customer is satisfied. The potential impact of this standard is still being
assessed, and is not applicable until 1 October 2018.
AASB 16 "Leases" significantly changes accounting for lessees
requiring recognition of all leases (subject to certain exceptions) on-
The classification depends on the Group’s business model for
managing financial assets and the contractual terms of the financial
assets' cash flows.
The Group classifies its financial liabilities at amortised cost (Refer
Note 19 Deposits and other borrowings, Note 20 Bonds, notes and
subordinated debt, Note 21 Other debt issues and Note 25 Other
liabilities) unless it has designated liabilities at fair value through profit
or loss or is required to measure liabilities at fair value through profit or
loss such as derivative liabilities.
2017 Annual Financial Report
65
Notes to the financial statements
1 Principal accounting policies (continued)
(ii) Financial assets measured at amortised cost
• debt instruments with contractual terms that do not represent solely
Debt instruments
Investments in debt instruments are measured at amortised cost
where they have:
•
contractual terms that give rise to cash flows on specified dates,
that represent solely payments of principal and interest on the
principal amount outstanding; and
• are held within a business model whose objective is achieved by
holding to collect contractual cash flows.
These debt instruments are initially recognised at fair value plus
directly attributable transaction costs and subsequently measured at
amortised cost. The measurement of credit impairment is based on the
three-stage expected credit loss model described below in Note 1 (vi)
Impairment of financial assets. Financial assets measured at
amortised cost are included in Note 10 Cash and cash equivalents,
Note 16 Loans and advances and Note 23 Other assets.
(iii) Financial assets measured at fair value through other
comprehensive income
Debt instruments
Investments in debt instruments are measured at fair value through
other comprehensive income where they have:
•
contractual terms that give rise to cash flows on specified dates,
that represent solely payments of principal and interest on the
principal amount outstanding; and
• are held within a business model whose objective is achieved by
both collecting contractual cash flows and selling financial assets.
These debt instruments are initially recognised at fair value plus
directly attributable transaction costs and subsequently measured at
fair value. Gains and losses arising from changes in fair value are
included in other comprehensive income within a separate component
of equity. Impairment losses or reversals, interest revenue and foreign
exchange gains and losses are recognised in profit and loss. Upon
disposal, the cumulative gain or loss previously recognised in other
comprehensive income is reclassified from equity to the income
statement. Refer Note 13 Debt instruments at fair value through other
comprehensive income.
The measurement of credit impairment is based on the three-stage
expected credit loss model as applied to financial assets at
amortised cost. The expected credit loss model is described below in
Note 1 (vi) Impairment of financial assets.
Equity instruments
Investment in equity instruments that are neither held for trading nor
contingent consideration recognised by the Group in a business
combination to which AASB 3 "Business Combination" applies, are
measured at fair value through other comprehensive income, where an
irrevocable election has been made by management.
Amounts presented in other comprehensive income are not
subsequently transferred to profit or loss. Dividends on such
investments are recognised in profit or loss unless the dividend clearly
represents a recovery of part of the cost of the investment. Refer Note
23 Other assets.
(iv) Items at fair value through profit or loss
Items at fair value through profit or loss comprise:
•
•
items held for trading;
items specifically designated as fair value through profit or loss on
initial recognition; and
66 NATIONAL AUSTRALIA BANK
payments of principal and interest.
Financial instruments held at fair value through profit or loss are
initially recognised at fair value, with transaction costs recognised in
the income statement as incurred. Subsequently, they are measured at
fair value and any gains or losses are recognised in the income
statement as they arise.
Where a financial asset is measured at fair value, a credit valuation
adjustment is included to reflect the credit worthiness of the
counterparty, representing the movement in fair value attributable to
changes in credit risk.
Financial instruments held for trading
A financial instrument is classified as held for trading if it is acquired or
incurred principally for the purpose of selling or repurchasing in the
near term, or forms part of a portfolio of financial instruments that are
managed together and for which there is evidence of short-term profit
taking, or it is a derivative not in a qualifying hedge relationship.
Trading derivatives and trading securities are classified as held for
trading and recognised at fair value. Refer to Note 11 Trading
derivative assets and liabilities and Note 12 Trading securities.
Financial instruments designated as measured at fair value through
profit or loss
Upon initial recognition, financial instruments may be designated as
measured at fair value through profit or loss. A financial asset may only
be designated at fair value through profit or loss if doing so eliminates
or significantly reduces measurement or recognition inconsistencies
(i.e. eliminates an accounting mismatch) that would otherwise arise
from measuring financial assets or liabilities on a different basis. Refer
to Note 14 Other financial assets at fair value.
A financial liability may be designated at fair value through profit or
loss if it eliminates or significantly reduces an accounting mismatch or:
if a host contract contains one or more embedded derivatives; or
•
if financial assets and liabilities are both managed and their
•
performance evaluated on a fair value basis in accordance with a
documented risk management or investment strategy.
Where a financial liability is designated at fair value through profit or
loss, the movement in fair value attributable to changes in the Group’s
own credit quality is calculated by determining the changes in credit
spreads above observable market interest rates and is presented
separately in other comprehensive income. Refer to Note 18 Other
financial liabilities at fair value.
(v) Derivative financial instruments and hedge accounting
Derivative financial instruments are contracts whose value is derived
from one or more underlying price, index or other variable, and
typically comprise of instruments such as swaps, forward rate
agreements, futures and options.
All derivatives are recognised in the balance sheet at fair value and are
classified as trading except where they are designated as a part of an
effective hedge relationship and classified as hedging derivatives. The
carrying value of a derivative is remeasured at fair value throughout
the life of the contract. Derivatives are carried as assets when the fair
value is positive and as liabilities when the fair value is negative.
The method of recognising the resulting fair value gain or loss on a
derivative depends on whether the derivative is designated as a
hedging instrument, and if so, the nature of the item being hedged.
Refer to Note 11 Trading derivative assets and liabilities and Note 15
Hedge accounting, including hedging derivative assets and liabilities.
Notes to the financial statements
1 Principal accounting policies (continued)
(vi) Impairment of financial assets
The Group applies a three-stage approach to measuring expected
credit losses (ECLs) for the following categories of financial assets that
are not measured at fair value through profit or loss:
• debt instruments measured at amortised cost and fair value through
other comprehensive income;
loan commitments; and
financial guarantee contracts.
•
•
No ECL is recognised on equity investments.
Financial assets migrate through the following three stages based on
the change in credit risk since initial recognition:
Stage 1: 12-months ECL
The Group collectively assesses ECLs on exposures where there has
not been a significant increase in credit risk since initial recognition and
that were not credit impaired upon origination. For these exposures,
the Group recognises as a collective provision the portion of the
lifetime ECL associated with the probability of default events occurring
within the next 12 months. The Group does not conduct an individual
assessment of exposures in Stage 1 as there is no evidence of one or
more events occurring that would have a detrimental impact on
estimated future cash flows.
Stage 2: Lifetime ECL – not credit impaired
The Group collectively assesses ECLs on exposures where there has
been a significant increase in credit risk since initial recognition but are
not credit impaired. For these exposures, the Group recognises as a
collective provision a lifetime ECL (i.e. reflecting the remaining lifetime
of the financial asset). Similar to Stage 1, the Group does not conduct
an individual assessment on Stage 2 exposures as the increase in
credit risk is not, of itself, an event that could have a detrimental impact
on future cash flows.
Stage 3: Lifetime ECL – credit impaired
The Group identifies, both collectively and individually, ECLs on those
exposures that are assessed as credit impaired based on whether one
or more events that have a detrimental impact on the estimated future
cash flows of that asset have occurred. For exposures that have
become credit impaired, a lifetime ECL is recognised as a collective or
specific provision, and interest revenue is calculated by applying the
effective interest rate to the amortised cost (net of provision) rather
than the gross carrying amount.
Determining the stage for impairment
At each reporting date, the Group assesses whether there has been a
significant increase in credit risk for exposures since initial recognition
by comparing the risk of default occurring over the remaining expected
life from the reporting date and the date of initial recognition. The
Group considers reasonable and supportable information that is
relevant and available without undue cost or effort for this purpose.
This includes quantitative and qualitative information and also,
forward-looking analysis. Refer to Note 34 Financial risk management.
An exposure will migrate through the ECL stages as asset quality
deteriorates. If, in a subsequent period, asset quality improves and
also reverses any previously assessed significant increase in credit
risk since origination, then the provision for doubtful debts reverts from
lifetime ECL to 12-months ECL. Exposures that have not deteriorated
significantly since origination are considered to have a low credit risk.
The provision for doubtful debts for these financial assets is based on
a 12-months ECL. When an asset is uncollectible, it is written off
against the related provision. Such assets are written off after all the
necessary procedures have been completed and the amount of the
loss has been determined. Subsequent recoveries of amounts
previously written off reduce the amount of the expense in the income
statement.
The Group assesses whether the credit risk on an exposure has
increased significantly on an individual or collective basis. For the
purposes of a collective evaluation of impairment, financial instruments
are grouped on the basis of shared credit risk characteristics, taking
into account instrument type, credit risk ratings, date of initial
recognition, remaining term to maturity, industry, geographical location
of the borrower and other relevant factors.
Measurement of ECLs
ECLs are derived from unbiased and probability-weighted estimates of
expected loss, and are measured as follows:
• Financial assets that are not credit-impaired at the reporting date:
as the present value of all cash shortfalls over the expected life of
the financial asset discounted by the effective interest rate. The
cash shortfall is the difference between the cash flows due to the
Group in accordance with the contract and the cash flows that the
Group expects to receive.
• Financial assets that are credit-impaired at the reporting date:
as the difference between the gross carrying amount and the
present value of estimated future cash flows discounted by the
effective interest rate.
• Undrawn loan commitments: as the present value of the difference
between the contractual cash flows that are due to the Group if the
commitment is drawn down and the cash flows that the Group
expects to receive.
• Financial guarantee contracts: as the expected payments to
reimburse the holder less any amounts that the Group expects to
recover.
For further details on how the Group calculates ECLs including the use
of forward looking information, refer to the Credit quality of financial
assets section in Note 34 Financial risk management. For details on
the effect of modifications of loans on the measurement of ECL refer to
Note 17 Provision for doubtful debts.
ECLs are recognised using a provision for doubtful debts account in
profit and loss. In the case of debt instruments measured at fair value
through other comprehensive income, the measurement of ECLs is
based on the three-stage approach as applied to financial assets at
amortised cost. The Group recognises the provision charge in profit
and loss, with the corresponding amount recognised in other
comprehensive income, with no reduction in the carrying amount of the
asset in the balance sheet.
(vii) Recognition and derecognition of financial instruments
A financial asset or financial liability is recognised in the balance sheet
when the Group becomes a party to the contractual provisions of the
instrument, which is generally on trade date. Loans and receivables
are recognised when cash is advanced (or settled) to the borrowers.
Financial assets at fair value through profit or loss are recognised
initially at fair value. All other financial assets are recognised initially at
fair value plus directly attributable transaction costs.
The Group derecognises a financial asset when the contractual cash
flows from the asset expire or it transfers its rights to receive
contractual cash flows from the financial asset in a transaction in which
substantially all the risks and rewards of ownership are transferred.
Any interest in transferred financial assets that is created or retained
by the Group is recognised as a separate asset or liability.
2017 Annual Financial Report
67
Notes to the financial statements
1 Principal accounting policies (continued)
A financial liability is derecognised from the balance sheet when the
Group has discharged its obligation or the contract is cancelled or
expires.
(viii) Offsetting
Financial assets and liabilities are offset and the net amount is
presented in the balance sheet when the Group has a legal right to
offset the amounts and intends to settle on a net basis or to realise the
asset and settle the liability simultaneously. Refer to Note 34 Financial
risk management - Offsetting of financial assets and liabilities.
(h) Critical accounting assumptions and estimates
The application of the Group’s accounting policies requires the use of
judgements, estimates and assumptions. If different assumptions or
estimates were applied, the resulting values would change, impacting
the net assets and income of the Group.
Assumptions made at each reporting date are based on best estimates
at that date. Although the Group has internal control systems in place
to ensure that estimates are reliably measured, actual amounts may
differ from those estimates. Estimates and underlying assumptions are
reviewed on an on-going basis. Revisions to accounting estimates are
recognised in the period in which the estimates are revised and in any
future periods affected.
The accounting policies which are most sensitive to the use of
judgement, estimates and assumptions are specified below.
(i) Fair value measurement
A significant portion of financial instruments are carried on the balance
sheet at fair value.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants
at the measurement date.
Where the classification of a financial asset or liability results in it being
measured at fair value, wherever possible, the fair value is determined
by reference to the quoted bid or offer price in the most advantageous
active market to which the Group has immediate access. An
adjustment for credit risk is also incorporated into the fair value as
appropriate.
Fair value for a net open position that is a financial liability quoted in an
active market is the current offer price, and for a financial asset the bid
price, multiplied by the number of units of the instrument held or
issued.
Where no active market exists for a particular asset or liability, the
Group uses a valuation technique to arrive at the fair value, including
the use of transaction prices obtained in recent arm’s length
transactions, discounted cash flow analysis, option pricing models and
other valuation techniques, based on market conditions and risks
existing at reporting date. In doing so, fair value is estimated using a
valuation technique that makes maximum use of observable market
inputs and places minimal reliance upon entity-specific inputs.
The best evidence of the fair value of a financial instrument at initial
recognition is the transaction price (i.e. the fair value of the
consideration given or received) unless the fair value of that instrument
is evidenced by comparison with other observable current market
transactions in the same instrument (i.e. without modification or
repackaging) or based on a valuation technique whose variables
include only data from observable markets. When such evidence
exists, the Group recognises the difference between the transaction
price and the fair value in profit or loss on initial recognition (i.e. on day
one).
68 NATIONAL AUSTRALIA BANK
(ii) Impairment charges on loans and advances
Judgement is required by management in the estimation of the amount
and timing of future cash flows when determining an impairment loss
for loans and advances. In estimating these cash flows, the Group
makes judgements about the borrower’s financial situation and the net
realisable value of collateral. These estimates are based on
assumptions about a number of factors including forward looking
information, and actual results may differ, resulting in future changes to
the impairment allowance.
A collective assessment of impairment takes into account data from
the loan portfolio (such as credit quality, levels of arrears, credit
utilisation, loan to collateral ratios etc.), and concentrations of risk and
economic data (including levels of unemployment, real estate price
indices, country risk and the performance of different individual
groups). The impairment loss on loans and advances is disclosed in
more detail in Note 17 Provision for doubtful debts.
(iii) Goodwill
The determination of the fair value of assets and liabilities of acquired
businesses requires the exercise of management judgement. Goodwill
is allocated to disposed operations on the basis of the relative values
of the disposed and retained operations and this also requires
management judgement. Different fair values would result in changes
to the goodwill balance and to the post-acquisition performance of the
acquisition, or in the case of a disposal, the loss on sale.
Goodwill is assessed for impairment annually, or more frequently if
there is indication that goodwill may be impaired. Determination of
appropriate cash flows and discount rates for the calculation of value in
use is subjective. The assumptions applied to determine if any
impairment exists are outlined in Note 22 Goodwill and other intangible
assets.
(iv) Provisions other than loan impairment
Provisions are held in respect of a range of future obligations such as
employee entitlements, restructuring costs and litigation provisions.
Some of the provisions involve significant judgement about the likely
outcome of various events and estimated future cash flows. The
measurement of these provisions involves the exercise of
management judgements about the ultimate outcomes of the
transactions. Payments that are expected to be incurred after more
than one year are discounted at a rate which reflects both current
interest rates and the risks specific to that provision.
Entities within the Group are defendants from time to time in legal
proceedings arising from the conduct of their business. There are
contingent liabilities in respect of claims, potential claims and court
proceedings against entities in the Group. Where appropriate,
provisions have been made. The aggregate of potential liabilities in
respect thereof cannot be accurately assessed. Refer to Note 32
Contingent liabilities and credit commitments for further information.
(v) Provisions for obligations to CYBG
As part of the arrangements relating to the CYBG demerger, NAB and
CYBG entered into a Conduct Indemnity Deed under which NAB
agreed, subject to certain limitations, to provide an indemnity in
respect of certain historic conduct liabilities (Capped Indemnity) up to a
cap of £1.115 billion (Capped Indemnity Amount). The Capped
Indemnity provides CYBG with economic protection against certain
costs and liabilities (including financial penalties imposed by a
regulator).
Notes to the financial statements
1 Principal accounting policies (continued)
The provisions recognised by the Group are based on a number of
assumptions derived from a combination of past experience, estimated
future experience, industry comparison and the exercise of judgement.
There remain risks and uncertainties in relation to these assumptions
and consequently in relation to ultimate costs of redress and related
costs. Refer to Note 32 Contingent liabilities and credit commitments
for further information.
(i) Discontinued operations
A discontinued operation is a component of the Group that has been
disposed of or is classified as held for sale and represents a separate
major line of business or geographical area of operations, and is part
of a single coordinated plan to dispose of such a line of business or
area of operations. The results of discontinued operations are
presented separately in the income statements and statements of
comprehensive income. Refer to Note 41 Discontinued operations for
further information.
2017 Annual Financial Report
69
Notes to the financial statements
Financial performance
2 Segment information
The Group’s reportable segments are business units engaged in providing either different products or services, or similar products and services in
different geographical areas. The businesses are managed separately as each requires a strategy focussed on the specific services provided for the
economic, competitive and regulatory environment in which it operates.
Following the implementation of the organisational restructure effective from 1 August 2016, the Group’s business now consists of the following
reportable segments: Consumer Banking and Wealth, Business and Private Banking, Corporate and Institutional Banking and NZ Banking. In addition,
information on Corporate Functions and Other is included in this note to reconcile to Group information. The Group evaluates reportable segments’
performance on the basis of cash earnings (refer to Information about Cash Earnings on page 72).
Major customers
Revenues from no one single customer amount to greater than 10% of the Group’s revenues.
Reportable segment information
For the year ended
30 September 2017 (3)
Net interest income
Other income
Net operating income
Operating expenses
Underlying profit
Charge to provide for doubtful debts
Cash earnings / (deficit) before tax and
distributions
Income tax expense
Cash earnings / (deficit) before distributions
Distributions
Cash earnings / (deficit)
Consumer
Banking and
Wealth
$m
3,884
Business
and Private
Banking
$m
5,257
Corporate and
Institutional
Banking
$m
1,972
NZ
Banking
$m
1,586
Corporate
Functions
and Other (1) (2)
$m
467
Eliminations
$m
-
Group Cash
Earnings
$m
13,166
1,597
5,481
(2,910)
2,571
(267)
2,304
(671)
1,633
-
1,633
1,062
6,319
(2,084)
4,235
(180)
4,055
(1,214)
2,841
-
2,841
1,368
3,340
(1,236)
2,104
(37)
2,067
(532)
1,535
-
1,535
530
2,116
(827)
1,289
(67)
1,222
(340)
882
-
882
198
665
(604)
61
(259)
(198)
47
(151)
(98)
(249)
(26)
(26)
26
-
-
-
-
-
-
-
4,729
17,895
(7,635)
10,260
(810)
9,450
(2,710)
6,740
(98)
6,642
(1)
(2)
(3)
Corporate Functions & Other includes Treasury, NAB UK CRE, Technology and Operations and Other Support units.
Balance reflects Nautilus Insurance premiums booked and eliminated all within Corporate Functions and Other.
Information is presented on a continuing operations basis.
For the year ended
30 September 2016 (3)
Net interest income
Other income
Net operating income
Operating expenses
Underlying profit
Charge to provide for doubtful debts
Cash earnings before tax and distributions
Income tax expense
Cash earnings before distributions
Distributions
Cash earnings
Consumer
Banking and
Wealth
$m
3,709
Business
and Private
Banking
$m
4,955
Corporate and
Institutional
Banking
$m
1,919
NZ
Banking
$m
1,496
1,659
5,368
(2,870)
2,498
(282)
2,216
(651)
1,565
-
1,565
1,048
6,003
(2,045)
3,958
(140)
3,818
(1,145)
2,673
-
2,673
1,427
3,346
(1,298)
2,048
(217)
1,831
(464)
1,367
-
1,367
533
2,029
(806)
1,223
(116)
1,107
(303)
804
-
804
Corporate
Functions
and Other(1) Eliminations(2)
$m
851
(113)
738
(470)
268
(45)
223
(25)
198
(124)
74
$m
-
(51)
(51)
51
-
-
-
-
-
-
-
Group Cash
Earnings
$m
12,930
4,503
17,433
(7,438)
9,995
(800)
9,195
(2,588)
6,607
(124)
6,483
(1)
(2)
(3)
Corporate Functions & Other includes Treasury, NAB UK CRE, Technology and Operations and Other Support units.
Balance includes Nautilus Insurance premiums which are booked to the Customer Segments and eliminated at the Group Level.
Information is presented on a continuing operations basis.
Reportable segment assets
30 September 2017
30 September 2016
Consumer
Banking and
Wealth(1)
$m
217,567
206,016
Business
and Private
Banking
$m
192,848
Corporate and
Institutional
Banking
$m
259,297
NZ
Banking
$m
76,055
Corporate
Functions
and Other (2) (3)
$m
97,981
Eliminations
$m
(55,423)
Group Total
Assets
$m
788,325
187,200
257,303
73,916
103,265
(50,990)
776,710
(1)
(2)
(3)
Total assets of the Consumer Banking and Wealth segment include the investment in MLC Limited of $549 million (2016: $550 million), an associate accounted for using the equity method. Refer to Note 31
Interest in subsidiaries and other entities for further information on the investment in MLC Limited.
Corporate Functions & Other includes Treasury, NAB UK CRE, Technology and Operations and Other Support units.
Total assets for Corporate Functions and Other has been restated to reflect a change in presentation of interest accrual on certain derivatives.
70 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Financial performance (continued)
Reconciliations between reportable segment information and statutory results
The tables below reconcile the information in the segment tables presented above, which have been prepared on a cash earnings basis, to the relevant
statutory information presented in the financial report. In addition to the sum of the reportable segments, the cash earnings basis includes the segments
that do not meet the threshold to be reportable segments and intra group eliminations. The Wealth net adjustment represents a reallocation of the
income statement of the NAB Wealth business prepared on a cash earnings basis into the appropriate statutory income statement lines.
Net interest income
Net interest income on a cash earnings basis
Fair value and hedge ineffectiveness
Wealth net adjustment
Net interest income on a statutory basis
Other income
Other income on a cash earnings basis (2)
Wealth net adjustment
Treasury shares
Fair value and hedge ineffectiveness
Life insurance 20% share of profit (3)
Amortisation of acquired intangible assets
Other income on a statutory basis
Operating expenses
Operating expenses on a cash earnings basis (2)
Wealth net adjustment
Amortisation of acquired intangible assets
Operating expenses on a statutory basis
Charge to provide for doubtful debts
Charge to provide for doubtful debts on a cash earnings basis
Fair value adjustment on loans and advances at fair value
Charge to provide for doubtful debts on a statutory basis
Income tax expense
Income tax expense on a cash earnings basis
Income tax benefit / (expense) on non-cash earnings items:
Wealth net adjustment
Treasury shares
Fair value and hedge ineffectiveness
Amortisation of acquired intangible assets
Income tax expense on a statutory basis
Cash earnings
Group cash earnings (2)
Non-cash earnings items (after tax):
Distributions
Treasury shares
Fair value and hedge ineffectiveness
Life insurance 20% share of profit (3)
Amortisation of acquired intangible assets
Net loss attributable to discontinued operations
Net profit attributable to owners of NAB
(1)
(2)
(3)
Information is presented on a continuing operations basis.
Includes eliminations and distributions.
Included in statutory profit from 1 October 2016 onward.
Group
2017 (1)
$m
2016 (1)
$m
13,166
12,930
(21)
37
-
-
13,182
12,930
4,729
817
-
(692)
-
(12)
4,842
7,635
849
55
8,539
810
14
824
4,503
801
68
(141)
(39)
-
5,192
7,438
801
92
8,331
800
13
813
2,710
2,588
2
-
(227)
(5)
2,480
(5)
7
(28)
(9)
2,553
6,642
6,483
98
-
(500)
-
(62)
(893)
5,285
124
61
(126)
(39)
(83)
(6,068)
352
2017 Annual Financial Report
71
Notes to the financial statements
Financial performance (continued)
Geographical information
The Group has operations in Australia (the Company’s country of domicile), Europe, New Zealand, the United States and Asia. The allocation of income
and non-current assets is based on the geographical location in which transactions are booked.
Income (1)
2017
$m
14,966
2,176
939
18,081
(57)
18,024
2016
$m
15,218
2,105
845
18,168
(46)
18,122
Group
Non-current assets (2)
2016
$m
10,642
2017
$m
10,283
677
45
11,005
-
11,005
625
59
11,326
-
11,326
Australia
New Zealand
Other International
Total before inter-geographic eliminations
Elimination of inter-geographic items
Total
(1)
(2)
Information is presented on a continuing operations basis.
Non-current assets refer to assets that include amounts expected to be recovered more than 12 months after the reporting date. They do not include financial instruments, deferred tax assets or post-
employment benefits assets.
exchange rates and cross currency spreads, and mark-to-market
movements of assets and liabilities designated at fair value reflecting
current market conditions.
Amortisation of Acquired Intangible Assets
The amortisation of acquired intangibles represents the amortisation of
intangible assets arising from the acquisition of controlled entities and
associates such as management agreements and contracts in force. In
the September 2017 financial year, there was a decrease in statutory
profit of $67 million ($62 million after tax) due to the amortisation of
acquired intangible assets.
Information about Cash Earnings
Cash earnings is a non-IFRS key financial performance measure used
by NAB, the investment community and NAB’s Australian peers with
similar business portfolios. NAB also uses cash earnings for its internal
management reporting as it better reflects what NAB considers to be
the underlying performance of the Group. Cash earnings is calculated
by excluding discontinued operations and other items which are
included within the statutory net profit attributable to owners of NAB.
Cash earnings does not purport to represent the cash flows, funding or
liquidity position of the Group, nor any amount represented on a cash
flow statement. It is not a statutory financial measure, is not presented
in accordance with Australian Accounting Standards and is not audited
or reviewed in accordance with Australian Auditing Standards.
Cash earnings is defined as net profit attributable to owners of NAB
from continuing operations, adjusted for the items NAB considers
appropriate to better reflect the underlying performance of the Group.
Cash earnings for the year ended 30 September 2017 has been
adjusted for the following:
• Distributions.
• Fair value and hedge ineffectiveness.
• Amortisation of acquired intangible assets.
Non-cash Earnings Items
Distributions
Distributions relating to hybrid equity instruments are treated as an
expense for cash earnings purposes and as a reduction in equity
(dividend) for statutory reporting purposes. The distributions on other
equity instruments are set out in Note 29 Dividends and distributions.
The effect of this in the September 2017 financial year is to reduce
cash earnings by $98 million.
Fair Value and Hedge Ineffectiveness
Fair value and hedge ineffectiveness causes volatility in statutory
profit, which is excluded from cash earnings as it is income neutral
over the full term of transactions. This arises from fair value
movements relating to trading derivatives for risk management
purposes; fair value movements relating to assets, liabilities and
derivatives designated in hedge relationships; and fair value
movements relating to assets and liabilities designated at fair value.
In the September 2017 financial year there was a reduction in statutory
profit of $727 million ($500 million after tax) from fair value and hedge
ineffectiveness. This was largely due to the mark-to-market losses
from derivatives used to hedge the Group’s long-term funding
issuances, driven by unfavourable movements in interest rates, foreign
72 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Financial performance (continued)
3 Net interest income
Interest income
Due from other banks
Marketable debt securities
Loans and advances (2)
Due from customers on acceptances
Due from controlled entities
Other interest income
Total interest income
Interest expense
Due to other banks
Deposits and other borrowings (3)
Bonds, notes and subordinated debt (4) (5)
Due to controlled entities
Bank levy
Other debt issues (5)
Other interest expense
Total interest expense
Net interest income
Group
Company
2017(1)
$m
2016(1)
$m
590
2,226
23,330
419
-
838
585
2,097
23,486
770
-
691
27,403
27,629
559
8,229
4,464
-
94
233
642
14,221
13,182
646
8,733
4,516
-
-
265
539
14,699
12,930
2017
$m
544
2,096
18,864
419
3,435
743
26,101
543
7,031
3,734
4,214
94
233
618
16,467
9,634
2016
$m
525
1,952
19,138
770
3,700
639
26,724
621
7,499
3,813
4,434
-
260
584
17,211
9,513
(1)
(2)
(3)
(4)
(5)
Information is presented on a continuing operations basis.
Includes $1,193 million (2016: $1,383 million) of interest income on loans and advances accounted for at fair value for the Group, and $934 million (2016: $1,028 million) for the Company.
Includes $164 million (2016: $224 million) of interest expense on deposits and other borrowings accounted for at fair value for the Group, and nil (2016: nil) for the Company.
Includes $734 million (2016: $530 million) of interest expense on bonds, notes and subordinated debt accounted for at fair value for the Group, and $128 million (2016: $155 million) for the Company.
For the year ended 30 September 2016, certain amounts previously classified as bonds, notes and subordinated debt were reclassified to other debt issues.
Interest income and expense
Interest income and expense are recognised in the income statement using the effective interest method. The effective interest method is a method of
calculating amortised cost using the effective interest rate of a financial asset or financial liability. The effective interest rate is the rate that discounts the
estimated stream of future cash payments or receipts over the expected life of the financial instrument or, when appropriate a shorter period, to the net
carrying amount of the financial asset or financial liability.
Fees and costs which form an integral part of the effective interest rate of a financial instrument are recognised using the effective interest method and
recorded in interest income or expense depending on whether the underlying instrument is a financial asset or liability (for example, loan origination
fees).
Interest expense includes the cost of the Bank levy. The levy is imposed under the Major Bank Levy Act 2017 on authorised deposit-taking institutions
with total liabilities of more than $100 billion, and became effective from 1 July 2017.
Interest income and expense on trading securities are recognised within net interest income. In certain circumstances, interest income and expense
attributable to trading derivatives which are considered economic hedges are recognised within net interest income and not part of the fair value
movement of the trading derivative.
Interest income and expense on both hedging instruments and financial assets and liabilities designated at fair value through profit or loss are
recognised in net interest income.
2017 Annual Financial Report
73
Notes to the financial statements
Financial performance (continued)
4 Other income
Net investment and insurance income
Change in policy liabilities
Movement in external unitholders' liability
Investment revenue (2)
Fee income (3)
Total net investment and insurance income
Gains less losses on financial instruments at fair value
Trading securities
Trading derivatives
Assets, liabilities and derivatives designated in hedge relationships (4)
Assets and liabilities designated at fair value
Other
Total gains less losses on financial instruments at fair value
Other operating income
Dividend revenue
Controlled entities
Other entities
Gains / (losses) from sale of investments, loans, property, plant and equipment and other assets
Banking fees
Money transfer fees
Fees and commissions
Investment management fees
Other income (2)
Total other operating income
Total other income
Group
Company
2017(1)
$m
2016(1)
$m
2017
$m
2016
$m
-
-
-
-
-
(821)
2,135
(680)
(225)
143
552
-
27
36
943
584
2,162
280
258
4,290
(2,861)
(1,015)
4,037
433
594
1,275
(275)
(82)
(187)
96
827
-
21
52
871
596
1,696
255
280
3,771
-
-
-
-
-
(818)
2,650
(646)
(164)
150
1,172
-
-
-
-
-
1,263
80
358
(147)
72
1,626
2,005
2,199
30
(6)
784
444
372
-
222
3,851
65
52
727
466
446
-
217
4,172
5,798
4,842
5,192
5,023
(1)
(2)
(3)
(4)
Information is presented on a continuing operations basis.
For the Group, this includes the impact of movements in Life investment contracts to 1 July 2016, being the date on which the Successor Fund Merger occurred and the related investment assets and
investment contract liabilities were deconsolidated.
Subsequent to the Successor Fund Merger, fee income on the related investment assets and investment contract liabilities is recognised within fees and commissions in Other operating income.
Represents hedge ineffectiveness of designated hedging relationships, plus economic hedges where hedge accounting has not been applied.
Gains less losses on financial instruments at fair value
Gains less losses on financial instruments at fair value comprises of fair value movements on:
• Trading derivatives
• Trading securities
• Assets, liabilities and derivatives designated in hedging relationships
• Other financial assets and liabilities designated at fair value through profit or loss
In general, gains less losses on trading derivatives recognise the full change in fair value of the derivatives inclusive of interest income and expense,
with the exception of certain trading derivatives which are considered economic hedges (see Note 3 Net interest income).
Gains less losses on trading securities recognise the change in the fair value of these instruments excluding interest income or interest expense which
is recognised separately in net interest income.
Gains less losses on assets, liabilities and derivatives designated in hedge relationships recognises fair value movements (excluding interest) on
both the hedged item and hedging derivative in a fair value hedge relationship, and hedge ineffectiveness from both fair value and cash flow hedge
relationships.
Gains less losses on other financial assets and liabilities designated at fair value through profit or loss recognises fair value movements (excluding
interest) on those items designated as fair value through profit or loss. Changes in the fair value of financial liabilities designated at fair value through
profit or loss attributable to the Group’s own credit quality are presented separately in other comprehensive income.
Dividend income
Dividend income is recorded in the income statement on an accruals basis when the Group’s right to receive the dividend is established.
Fees and commissions
Unless included in the effective interest calculation, fees and commissions are recognised on an accruals basis when the service has been provided or
on completion of the underlying transaction. Fees charged for providing ongoing services (for example, maintaining and administering existing facilities)
are recognised as income over the period the service is provided.
74 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Financial performance (continued)
Any commitment fees related to undrawn lending facilities are recognised as income over the commitment period.
When the Group acts in the capacity of an agent, revenue is recognised as the net amount of fees and commissions made by the Group.
Asset management fees related to investment funds are recognised over the period the service is provided. The same principle is applied to the
recognition of income from wealth management, financial planning and custody services that are continuously provided over an extended period of time.
5 Operating expenses
Personnel expenses
Salaries and related on-costs (2)
Superannuation costs - defined contribution plans (2)
Performance-based compensation (3)
Cash (2)
Equity-based compensation
Total performance-based compensation
Other expenses (2)
Total personnel expenses
Occupancy-related expenses
Operating lease rental expense
Other expenses
Total occupancy-related expenses
General expenses
Fees and commission expense (2)
Depreciation and amortisation of property, plant and equipment
Amortisation of intangible assets
Advertising and marketing
Charge to provide for operational risk event losses (4)
Communications, postage and stationery
Computer equipment and software
Data communication and processing charges
Professional fees
Loss on disposal of property, plant and equipment and other assets
Impairment losses recognised (5)
Loss on disposal of controlled entities (6)
Other expenses
Total general expenses
Total operating expenses
Charge to provide for doubtful debts (7)
Loans and advances
Total charge to provide for doubtful debts
Group
Company
2017 (1)
$m
2016 (1)
$m
3,252
258
395
187
582
326
3,344
267
445
197
642
278
2017
$m
2,488
230
274
160
434
247
2016
$m
2,515
230
283
177
460
242
4,418
4,531
3,399
3,447
442
85
527
611
305
429
187
182
204
651
80
503
9
20
-
413
3,594
8,539
824
824
404
89
493
501
274
347
196
48
272
621
89
500
8
6
-
445
3,307
8,331
813
813
464
68
532
31
151
325
163
973
169
614
45
373
1
129
-
302
3,276
7,207
731
731
446
70
516
46
126
243
151
793
198
586
51
367
1
1,137
4,433
228
8,360
12,323
702
702
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Information is presented on a continuing operations basis.
Comparative information has been restated to accord with the changes in presentations made in 2017, reflecting a reallocation of expenses between 'salaries and related on-costs', 'superannuation costs -
defined contribution plans', 'performance based compensation - cash', ‘other personnel expenses’ and 'fees and commission expense'.
Performance-based compensation includes deferred compensation that is expensed over the vesting period. Performance-based compensation expense in each year also includes prior period over / under
accruals and does not include the impact of decisions made by the Board Remuneration Committee subsequent to balance date. The impact of any over / under accrual will be reflected in the following year.
The Company charge to provide for operational risk event losses includes provisions in relation to the Conduct Indemnity Deed which are included in discontinued operations at a Group level. Refer to Note
41 Discontinued operations for further information.
The Company charge in 2016 includes the impairment of National Wealth Management Holdings which is eliminated at a Group level.
The Company charge in 2016 includes the CYBG Group loss on sale and other related costs.
Refer to Note 17 Provision for doubtful debts for further details of the Group’s policy for recognition of charges to provide for doubtful debts.
Operating expenses are recognised as the underlying service is rendered or over the period in which an asset is consumed or once a liability is incurred.
Annual leave, long service leave and other employee benefits
Wages and salaries, annual leave and other employee entitlements expected to be paid or settled within 12 months of employees rendering service are
measured at their nominal amounts using remuneration rates that the Group expects to pay when the liabilities are settled. Employee entitlements to
long service leave are accrued using an actuarial calculation, including assumptions regarding staff departures, leave utilisation and future salary
increases.
A liability is recognised for the amount expected to be paid under short-term cash bonuses when the Group has a present legal or constructive
obligation to pay this amount as a result of past service provided by the employee and the obligation can be reliably estimated. All other employee
2017 Annual Financial Report
75
Notes to the financial statements
Financial performance (continued)
entitlements that are not expected to be paid or settled within 12 months of the reporting date are measured at the present value of net future cash
flows. Termination benefits are recognised as an expense when the Group is demonstrably committed, without realistic possibility of withdrawal, to a
formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to
encourage voluntary redundancy. Termination benefits for voluntary redundancy are recognised as an expense if the Group has made an offer of
voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably.
The defined contribution plans receive fixed contributions and the obligation for contributions to these plans are recognised as an expense in the income
statement as incurred. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available.
Refer to Note 24 Provisions for details of employee benefit related provisions.
Occupancy related expenses
Operating lease rentals are charged to the income statement on a straight-line basis over the term of the lease. When an operating lease is terminated
before the end of the lease period, any payment made to the lessor by way of penalty is recognised as an expense in the income statement in the
period of termination. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease.
Refer to Note 33 Operating leases for details of the Group’s future minimum operating leases commitments.
Operational risk event losses
Operational risk event losses relate to non-lending losses which include losses arising from specific legal actions not directly related to amounts of
principal outstanding for loans and advances, and losses arising from forgeries, frauds and the correction of operational issues. Refer to Note 24
Provisions for details of the Group’s operational risk event losses provisions.
Depreciation and amortisation
With the exception of freehold land, all items of property, plant and equipment are depreciated using the straight-line method at rates appropriate to their
estimated useful life to the Group. For major classes of property, plant and equipment, the annual rates of depreciation are:
• Buildings - 3.3%
• Furniture, fixtures and fittings and other equipment - from 10% to 20%
• Motor vehicles - 20%
• Personal computers - 33.3%
• Other data processing equipment - from 20% to 33.3%
• Leasehold improvements are depreciated on a straight-line basis over the shorter of their useful lives and the remaining expected term of the lease.
Capitalised software costs and other intangible assets are amortised on a systematic basis, using the straight-line method over their expected useful
lives. Refer to Note 22 Goodwill and other intangible assets for details around the useful lives of specific intangible asset classes.
76 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Financial performance (continued)
6 Earnings per share
Earnings ($m)
Net profit attributable to owners of NAB
Distributions on other equity instruments
Potential dilutive adjustments (after tax)
Interest expense on convertible notes
Interest expense on convertible preference shares
Adjusted earnings
Net (loss) attributable to owners of NAB from discontinued operations (1)
Adjusted earnings from continuing operations (2)
Weighted average ordinary shares (No. ’000)
Weighted average ordinary shares (net of treasury shares)
Potential dilutive weighted average ordinary shares
Performance options and performance rights
Partly paid ordinary shares
Employee share plans
Convertible notes
Convertible preference shares
Total weighted average ordinary shares
Earnings per share (cents) attributable to owners of NAB
Earnings per share from continuing operations (cents)
Earnings per share from discontinued operations (cents)
(1)
(2)
Refer to Note 41 Discontinued operations for further details.
Information is presented on a continuing operations basis.
Group
2017
2016
Basic
Diluted
Basic
Diluted
5,285
(98)
-
-
5,187
(893)
6,080
5,285
(98)
126
119
5,432
(893)
6,325
352
(124)
-
-
228
(6,068)
6,296
352
(124)
75
130
433
(6,068)
6,501
2,664,511
2,664,511
2,596,957
2,596,957
-
-
-
-
-
4,687
29
5,375
92,866
105,605
-
-
-
-
-
2,664,511
2,873,073
2,596,957
194.7
228.2
(33.5)
189.1
220.1
(31.1)
8.8
242.4
(233.7)
4,735
32
8,587
63,689
119,686
2,793,686
15.5
232.7
(217.2)
There has been no material conversion to, calls of, or subscriptions for ordinary shares, or issue of potential ordinary shares since 30 September 2017,
and before the completion of this financial report.
2017 Annual Financial Report
77
Notes to the financial statements
Taxation
7 Income tax expense
Income tax expense (or benefit) is the tax payable (or receivable) on the current year's taxable income based on the applicable tax rate in each
jurisdiction adjusted by changes in deferred tax assets and liabilities. Income tax expense is recognised in the income statement except to the extent
that it relates to items recognised directly in other comprehensive income, in which case it is recognised in the statement of comprehensive income. The
tax associated with these transactions will be recognised in the income statement at the same time as the underlying transaction.
The income tax benefit related to research and development expenditure is recognised as a reduction in the related asset or operating expense,
depending on the nature of the expenditure.
Income tax expense
Current tax
Deferred tax
Total income tax expense
(1)
Information is presented on a continuing operations basis.
Group
Company
2017 (1)
$m
2016 (1)
$m
2017
$m
2,573
(93)
2,480
2,766
(213)
2,553
1,818
(74)
1,744
2016
$m
1,856
(89)
1,767
Reconciliation of income tax expense shown in the income statement with prima facie tax payable on the pre-tax accounting
profit
Profit before income tax expense
Prima facie income tax at 30%
Add / (deduct): Tax effect of amounts not deductible / (assessable):
Assessable foreign income
Foreign tax rate differences
Losses not tax effected
Foreign branch income not assessable
(Over) / under provision in prior years
Offshore banking unit income
Restatement of deferred tax balances for tax rate changes
Treasury shares adjustment
Non-deductible hybrid distributions
Dividend income adjustments
Other (2)
Total income tax expense
Group
Company
2017 (1)
$m
8,661
2016 (1)
$m
8,978
2,598
2,693
2017
$m
6,719
2,016
2016
$m
2,286
686
7
(43)
11
(78)
(17)
(62)
1
-
70
-
(7)
4
(36)
42
(65)
(26)
(56)
4
(14)
58
-
(51)
2,480
2,553
4
(16)
11
(78)
(13)
(53)
1
-
70
4
(20)
42
(65)
(18)
(46)
4
-
58
(352)
154
1,744
(433)
1,555
1,767
(1)
(2)
Information is presented on a continuing operations basis.
The Company reconciliation items disclosed as "Other" includes primarily the CYBG loss on sale for 30 September 2016, plus other permanent adjustments which are non-deductible / non-assessable for tax
purposes.
Tax consolidation
The Group and its wholly owned Australian resident entities formed a tax-consolidated group with effect from 1 October 2002 and are taxed as a single
entity from that date. The head entity within the tax-consolidated group is National Australia Bank Limited.
Current tax expense (or benefit) and deferred tax assets and liabilities arising from temporary differences of the members of the tax-consolidated group
are recognised in the separate financial statements of the members of the tax-consolidated group using the Group allocation approach.
Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses of the subsidiaries are assumed by the head entity in the
tax-consolidated group and are recognised as amounts payable to (or receivable from) other entities in the tax-consolidated group under the tax funding
arrangement. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised by the
Company as an equity contribution to or distribution from its subsidiaries.
The members of the tax-consolidated group have entered into a tax funding agreement that sets out the funding obligations of members of the tax-
consolidated group in respect of tax amounts. Contributions to fund the current tax liabilities are payable in accordance with the tax funding agreement.
Goods and services tax
Revenues, expenses and assets are recognised net of the amount of goods and services tax or other value-added tax, except where the tax incurred is
not recoverable from the relevant taxation authority. In these circumstances, the tax is recognised as part of the expense or the cost of acquisition of the
asset.
Receivables and payables are stated at an amount with tax included. The net amount of tax recoverable from, or payable to, the relevant taxation
authority is included in other assets or other liabilities. Cash flows are included in the cash flow statement on a gross basis. The tax component of cash
flows arising from investing and financing activities which is recoverable from, or payable to, the relevant taxation authority is classified as operating
cash flows.
78 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Taxation (continued)
8 Current tax liabilities
Current tax liabilities
Total income tax liabilities
Group
Company
2017
$m
230
230
2016
$m
297
297
2017
$m
71
71
2016
$m
248
248
Current tax liability is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting
date, and any adjustment to tax payable in respect of previous years.
9 Deferred tax assets and liabilities
Deferred tax assets
Specific provision for doubtful debts
Collective provision for doubtful debts
Employee entitlements
Tax losses
Unrealised revaluations on Funding vehicles
Other
Total deferred tax assets
Set-off of deferred tax liabilities pursuant to set-off provisions
Net deferred tax assets
Deferred tax liabilities
Intangible assets
Depreciation
Defined benefit superannuation plan assets
Other
Total deferred tax liabilities
Deferred tax liabilities set-off against deferred tax assets pursuant to set-off provisions
Net deferred tax liability
Group
Company
2017
$m
2016
$m
2017
$m
2016
$m
223
742
250
76
531
470
2,292
(304)
1,988
8
148
10
138
304
(304)
-
248
713
263
76
528
426
2,254
(329)
1,925
8
196
10
115
329
(329)
-
166
625
225
68
-
374
1,458
(216)
1,242
-
80
6
130
216
(216)
-
173
606
238
74
-
324
1,415
(243)
1,172
-
148
6
89
243
(243)
-
Deferred tax assets and liabilities are recognised for temporary differences arising between the tax bases of assets and liabilities and their carrying
amounts. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the reporting date and are
expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
Deferred tax assets are only recognised for temporary differences, unused tax losses and unused tax credits if it is probable that future taxable amounts
will arise to utilise those temporary differences and losses. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it
is no longer probable that the related tax benefit will be realised.
Deferred tax assets and liabilities are offset where there is a legally enforceable right to offset current tax assets and liabilities and they relate to income
taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on
a net basis or their tax assets and liabilities are realised simultaneously.
Deferred tax assets not brought to account
Deferred tax assets have not been brought to account for the following items as realisation of the benefits is not regarded as probable:
Capital gains tax losses
Income tax losses
Group
Company
2017
$m
1,131
478
2016
$m
1,143
444
2017
$m
1,131
478
2016
$m
1,143
444
2017 Annual Financial Report
79
Notes to the financial statements
Financial assets and liabilities
10 Cash and cash equivalents
Cash and cash equivalents comprise the net amount of short-term, highly liquid investments that are readily convertible to known amounts of cash and
are subject to an insignificant risk of change in value. They are held for the purposes of meeting short-term cash commitments (rather than for
investment or other purposes). For the purposes of the cash flow statement, cash and cash equivalents includes cash and liquid assets and amounts
due from other banks (including reverse repurchase agreements and short-term government securities) net of amounts due to other banks, that are
readily convertible to known amounts of cash within three months.
Refer to Note 30 Notes to the cash flow statements for a detailed reconciliation of cash and cash equivalents.
Reverse repurchase and securities borrowing agreements
Reverse repurchase agreements (i.e. securities purchased under agreements to resell) are accounted for as collateralised loans. The difference
between the sale and repurchase price is treated as interest and accrued over the life of the agreements using the effective interest method. Such
amounts are normally classified as due from other banks or cash and liquid assets. Securities borrowed are not recognised in the financial statements
unless they are sold to third parties, in which case the purchase and sale are recorded with the gain or loss included in trading income. The obligation to
return securities borrowed is recorded at fair value.
As part of the reverse repurchase and securities borrowing agreements included within ‘Cash and liquid assets’ and ‘Due from other banks’, the Group
has received securities that it is allowed to sell or re-pledge. Securities accepted under agreements to resell generally comprise of high quality
government, financial institution or corporate debt securities. Accordingly, the fair value of these securities accepted is based primarily on Level 1 quoted
market prices as at reporting date (Level 1 of the fair value hierarchy as defined in Note 35 Fair value of financial instruments) or Level 2 market
observable inputs in the case of various financial institution or corporate securities. The fair value of the securities accepted under these terms as at
30 September 2017 amounted to $48,785 million (2016: $37,534 million) for the Group and $47,926 million (2016: $36,771 million) for the Company, of
which $32,489 million (2016: $25,426 million) for the Group and $32,305 million (2016: $25,343 million) for the Company have been sold or re-pledged
to third parties in connection with financing activities or to comply with commitments under short-sale transactions.
Where the securities pledged have been sold, the Group is obliged to return equivalent securities. The obligation to return securities for short-sale
transactions is included in ‘Other financial liabilities at fair value’ (Note 18 Other financial liabilities at fair value). These transactions are conducted under
terms that are usual and customary to standard lending and securities borrowing activities.
Repurchase agreements
Where the Group transacts in repurchase agreements (i.e. securities sold subject to repurchase agreements), the securities are retained in their
respective balance sheet categories. The counterparty liability is included in amounts due to other banks and deposits and other borrowings, as
appropriate, based on the counterparty to the transaction. Securities lent to counterparties are also retained in their respective balance sheet categories.
Due from and due to other banks
Due from other banks includes loans, deposits with central banks and other regulatory authorities and settlement account balances due from other
banks. Amounts due from other banks are initially recognised at fair value plus directly attributable transaction costs and subsequently measured at
amortised cost.
Due to other banks includes deposits, repurchase agreements and settlement account balances due to other banks. Amounts due to other banks are
initially recognised at fair value less directly attributable transaction costs and subsequently measured at amortised cost.
Cash and liquid assets
Coins, notes and cash at bank
Securities purchased under agreements to resell
Other (including bills receivable and remittances in transit)
Total cash and liquid assets
Due from other banks
Central banks and other regulatory authorities (1)
Other banks (1)
Total due from other banks
Group
Company
2017
$m
1,162
40,766
1,898
43,826
2016
$m
1,024
28,219
1,387
30,630
2017
$m
1,035
40,627
490
42,152
2016
$m
895
27,762
60
28,717
Group
Company
2017
$m
22,219
14,847
37,066
2016
$m
26,320
18,916
45,236
2017
$m
20,916
14,114
35,030
2016
$m
24,955
18,404
43,359
(1)
Securities purchased under agreements to resell as at 30 September 2016 have been reclassified from Central banks and other regulatory authorities to Other banks.
80 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Financial assets and liabilities (continued)
Due to other banks
Central banks and other regulatory authorities (1)
Other banks (1)
Total due to other banks
Group
Company
2017
$m
15,103
21,580
36,683
2016
$m
17,812
26,091
43,903
2017
$m
15,103
20,098
35,201
2016
$m
17,812
24,837
42,649
(1)
Securities sold under repurchase agreements as at 30 September 2016 have been reclassified from Central banks and other regulatory authorities to Other banks.
11 Trading derivative assets and liabilities
The Group maintains trading positions in a variety of derivative financial instruments and acts primarily in the market by satisfying the needs of its
customers through foreign exchange, interest rate-related and credit-related contracts. In addition, the Group takes positions on its own account, and
carries an inventory of capital market instruments. Derivatives, except for those that are specifically designated as effective hedging instruments, are
classified as trading. The held for trading classification therefore includes those derivatives used for risk management purposes which for various
reasons do not meet the qualifying criteria for hedge accounting. The carrying value of a derivative classified as trading is remeasured at fair value
throughout the life of the contract. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative.
The table below sets out the fair value of trading derivatives:
Trading derivative financial instruments
Foreign exchange rate-related contracts
Spot and forward contracts
Cross currency swaps
Options / swaptions purchased
Options / swaptions written
Group
Assets Liabilities Assets Liabilities
Company
Assets Liabilities Assets
Liabilities
2017
$m
4,388
9,384
50
19
2017
$m
2016(1)
$m
2016(1)
$m
2017
$m
2017
$m
2016(1)
$m
2016(1)
$m
4,128
9,789
-
63
4,656
13,112
132
52
4,720
13,383
51
213
4,106
9,696
49
19
3,790
9,941
43
20
4,305
14,096
127
52
4,336
13,760
141
125
Total foreign exchange rate-related contracts
13,841
13,980
17,952
18,367
13,870
13,794
18,580
18,362
Interest rate-related contracts
Forward rate agreements
Swaps
Futures (2)
Options / swaptions purchased
Options / swaptions written
Total interest rate-related contracts
Credit derivatives
Commodity derivatives
Other derivatives
1
2
10
11
1
2
9
14,386
12,262
23,075
21,137
15,599
12,322
21,764
-
267
333
-
204
383
682
344
484
766
123
623
-
267
333
-
204
383
682
343
484
11
18,481
766
123
623
14,987
12,851
24,595
22,660
16,200
12,911
23,282
20,004
77
169
63
126
168
62
142
177
280
144
164
224
82
170
61
131
167
62
145
177
283
147
164
224
Total trading derivative financial instruments
29,137
27,187
43,146
41,559
30,383
27,065
42,467
38,901
(1)
(2)
Comparative information has been restated to reflect a change in presentation of interest accrual on certain derivative assets and derivative liabilities, which is now presented within derivative assets and
derivative liabilities (previously included in other assets and other liabilities).
As of 30 September 2017, the Group has recognised variation margin as settlement of exchange traded derivatives. Comparative information has not been restated.
12 Trading securities
Government bonds, notes and securities
Semi-government bonds, notes and securities
Corporate / financial institution bonds, notes and securities
Other bonds, notes and securities
Total trading securities
Group
Company
2017
$m
27,816
5,079
17,996
63
50,954
2016
$m
21,247
4,523
19,096
1,105
45,971
2017
$m
24,802
4,303
16,468
64
45,637
2016
$m
18,225
4,037
18,188
1,063
41,513
2017 Annual Financial Report
81
Notes to the financial statements
Financial assets and liabilities (continued)
13 Debt instruments at fair value through other comprehensive income
Government bonds, notes and securities
Semi-government bonds, notes and securities
Corporate / financial institution bonds, notes and securities
Other bonds, notes and securities
Total debt instruments at fair value through other comprehensive income
14 Other financial assets at fair value
Loans at fair value
Other financial assets at fair value
Total other financial assets at fair value
Loans
Group
Company
2017
$m
2,927
20,915
7,951
10,338
42,131
2016
$m
2,562
21,186
8,793
8,148
40,689
2017
$m
2,927
20,915
7,876
10,311
42,029
2016
$m
2,562
21,186
8,700
8,132
40,580
Group
Company
2017
$m
14,596
1,462
16,058
2016
$m
19,864
1,632
21,496
2017
$m
10,926
899
11,825
2016
$m
14,560
271
14,831
The maximum credit exposure of loans (excluding any undrawn facility limits) included in other financial assets at fair value through profit or loss
(designated on initial recognition) is $14,596 million (2016: $19,864 million) for the Group and $10,926 million (2016: $14,560 million) for the Company.
The cumulative change in fair value of the loans attributable to changes in credit risk amounted to a $116 million loss (2016: $148 million loss) for the
Group and a $90 million loss (2016: $103 million loss) for the Company and the change for the current year is a $32 million gain (2016: $174 million
gain) for the Group and a $13 million gain (2016: $96 million gain) for the Company.
15 Hedge accounting, including hedging derivative assets and liabilities
Entities in the Group designate certain derivatives entered into for risk management purposes as:
• Hedges of highly probable future cash flows attributable to a recognised asset or liability, or a highly probable forecast transaction (cash flow
hedges).
• Hedges of the fair value of recognised assets or liabilities or firm commitments (fair value hedges).
• Hedges of net investments in foreign operations.
Derivatives used for risk management purposes which for various reasons do not meet the qualifying criteria for hedge accounting, are included in
trading derivatives.
The table below sets out hedging derivative assets and liabilities by the type of hedge relationship in which they are designated.
Hedging derivatives in cash flow hedges
Hedging derivatives in fair value hedges
Hedging derivatives of net investments in foreign operations
Total hedging derivatives
Group
Company
2017
Assets Liabilities
$m
115
$m
160
2016 (1)
Assets Liabilities
$m
306
$m
461
2017
Assets Liabilities
$m
115
$m
152
2016 (1)
Assets Liabilities
$m
271
$m
299
3,732
-
3,892
1,542
17
1,674
6,278
2
6,741
3,092
3,664
4
-
3,402
3,816
3,727
17
3,859
6,020
-
6,319
6,426
4
6,701
(1)
Comparative information has been restated to reflect a change in presentation of interest accrual, which is now presented within hedging derivative assets and hedging derivative liabilities (previously
included in other assets and other liabilities).
The Group elected an accounting policy choice under AASB 9 "Financial Instruments" to apply the hedge accounting requirements under AASB 139
"Financial Instruments: Recognition and Measurement". As part of the requirements to apply hedge accounting, the Group documents, at the inception
of the hedge relationship, the relationship between hedging instruments and hedged items, the risk being hedged, the Group's risk management
objective and strategy for undertaking hedge transactions, and how effectiveness will be measured throughout the life of the hedge relationship. In
addition, the Group documents its assessment, both at inception and on an ongoing basis, of whether the hedging instruments that are used in hedging
transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The Group measures hedge effectiveness on a
prospective basis at inception, as well as retrospectively and prospectively over the term of the hedge relationship.
82 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Financial assets and liabilities (continued)
(a) Cash flow hedges
The operations of the Group are subject to the risk of interest rate fluctuations to the extent of the repricing profile of the Group's balance sheet.
Derivatives are held for the purpose of managing existing or anticipated interest rate risk. Whilst some derivatives are entered into on a one-to-one basis
to manage a specific exposure, other derivatives are entered into after consideration of the interest rate risk from a portfolio of exposures, such as a
portfolio of assets, or the net exposure from a portfolio of assets and liabilities. Where the derivatives used are eligible for hedge accounting, they are
designated in a cash flow hedge relationship where possible to manage the profit and loss volatility associated with the derivatives which would
otherwise be measured at fair value through profit or loss. This requires identification of eligible assets or liabilities, and designation of derivatives to
obtain hedge accounting. Cash flow hedge accounting involves designating derivatives as hedges of the variability in highly probable forecast future
cash flows attributable to interest rate risk from the benchmark interest rate on variable rate assets and liabilities.
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in the cash flow hedge
reserve within equity. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in
equity are transferred to the income statement in the period(s) in which the hedged item (e.g. the forecast hedged variable cash flows) affects the
income statement.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing
in equity at that time remains in equity and is recognised in the income statement when the forecast transaction is ultimately recognised in the income
statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss existing in equity at that time is immediately
transferred to the income statement.
Methods used to test hedge effectiveness and establish the hedge ratio include regression analysis, and for some portfolio hedge relationships, a
comparison to ensure the expected interest cash flows from the portfolio exceed those of the hedging instruments. The main potential source of hedge
ineffectiveness from cash flow hedges is mismatches in the terms of hedged items and hedging instruments, for example the frequency and timing of
when interest rates are reset.
The carrying amount of derivatives designated in cash flow hedge relationships is as follows.
Interest rate swaps
Group
Company
2017
2016 (1)
2017
2016 (1)
Assets Liabilities
$m
115
$m
160
Assets Liabilities
$m
306
$m
461
Assets Liabilities
$m
115
$m
152
Assets Liabilities
$m
271
$m
299
(1)
Comparative information has been restated to reflect a change in presentation of interest accrual, which is now presented within hedging derivative assets and hedging derivative liabilities (previously
included in other assets and other liabilities).
The following tables show the notional amount of derivatives designated in cash flow hedge relationships in time bands based on the maturity of the
derivatives.
Group
Interest rate swaps
Pay fixed
Receive fixed
Other interest rate derivatives (1)
Pay fixed
Receive fixed
Company
Interest rate swaps
Pay fixed
Receive fixed
Other interest rate derivatives (1)
Pay fixed
Receive fixed
0 to 3
month(s)
$m
3 to 12
months
$m
11,797
12,895
6,291
5,547
19,486
33,999
8,000
7,300
0 to 3
month(s)
$m
3 to 12
months
$m
11,584
12,676
2,927
2,000
18,978
33,145
5,985
3,950
2017
1 to 5
year(s)
$m
44,921
29,599
3,198
2,331
2017
1 to 5
year(s)
$m
41,238
26,014
3,060
2,193
Over 5
years
$m
Total
$m
0 to 3
month(s)
$m
3 to 12
months
$m
1,450
817
-
-
77,654
77,310
17,489
15,178
10,330
48,390
5,379
3,904
6,426
17,707
7,448
5,325
Over 5
years
$m
Total
$m
0 to 3
month(s)
$m
3 to 12
months
$m
1,352
766
-
-
73,152
72,601
11,972
8,143
10,187
47,839
3,241
2,668
6,326
16,821
4,465
3,330
2016
1 to 5
year(s)
$m
21,388
24,289
1,970
2,295
2016
1 to 5
year(s)
$m
19,324
20,588
1,970
2,200
Over 5
years
$m
1,583
372
-
-
Over 5
years
$m
1,454
335
-
-
Total
$m
39,727
90,758
14,797
11,524
Total
$m
37,291
85,583
9,676
8,198
(1)
Other interest rate derivatives include interest rate futures and forward rate agreements. The carrying amount of other interest rate derivatives is less than $1 million.
A loss of $1 million (2016: $6 million gain) for the Group and the Company was recognised in other income in the income statement related to hedge
ineffectiveness from cash flow hedge relationships.
There is no balance in the cash flow hedge reserve from any hedge relationship for which hedge accounting is no longer applied.
2017 Annual Financial Report
83
Notes to the financial statements
Financial assets and liabilities (continued)
(b) Fair value hedges
Derivatives are held for the purpose of managing existing and anticipated interest rate risk, in particular to swap the exposure from fixed rate assets and
liabilities to a floating interest rate. In addition, where fixed rate assets and liabilities are denominated in a foreign currency, derivatives are used to
manage the associated foreign currency risk. The Group may designate a cross currency swap that swaps from the fixed foreign currency to floating US
dollars or floating Australian dollars in a single hedge relationship of both interest rate risk and currency risk, or may use a combination of derivatives
(such as an interest rate swap and cross currency swap), and apply hedge accounting to the interest rate swap, and include the cross currency swap in
trading derivatives. As both interest rate risk and currency risk are hedged in a single hedge relationship in some cases, these disclosures do not
distinguish between interest rate risk, and the combination of interest rate risk and currency risk as two separate risk categories. The Group generally
hedges its exposure to changes in the fair value of fixed rate assets and liabilities in respect of the benchmark interest rate.
Derivatives are entered into on a one-to-one basis to manage specific exposures, namely:
•
•
•
Interest rate risk in respect of fixed rate semi-government bonds, notes and securities classified as fair value through other comprehensive income.
Interest rate risk in respect of fixed rate amounts due from other term lending.
Interest rate risk or both interest rate and currency risk in respect of fixed rate bonds, notes and subordinated debt. Associated with these hedges are
fair value hedges at the Company level of amounts due from controlled entities for amounts raised from the issuance of covered bonds that have
been on lent to controlled entities.
In addition, derivatives are entered into to manage interest rate risk from a portfolio of exposures, namely amounts due from fixed rate housing loans
originated in New Zealand. A dynamic process is used for these portfolio fair value hedges as the make-up of the portfolio of fixed rate housing loans
changes with early repayments, new originations and maturities. The hedge relationship is frequently discontinued and redesignated, generally on a
weekly basis. This note includes these portfolio hedge relationships because the volume of fixed rate housing loans hedged is relatively stable, and it is
the change in the make-up of the portfolio and desire to maximise the hedge effectiveness result that drive the dynamic hedging strategy.
Subsequent to initial designation, changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income
statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The movement in fair value
of the hedged item attributable to the hedged risk is made as an adjustment to the carrying amount of the hedged asset or liability.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying
amount of a hedged item is amortised to the income statement on an effective yield basis. Where the hedged item is derecognised from the balance
sheet, the adjustment to the carrying amount of the asset or liability is immediately transferred to the income statement.
Regression analysis and cumulative dollar offset are used to test hedge effectiveness and establish the hedge ratio. The main potential sources of
hedge ineffectiveness from fair value hedges are:
• Currency basis inherent in the valuation of cross currency swaps, but not in hedged items denominated in a foreign currency. Currency basis is a
liquidity premium that is charged for borrowing in one currency over another, and changes over time impacting the fair value of cross currency
swaps.
• Changes in margin where the full interest rate (rather than the benchmark interest rate component) of hedged items has been included in a hedge
relationship.
• Mismatches in the terms of hedged items and hedging instruments, for example the frequency and timing of when interest rates are reset.
• Early repayment of hedged housing loans.
The carrying amount of derivatives designated in fair value hedge relationships is as follows:
Interest rate swaps
Cross currency swaps
Total hedging derivatives in fair value hedges
Group
Company
2017
Assets Liabilities
$m
756
$m
256
2016 (1)
Assets Liabilities
$m
2,160
$m
925
2017
Assets Liabilities
$m
782
$m
227
2016 (1)
Assets Liabilities
$m
2,045
$m
825
3,476
3,732
786
1,542
5,353
6,278
932
3,092
3,437
3,664
2,945
3,727
5,195
6,020
4,381
6,426
(1)
Comparative information has been restated to reflect a change in presentation of interest accrual, which is now presented within hedging derivative assets and hedging derivative liabilities (previously
included in other assets and other liabilities).
84 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Financial assets and liabilities (continued)
The following tables show the notional amount of derivatives designated in fair value hedge relationships in time bands based on the maturity of the
derivatives.
Group
Interest rate swaps
Pay fixed
Receive fixed
Cross currency swaps hedging
exposures denominated in (1)
USD
EUR
GBP
Other
Company
Interest rate swaps
Pay fixed
Receive fixed
Cross currency swaps hedging
exposures denominated in (1)
USD
EUR
GBP
Other
0 to 3
month(s)
$m
3 to 12
months
$m
2017
1 to 5
year(s)
$m
Over 5
years
$m
Total
$m
0 to 3
month(s)
$m
3 to 12
months
$m
1,620
1,982
-
-
1,026
169
4,143
7,457
2,232
-
599
235
15,193
46,348
9,981
13,810
30,937
69,597
1,715
664
3,284
4,131
1,710
1,513
-
5,213
428
995
5,516
9,344
3,763
2,912
-
-
-
-
9,101
9,868
3,423
-
-
97
0 to 3
month(s)
$m
3 to 12
months
$m
2017
1 to 5
year(s)
$m
Over 5
years
$m
Total
$m
0 to 3
month(s)
$m
3 to 12
months
$m
2016
1 to 5
year(s)
$m
Over 5
years
$m
12,844
37,130
8,800
13,487
5,727
1,099
2,291
1,281
-
8,002
1,438
1,589
2016
1 to 5
year(s)
$m
Over 5
years
$m
35
1,913
-
-
1,026
169
180
3,013
4,463
-
599
235
14,265
43,436
9,949
13,810
24,429
62,172
6,472
5,257
1,710
1,854
-
7,408
855
1,580
10,935
12,665
4,190
3,838
-
60
-
-
-
-
4,103
8,420
12,337
35,206
10,300
12,384
6,706
11,290
-
-
97
2,199
2,291
1,281
-
10,155
1,860
2,542
(1)
The notional amount of cross currency swaps is determined based on the currency of the hedged item translated at the spot exchange rate at 30 September.
The average rate for major currencies of the final exchange of cross currency swaps designated in fair value hedge relationships is as follows:
USD: AUD
EUR: USD
EUR: AUD
GBP: USD
GBP: AUD
Group
Company
2017
1.034
1.372
1.350
1.655
1.725
2016
1.026
1.372
1.350
1.655
1.725
2017
1.036
1.372
1.329
1.655
1.700
Total
$m
32,460
61,149
9,150
9,101
3,729
2,967
Total
$m
26,740
56,070
17,996
12,354
4,151
3,920
2016
1.027
1.372
1.329
1.655
1.700
2017 Annual Financial Report
85
Notes to the financial statements
Financial assets and liabilities (continued)
The carrying amount of hedged items in fair value hedge relationships, and the accumulated amount of fair value hedge adjustments included in these
carrying amounts are as follows:
Group
Company
Carrying
amount
2017
$m
Fair value
hedge
adjustments
2017
$m
Carrying
amount
2016
$m
Fair value
hedge
adjustments
2016
$m
Carrying
amount
2017
$m
Fair value
hedge
adjustments
2017
$m
Carrying
amount
2016
$m
Fair value
hedge
adjustments
2016
$m
Debt instruments at fair value through other
comprehensive income
Semi-government bonds, notes and
securities (1)
Loans and advances
Housing loans (2)
Other term lending (3)
Due from controlled entities (4)
Bonds, notes and subordinated debt (5) (6)
Medium-term notes
Covered bonds
Subordinated medium-term notes
17,796
-
17,986
-
17,796
12,875
1,577
14,452
-
46,109
21,303
2,081
69,493
38
(12)
26
-
293
567
155
1,015
14,072
1,111
15,183
139
37
176
-
1,577
1,577
-
-
(12)
(12)
17,986
-
1,111
1,111
-
-
37
37
-
-
13,022
593
16,832
1,028
40,384
21,351
1,854
63,589
1,526
1,178
296
3,000
46,109
12,996
2,081
61,186
293
593
155
1,041
40,384
16,802
1,854
59,040
1,526
1,028
296
2,850
(1)
(2)
(3)
(4)
(5)
(6)
The carrying amount of debt instruments at fair value through other comprehensive income does not include a fair value hedge adjustment as the hedged asset is measured at fair value. The accounting for
the hedge relationship results in a transfer from other comprehensive income to the income statement.
The carrying amount of housing loans in a portfolio fair value hedge relationship is approximate, and represents the principal of the loans and the fair value hedge adjustment.
The carrying amount of other term lending for the Group and the Company is presented in the balance sheet as $1,572 million (2016: $1,108 million) of loans and advances and $5 million (2016: $3 million)
of accrued interest receivable in other assets.
The carrying amount of due from controlled entities is presented in the balance sheet as $12,939 million (2016: $16,731 million) of amounts due from controlled entities and $83 million (2016: $101 million) of
accrued interest receivable in other assets.
The carrying amount of bonds, notes and subordinated debt is presented in the balance sheet as $68,984 million (2016: $63,126 million) for the Group and $60,715 million (2016: $58,595 million) for the
Company of bonds, notes and subordinated debt and $509 million (2016: $463 million) for the Group and $471 million (2016: $445 million) for the Company of accrued interest payable in other liabilities.
The accumulated amount of fair value hedge adjustments included in the carrying amount of bonds, notes and subordinated debt includes $309 million (2016: $492 million) for the Group and $287 million
(2016: $492 million) for the Company related to hedged items that have ceased to be adjusted for hedging gains and losses.
Fair value hedge relationships resulted in the following changes in value used as the basis for recognising hedge ineffectiveness during the period:
Losses on hedging instruments
Gains on hedged items attributable to the hedged risk
Hedge ineffectiveness recognised in the income statement (2) (3)
(1)
(2)
(3)
Information is presented on a continuing operations basis.
Hedge ineffectiveness was recognised in other income in the income statement.
Represents hedge ineffectiveness of designated hedge relationships, plus economic hedges where hedge accounting has not been applied.
Group
Company
2017(1)
$m
(2,566)
1,887
(679)
2016(1)
$m
(2,304)
2,217
(87)
2017
$m
(2,008)
1,363
(645)
2016
$m
(1,552)
1,434
(118)
86 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Financial assets and liabilities (continued)
(c) Hedges of net investments in foreign operations
A foreign currency exposure arises from a net investment in branches and subsidiaries that have a different functional currency from that of the
Company. The risk arises from the fluctuation in spot exchange rates between the functional currencies of the foreign operations and the Company. It is
the Group's policy not to hedge the exposure to foreign currency where the investment in a foreign operation is considered perpetual in nature. In
certain circumstances the Group does undertake hedging activities such as where the investment in a foreign operation is non-core or flagged for
divestment.
Hedges of net investments in foreign operations are accounted for in a similar way to cash flow hedges. Any gain or loss on the hedging instrument
relating to the effective portion of the hedge is recognised in the foreign currency translation reserve within equity. The gain or loss relating to the
ineffective portion is recognised immediately in the income statement. Gains and losses accumulated in equity are transferred to the income statement
when the foreign operation is disposed.
Items designated as hedging instruments in hedges of net investments in foreign operations are liabilities denominated in the functional currency of the
foreign operation and forward foreign exchange contracts. Effectiveness is assessed by comparing changes in the carrying amount of the liability or the
fair value of the derivative attributable to movements in the spot rate with changes in the investment in the foreign operation due to movement in the
spot rate. As foreign operations are only hedged to the extent of the liability or notional amount of the derivative, no ineffectiveness is expected to arise.
Details of items designated as hedging instruments in hedges of net investments in foreign operations are outlined in the following tables.
Group
Hedging derivatives
Liabilities (1)
Company
Hedging derivatives
2017
Nominal amount
(millions of GBP)
539
Carrying amount
Assets
$m
-
Liabilities
$m
17
2016
Carrying amount
Nominal amount
(millions of GBP)
714
Assets
$m
2
Liabilities
$m
4
1,021
1,560
-
-
1,746
1,763
1,018
1,732
-
2
1,731
1,735
2017
Nominal amount
(millions of GBP)
513
Carrying amount
Assets
$m
-
Liabilities
$m
17
2016
Carrying amount
Nominal amount
(millions of GBP)
689
Assets
$m
-
Liabilities
$m
4
(1)
Liabilities denominated in the functional currency of the foreign operation that have been designated as hedging net investments in foreign operations are presented in the balance sheet as due to other
banks, and deposits and other borrowings.
2017 Annual Financial Report
87
Notes to the financial statements
Financial assets and liabilities (continued)
16 Loans and advances
Loans and advances are initially recognised at fair value plus directly attributable transaction costs and subsequently measured at amortised cost, using
the effective interest method, net of any provision for doubtful debts.
Housing loans
Other term lending
Asset and lease financing
Overdrafts
Credit card outstandings
Other lending
Total gross loans and advances
Deduct:
Unearned income and deferred net fee income
Provision for doubtful debts
Total net loans and advances
Group
Company
2017
$m
329,534
182,935
11,674
5,673
7,409
6,539
2016
$m
314,557
168,604
10,949
6,304
7,518
5,759
2017
$m
293,212
150,920
11,214
3,715
6,365
6,025
2016
$m
278,659
139,632
10,478
4,223
6,439
5,215
543,764
513,691
471,451
444,646
(415)
(3,224)
(532)
(3,114)
(479)
(2,695)
(700)
(2,625)
540,125
510,045
468,277
441,321
Description of collateral held as security and other credit enhancements
The Group evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Group
upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include:
• A floating charge over all assets and undertakings of an entity, including uncalled capital and called but unpaid capital.
• Specific or inter-locking guarantees.
• Specific charges over defined assets of the counterparty.
Loans and advances by credit quality
Gross loans and advances
Neither past due nor impaired
Past due but not impaired
Impaired
Total gross loans and advances
Loans and advances past due but not impaired
1 to 7 day(s) past due
8 to 29 days past due
30 to 59 days past due
60 to 89 days past due
90 or more days past due
Total loans and advances past due but not impaired
Group
Company
2017
$m
2016
$m
2017
$m
530,654
11,440
1,670
543,764
500,556
10,646
2,489
513,691
459,577
10,629
1,245
471,451
2016
$m
433,319
9,747
1,580
444,646
Group
Company
2017
$m
5,056
2,149
1,282
711
2,242
11,440
2016
$m
4,675
2,028
1,288
680
1,975
2017
$m
4,735
1,968
1,172
670
2,084
10,646
10,629
2016
$m
4,349
1,809
1,177
630
1,782
9,747
Loans and advances that are past due but not impaired are classified as such where net current market value of supporting security is sufficient to cover
all principal, interest and other amounts (including legal, enforcement, realisation costs etc.) due on the facility.
88 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Financial assets and liabilities (continued)
17 Provision for doubtful debts
New and increased provisions (net of releases)
Write-backs of specific provisions
Recoveries of specific provisions
Total charge to the income statement
Attributable to:
Charge to income statement from continuing operations
Charge to income statement from discontinuing operations
Group
Balance at 1 October 2015
Changes due to financial assets recognised in the opening balance that have:
Transferred to 12-months ECL - collective provision
Transferred to Lifetime ECL not credit impaired - collective provision
Transfer to Lifetime ECL credit impaired - collective provision
Transfer to Lifetime ECL credit impaired - specific provision
New and increased provisions (net of releases)
Write-backs of specific provisions
Bad debts written-off
Derecognised in respect of the group disposal (1)
Foreign currency translation and other adjustments
Balance at 30 September 2016
Changes due to financial assets recognised in the opening balance that have:
Transferred to 12-months ECL - collective provision
Transferred to Lifetime ECL not credit impaired - collective provision
Transfer to Lifetime ECL credit impaired - collective provision
Transfer to Lifetime ECL credit impaired - specific provision
New and increased provisions (net of releases)
Write-backs of specific provisions
Bad debts written-off
Foreign currency translation and other adjustments
Balance at 30 September 2017
(1)
The September 2016 full year reflects the CYBG demerger.
Group
Company
2017
$m
1,177
(242)
(111)
824
824
-
2016
$m
1,158
(156)
(119)
883
813
70
2017
$m
1,014
(195)
(88)
731
731
-
Stage 1
12-mth
ECL
Collective
provision
$m
455
Stage 2
Lifetime
ECL not
credit
impaired
Collective
provision
$m
1,988
Stage 3
Lifetime
ECL credit
impaired
Collective
provision
$m
440
Lifetime
ECL
credit
impaired
Specific
provision
$m
637
543
(45)
(3)
(2)
(518)
-
-
(85)
(16)
329
329
(44)
(3)
(2)
(295)
-
-
(1)
313
(520)
98
(76)
(120)
526
-
-
(222)
(17)
1,657
(316)
123
(42)
(135)
538
-
-
(6)
1,819
(23)
(53)
79
(114)
191
-
-
(94)
(4)
422
(13)
(79)
45
(100)
124
-
-
4
403
-
-
-
236
959
(156)
(778)
(174)
(18)
706
-
-
-
237
810
(242)
(849)
27
689
2016
$m
904
(104)
(98)
702
702
-
Total
$m
3,520
-
-
-
-
1,158
(156)
(778)
(575)
(55)
3,114
-
-
-
-
1,177
(242)
(849)
24
3,224
Group - Impact of movements in gross carrying amount on provision for doubtful debts
Provision for doubtful debts reflects expected credit losses (ECL) measured using the three-stage approach, as described in Note 1 Principal accounting
policies. The following explains how significant changes in the gross carrying amount of loans and advances during the 2017 financial year have
contributed to the changes in the provision for doubtful debts for the Group under the expected credit loss model.
Overall, the total provision for doubtful debts increased by $110 million compared to the balance at 30 September 2016.
Specific provisions decreased by $17 million compared to the balance at 30 September 2016, primarily due to a lower rate of new impairments
combined with successful work-out strategies across the Australian business lending portfolio.
Collective provisions increased by $127 million compared to the balance at 30 September 2016, comprised of:
• Collective provision 12-months ECL (Stage 1) – decrease of $16 million as a result of:
• $124 billion of loans and advances that were repaid, experienced movement in underlying account balances during the period or migrated from
Stage 1 to Stage 2 or Stage 3 due to deterioration in credit quality.
• Partially offset by $148 billion of loans and advances that were newly originated or migrated into Stage 1 from Stage 2 or Stage 3 due to credit
improvement.
• Collective provision Lifetime ECL – not credit-impaired (Stage 2) – increase of $162 million as a result of:
• $24 billion in loans and advances migrating into Stage 2 as a result of transfer of loans and advances from Stage 1 or Stage 3.
• Targeted overlays established for certain sectors on a forward looking basis.
• Partially offset by $33 billion of loans and advances exiting Stage 2 due to repayment or as a result of improved credit quality.
• Collective provision Lifetime ECL – credit-impaired (Stage 3) – decrease of $19 million as a result of:
• $3 billion of loans and advances that were repaid or migrated to individually credit assessed with specific provisions raised.
2017 Annual Financial Report
89
Notes to the financial statements
Financial assets and liabilities (continued)
Company
Balance at 1 October 2015
Changes due to financial assets recognised in the opening balance that have:
Transferred to 12-months ECL - collective provision
Transferred to Lifetime ECL not credit impaired - collective provision
Transferred to Lifetime ECL credit impaired - collective provision
Transferred to Lifetime ECL credit impaired - specific provision
New and increased provisions (net of releases)
Write-backs of specific provisions
Bad debts written-off
Foreign currency translation and other adjustments
Balance at 30 September 2016
Changes due to financial assets recognised in the opening balance that have:
Transferred to 12-months ECL - collective provision
Transferred to Lifetime ECL not credit impaired - collective provision
Transferred to Lifetime ECL credit impaired - collective provision
Transferred to Lifetime ECL credit impaired - specific provision
New and increased provisions (net of releases)
Write-backs of specific provisions
Bad debts written-off
Foreign currency translation and other adjustments
Balance at 30 September 2017
Stage 1
12-mth
ECL
Collective
provision
$m
312
Stage 2
Lifetime
ECL not
credit
impaired
Collective
provision
$m
1,569
Stage 3
Lifetime
ECL credit
impaired
Collective
provision
$m
314
Lifetime
ECL
credit
impaired
Specific
provision
$m
332
430
(36)
(2)
(2)
(419)
-
-
(14)
269
274
(36)
(2)
(2)
(258)
-
-
1
(412)
80
(47)
(109)
360
-
-
(10)
1,431
(263)
86
(36)
(131)
444
-
-
2
246
1,533
(18)
(44)
49
(93)
115
-
-
(1)
322
(11)
(50)
38
(91)
119
-
-
7
334
-
-
-
204
848
(104)
(668)
(9)
603
-
-
-
224
709
(195)
(789)
30
582
Total
$m
2,527
-
-
-
-
904
(104)
(668)
(34)
2,625
-
-
-
-
1,014
(195)
(789)
40
2,695
Company - Impact of movements in gross carrying amount on provision for doubtful debts
Provision for doubtful debts reflects expected credit losses (ECL) measured using the three-stage approach, as described in Note 1 Principal accounting
policies. The following explains how significant changes in the gross carrying amount of loans and advances during the 2017 financial year have
contributed to the changes in the provision for doubtful debts for the Company under the expected credit loss model.
Overall, the total provision for doubtful debts increased by $70 million compared to the balance at 30 September 2016.
Specific provisions decreased by $21 million compared to the balance at 30 September 2016, primarily due to lower rate of impairments combined with
successful work-out strategies across the Australian business lending portfolio.
Collective provisions increased by $91 million compared to the balance at 30 September 2016, comprised of:
• Collective provision 12-months ECL (Stage 1) – decreased by $23 million due to:
• $106 billion of loans and advances that were repaid, experienced movement in underlying account balances during the period or migrated from
Stage 1 to Stage 2 or Stage 3 due to deterioration in credit quality.
• Partially offset by $126 billion of loans and advances that were newly originated or migrated into Stage 1 from Stage 2 or Stage 3 due to credit
improvement.
• Collective provision Lifetime ECL – not credit-impaired (Stage 2) – increased by $102 million due to:
• $20 billion of loans and advances migrating into Stage 2 as a result of transfer of loans and advances from Stage 1 or Stage 3.
• Targeted overlays established for certain sectors on a forward looking basis.
• Partially offset by $26 billion of loans exiting Stage 2 due to repayment or as a result of improved credit quality.
• Collective provision Lifetime ECL – credit-impaired (Stage 3) – increased by $12 million due to:
• $2 billion of loans and advances that migrated into Stage 3 from Stage 1 and Stage 2 due to deterioration in credit quality.
• Partially offset by $1 billion of loans that were repaid.
Write-offs still under enforcement activity
The contractual amount outstanding on loans and advances that were written off during the 2017 financial year, and are still subject to enforcement
activity was $84 million (2016: $182 million) for the Group and $76 million (2016: $169 million) for the Company.
Information about the nature and effect of modifications on the measurement of provision for doubtful debts
A loan is renegotiated if the existing agreement is cancelled and a new agreement made on substantially different terms or if the terms of an existing
agreement are modified such that the renegotiated loan is a substantially different instrument. Where such renegotiated loans are derecognised, the
renegotiated contract is a new loan and impairment is assessed in accordance with the Group’s accounting policy.
Where renegotiated loans are not derecognised, impairment continues to be assessed for significant increases in credit risk compared to the initial
origination credit risk rating.
90 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Financial assets and liabilities (continued)
The following table discloses information on loans and advances that were modified but not derecognised during the 2017 financial year, for which the
provision for doubtful debts was measured at a lifetime ECL at 30 September 2016, and at the end of the 2017 financial year had changed to a 12-
months ECL:
Amortised cost before the modification
Gross carrying amount at end of reporting period
Information about total impaired assets
Group
Company
2017
$m
423
412
2016
$m
483
462
2017
$m
341
334
2016
$m
374
354
The following table provides details on impaired assets. Gross amounts are shown before taking into account any collateral held or other credit
enhancements. Refer Note 34 Financial risk management for analysis of the credit quality of the Group’s loans and advances.
Gross impaired assets (1)
Specific provision for doubtful debts (2)
Net impaired assets (3)
Group
Company
2017
$m
1,724
(691)
1,033
2016
$m
2,642
(712)
1,930
2017
$m
1,263
(582)
681
2016
$m
1,604
(607)
997
(1)
(2)
(3)
Gross impaired assets include $34 million (2016: $135 million) for the Group and nil (2016: $7 million) for the Company of gross impaired other financial assets at fair value, $20 million (2016: $18 million) of
impaired off-balance sheet credit exposures for the Group and $18 million (2016: $17 million) for the Company, and $205 million (2016: $785 million) for the Group and nil (2016: nil) for the Company of
impaired exposures currently assessed as no loss based on collective provision and security held.
Specific provision for doubtful debts includes $2 million (2016: $6 million) for the Group and nil (2016: $4 million) for the Company of fair value credit adjustments on other financial assets at fair value.
The fair value of security in respect of impaired assets is $1,089 million (2016: $1,810 million) for the Group and $747 million (2016: $883 million) for the Company. Fair value amounts of security held in
excess of the outstanding balance of individual impaired assets are not included in these amounts.
18 Other financial liabilities at fair value
In certain circumstances the Group applies the fair value measurement option to financial liabilities. This option is applied where an accounting
mismatch is significantly reduced or eliminated that would otherwise occur if the liability was measured on another basis. Where liabilities are
designated at fair value through profit or loss, they are initially recognised at fair value, with transaction costs recognised in the income statement as
incurred. Subsequently, they are measured at fair value and any gains or losses (except for changes in own credit risk) are recognised in the income
statement as they arise.
Bonds, notes and subordinated debt
Deposits and other borrowings
On-demand and short-term deposits
Certificates of deposit
Term deposits
Commercial paper & other borrowings
Securities sold short
Other financial liabilities
Total other financial liabilities at fair value
Group
Company
2017
$m
22,869
204
1,243
1,027
2,236
1,803
249
2016
$m
19,697
300
2,247
5,604
3,502
1,628
246
29,631
33,224
2017
$m
4,320
-
-
-
-
1,575
35
5,930
2016
$m
3,751
-
-
-
-
1,628
29
5,408
The change in fair value of bonds, notes and subordinated debt attributable to changes in the Group’s credit risk amounts to a gain for the 2017 financial
year of $11 million (2016: $113 million loss) for the Group and a gain of $55 million (2016: $131 million loss) for the Company. The cumulative change in
fair value of bonds, notes and subordinated debt attributable to changes in the Group’s credit risk amounts to a loss of $198 million (2016: $209 million
loss) for the Group and a loss of $93 million (2016: $148 million loss) for the Company. The contractual amount to be paid at the maturity of the bonds,
notes and subordinated debt is $22,365 million (2016: $18,773 million) for the Group and $4,075 million (2016: $3,303 million) for the Company.
2017 Annual Financial Report
91
Notes to the financial statements
Financial assets and liabilities (continued)
19 Deposits and other borrowings
Deposits and other borrowings include non-interest-bearing deposits redeemable at call, on-demand and short-term deposits lodged for periods of less
than 30 days, certificates of deposit, interest-bearing deposits, debentures and other borrowings. Deposits and other borrowings are initially recognised
at fair value less directly attributable transaction costs and subsequently measured at amortised cost.
Deposits
Term deposits
On-demand and short-term deposits
Certificates of deposit
Deposits not bearing interest
Commercial paper & other borrowings
Securities sold under agreements to repurchase
Total deposits and other borrowings
20 Bonds, notes and subordinated debt
Group
Company
2017
$m
2016
$m
2017
$m
2016
$m
159,861
199,245
51,009
47,247
19,749
23,493
153,181
189,718
43,763
41,698
15,290
16,064
131,279
182,103
51,009
42,566
19,560
23,493
132,344
171,783
43,764
37,296
14,990
16,064
500,604
459,714
450,010
416,241
Bonds, notes, subordinated debt and other debt issues are generally initially recognised at fair value less directly attributable transaction costs and
subsequently measured at amortised cost using the effective interest method. Premiums, discounts and associated issue expenses are recognised
using the effective interest method through the income statement from the date of issue to accrete the carrying value of securities to redemption values
by maturity date. Embedded derivatives within debt instruments are separately accounted for where not closely related to the terms of the host debt
instrument.
Bonds, notes and subordinated debt
Medium-term notes (1)
Securitisation notes (2)
Covered bonds (2)
Subordinated medium-term notes (1)
Other subordinated notes
Total bonds, notes and subordinated debt (3)
Group
Company
2017
$m
89,815
3,099
22,398
9,058
501
2016
$m
90,106
4,050
24,239
9,031
516
2017
$m
89,833
-
22,424
9,058
-
2016
$m
90,106
-
24,089
9,031
-
124,871
127,942
121,315
123,226
(1)
(2)
(3)
Prior period comparatives have been restated to reflect a $26 million reclassification of hedge adjustments between Medium-term notes to Subordinated medium-term notes.
Both Covered bonds and Securitisation notes were previously aggregated as a single line item (Other senior notes) in the 2016 AFR. Prior year comparatives have been restated.
The balances includes net discounts/premium adjustments. Prior year comparatives have been restated.
Issued bonds, notes and subordinated debt by currency
AUD
USD
EUR
GBP
Other
Total bonds, notes and subordinated debt (1)
(1)
The balances includes net discounts / premium adjustments.
Group
Company
2017
$m
35,887
40,220
29,851
7,611
11,302
2016
$m
35,863
39,663
28,380
11,004
13,032
2017
$m
32,806
40,259
29,828
7,621
10,801
2016
$m
31,815
39,648
28,244
11,004
12,515
124,871
127,942
121,315
123,226
92 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Financial assets and liabilities (continued)
Subordinated medium term notes
Currency
Notional amount(1)
Maturity / First optional call date
AUD
AUD
GBP
EUR
EUR
EUR
AUD
HKD
JPY
AUD
AUD
JPY
SGD
AUD
AUD
AUD
AUD
TOTAL
m
1,172m
950m
350m
500m
750m
1,000m
1,100m
1,137m
10,000m
150m
650m
10,000m
450m
943m
275m
20m
20m
Floating due 2017
Floating due 2017
Fixed due 2018
Fixed due 2018
Fixed due 2019
Fixed due 2020
Floating due 2020
Fixed due 2021
Fixed due 2021
Fixed due 2021
Floating due 2021
Fixed due 2021
Fixed due 2023
Floating due 2023
Fixed due 2027
Fixed due 2027
Fixed due 2028
Group
Company
2017
$m
-
950
625
777
1,124
1,586
1,100
184
113
146
650
113
428
935
272
28
27
2016(2)
$m
1,171
950
647
813
1,100
1,571
1,100
195
130
151
650
-
493
-
-
30
30
2017
$m
-
950
625
777
1,124
1,586
1,100
184
113
146
650
113
428
935
272
28
27
2016(2)
$m
1,171
950
647
813
1,100
1,571
1,100
195
130
151
650
-
493
-
-
30
30
9,058
9,031
9,058
9,031
(1)
(2)
Subordinated medium term notes qualify as Tier 2 capital, in some cases subject to transitional Basel III treatment.
Prior period comparatives have been restated to include any net discounts / premium adjustments, as well as the above mentioned $26 million reclassification of hedge adjustments from Medium-term notes.
Other subordinated notes
On 17 December 2015, BNZ issued NZD550 million of subordinated unsecured notes in New Zealand (BNZ Subordinated Notes), treated as Tier 2
capital under NAB's regulatory capital requirements. The BNZ Subordinated Notes will mature in December 2025, but in certain circumstances (subject
to APRA and RBNZ approval) BNZ may, at its option, repay some or all of the BNZ Subordinated Notes on 17 December 2020 or on any scheduled
interest payment date thereafter. The BNZ Subordinated Notes pay a fixed rate of interest, reset on the optional redemption date.
The Group holds derivative financial instruments to manage interest rate and foreign exchange risk on bonds, notes and subordinated debt. Refer to
Note 11 Trading derivative assets and liabilities and Note 15 Hedge accounting, including hedging derivative assets and liabilities for further information
on the Group’s trading and hedging derivative assets and liabilities.
Refer to Note 34 Financial risk management for a description of the Group’s risk management practices in relation to market risks such as interest rate,
foreign currency and liquidity risk.
2017 Annual Financial Report
93
Notes to the financial statements
Financial assets and liabilities (continued)
21 Other debt issues
Perpetual floating rate notes
Convertible preference shares and convertible notes
Total other debt issues
Perpetual Floating Rate Notes
Group
Company
2017
$m
147
6,040
6,187
2016
$m
220
6,028
6,248
2017
$m
147
6,040
6,187
2016
$m
220
6,028
6,248
On 9 October 1986, the Group issued USD250 million undated subordinated floating rate notes. Interest is payable semi-annually in arrears in April and
October at a rate of 0.15% per annum above the arithmetic average of the rates offered by the reference banks for six month US dollar deposits in
London. The floating rate notes are unsecured and have no final maturity. All or some of the floating rate notes may be redeemed at the option of the
Group with the prior consent of APRA. In July 2009, the Group repurchased USD82.5 million floating rate notes, which were subsequently cancelled by
the Group. In 2017, the Group executed a number of repurchases and cancellations of the undated subordinated floating rate notes aggregating
USD52.0 million. The Group currently has USD115.5 million of undated subordinated floating rate notes outstanding which qualify as Tier 2 capital
subject to transitional Basel III treatment.
Convertible Preference Shares
On 20 March 2013, the Group issued $1.51 billion of convertible preference shares (NAB CPS) and on 17 December 2013, the Group issued $1.72
billion of convertible preference shares (NAB CPS II). The convertible preference shares will mandatorily convert into ordinary shares on the mandatory
conversion dates, 22 March 2021 (NAB CPS) and 19 December 2022 (NAB CPS II), subject to certain conversion conditions being satisfied. With prior
written approval from APRA, the Company has the option to convert, redeem or resell NAB CPS on 20 March 2019 and NAB CPS II on 17 December
2020 or on the occurrence of particular events, provided certain conditions are met. NAB CPS and NAB CPS II may also convert in certain
circumstances if required by prudential regulatory requirements. Interest on both issuances is payable quarterly in arrears at a rate of 3.20% per annum
above the 3 month BBSW for NAB CPS and 3.25% per annum above the 3 month BBSW for NAB CPS II. Both issuances have supported the Group's
Tier 1 capital position as an eligible Additional Tier 1 capital instrument.
Convertible Notes
On 23 March 2015, the Group issued $1.34 billion of convertible notes (NAB Capital Notes) and on 7 July 2016, the Group issued $1.50 billion of
convertible notes (NAB Capital Notes 2). The convertible notes will mandatorily convert into ordinary shares on the mandatory conversion dates,
23 March 2022 (NAB Capital Notes) and 8 July 2024 (NAB Capital Notes 2), subject to certain conversion conditions being satisfied. With prior written
approval from APRA, the Company has the option to convert, redeem or resell the NAB Capital Notes on 23 March 2020 and the NAB Capital Notes 2
on 7 July 2022, or earlier following the occurrence of certain events. NAB Capital Notes and NAB Capital Notes 2 may also convert in certain
circumstances if required by prudential regulatory requirements. Interest on both issuances is payable quarterly in arrears at a rate of 3.50% per annum
above the 3 month BBSW for NAB Capital Notes and 4.95% per annum above the 3 month BBSW for NAB Capital Notes 2. Both issuances have
supported the Group's Tier 1 capital position as an eligible Additional Tier 1 capital instrument.
94 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Other assets and liabilities
22 Goodwill and other intangible assets
Goodwill
Goodwill arises on the acquisition of an entity and represents the excess of the aggregate of the fair value of the purchase consideration and the amount
of any non-controlling interest in the entity over the fair value of the identifiable net assets at the date of the acquisition. If the fair value of the identifiable
net assets of the acquired entity is greater than the aggregate of the fair value of the purchase consideration and amount of any non-controlling interest,
the excess is recognised in the income statement on acquisition date and no goodwill is recognised.
Software Costs
The identifiable and directly associated external and internal costs of acquiring and developing software are capitalised and recognised as an intangible
asset where the software is controlled by the Group, and where it is probable that future economic benefits will flow from its use over more than one
year. Costs associated with maintaining software are recognised as an expense as incurred.
Computer software and other intangible assets are stated at cost less amortisation and impairment losses, if any.
Capitalised software costs and other intangible assets are amortised on a systematic basis once deployed, using the straight-line method over their
expected useful lives which are between three and ten years. Software assets are generally deployed when the asset is ready for its intended use.
Certain software assets are deployed on a progressive basis to match the benefits profile from the asset’s use.
Goodwill
Internally generated software
Acquired software
Other acquired intangible assets (1)
Goodwill and other intangibles
At cost
Deduct: Accumulated amortisation / Impairment losses
Goodwill and other intangibles
(1)
Other acquired intangible assets include brand names and the value of business and contracts in force.
Reconciliation of movements in goodwill and other intangible assets
Goodwill
Balance at beginning of year
Disposals from sale of controlled entities
Foreign currency translation adjustments
Balance at end of year
Internally generated software
Balance at beginning of year
Additions from internal development
Disposals, impairments and write-offs (1)
Amortisation
Foreign currency translation adjustments
Balance at end of year
Group
Company
2017
$m
2,862
2,608
98
33
2016
$m
2,913
2,207
137
45
2017
$m
-
2,274
87
-
5,601
5,302
2,361
8,397
(2,796)
5,601
7,809
(2,507)
5,302
4,351
(1,990)
2,361
2016
$m
-
1,971
122
-
2,093
3,775
(1,682)
2,093
Group
Company
2017
$m
2,913
(50)
(1)
2,862
2016
$m
4,631
(1,713)
(5)
2,913
2017
$m
2016
$m
-
-
-
-
-
-
-
-
2,207
2,457
1,971
1,702
750
(20)
(324)
(5)
655
(674)
(273)
42
586
(19)
(264)
-
471
(10)
(192)
-
2,608
2,207
2,274
1,971
(1)
Includes discontinued operations of CYBG in the year ended 30 September 2016. Refer to Note 41 Discontinued operations for further details.
Impairment and cash generating units
Assets with an indefinite useful life, including goodwill, are not subject to amortisation and are tested on an annual basis for impairment, and additionally
whenever an indication of impairment exists. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount
of an asset exceeds its recoverable amount.
The recoverable amount of an asset is the higher of its fair value less costs to sell or its value in use. For assets that do not generate largely
independent cash inflows, the recoverable amount is determined for the cash generating unit to which that asset belongs. For the purpose of
undertaking impairment testing, cash generating units (CGUs) are identified and determined according to the smallest group of assets that generate
cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Goodwill impairment is assessed at the group of
CGUs that represents the lowest level within the Group at which goodwill is maintained for internal management purposes, which is at the segment
level.
2017 Annual Financial Report
95
Notes to the financial statements
Other assets and liabilities (continued)
As noted in Note 2 Segment information the Group has reorganised its reporting structure and this has changed the composition of the CGUs to which
goodwill has been allocated. For comparability, the 2016 goodwill has been restated on the basis of this new allocation.
Impairment testing compares the carrying value of a CGU with its recoverable amount as determined using a value in use calculation. An impairment
loss is recognised in the income statement if the carrying amount of the CGU or group of units is greater than its recoverable amount. Impairment losses
recognised for goodwill are not subsequently reversed.
Assumptions for determining the recoverable amount of each CGU are based on past experience and expectations for the future. Cash flow projections
are based on five year management approved forecasts which are then extrapolated using a constant growth rate for up to a further five years. In the
final year a terminal growth rate is applied in perpetuity. These forecasts use management estimates to determine income, expenses, capital
expenditure and cash flows for each CGU.
The discount rate reflects the market determined, risk-adjusted, post-tax discount rate and is adjusted for specific risks relating to the CGUs and the
countries in which they operate. Terminal value growth rate represents the growth rate applied to extrapolate cash flows beyond the forecast period.
These growth rates are based on forecast assumptions of the CGUs’ long-term performance in their respective markets.
The key assumptions used in determining the recoverable amount of CGUs, to which goodwill has been allocated, are as follows:
Reportable segments
Consumer Banking and Wealth
Business and Private Banking
NZ Banking
Total goodwill
23 Other assets
Cash collateral placed with third parties
Accrued interest receivable (1)
Prepayments
Receivables
Other debt instruments at amortised cost
Equity instruments at fair value through other comprehensive income
Investment in associates - MLC Limited (2)
Receivable - MLC Limited (3)
Other (4)
Total other assets
Goodwill
2017
$m
2,536
68
258
2,862
2016
$m
2,587
68
258
2,913
Discount rate
per annum
2017
%
10.5
Terminal value
growth rate
per annum
2017
%
4.8
10.5
11.0
n/a
4.8
4.9
n/a
2016
$m
3,176
716
155
243
1
240
-
2,206
2,658
9,395
Group
Company
2017
$m
3,209
981
196
642
584
271
549
-
3,014
9,446
2016
$m
3,176
879
189
596
778
273
550
2,206
3,254
11,901
2017
$m
2,765
832
161
314
1
239
-
-
2,354
6,666
(1)
(2)
(3)
(4)
The 2016 comparative information has been restated to reflect a change in presentation of interest accrual on certain derivative assets and derivative liabilities, which is now presented within derivative
assets and derivative liabilities (previously included in other assets and other liabilities).
NAB has retained a 20% interest in MLC Limited following the sale of 80% of that company to Nippon Life. Refer to Note 41 Discontinued operations for further information.
The balance represents the outstanding cash consideration at 30 September 2016 for the transaction outlined in footnote 2 above. This amount was settled on 3 October 2016. Refer to Note 41 Discontinued
operations for further information.
Other includes securities sold not delivered, settlements clearing and investments relating to life insurance business.
96 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Other assets and liabilities (continued)
24 Provisions
Provisions are recognised when a legal or constructive obligation exists as a result of a past event, it is probable that an outflow of economic benefits
will be necessary to settle the obligation and the amount of the obligation can be reliably estimated. Provisions are not discounted to the present value
of their expected net future cash flows except where the time value of money is material.
Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events or present obligations where the transfer
of economic benefits is not probable or cannot be reliably measured. Contingent liabilities are not recognised in the balance sheet but are disclosed
unless the likelihood of payment is remote. Refer to Note 32 Contingent liabilities and credit commitments.
Employee entitlements
Operational risk event losses
Restructuring
Other
Total provisions
Employee entitlements
Group
Company
2017
$m
952
785
-
224
1,961
2016
$m
1,024
12
25
371
1,432
2017
$m
772
755
-
207
1,734
2016
$m
821
5
23
308
1,157
Refer to Note 5 Operating expenses for a description of the Group’s policies for recognition of employee entitlements.
Operational risk event losses
Provisions for operational risk event losses are raised for non-lending losses which include losses arising from specific legal actions not directly related
to amounts of principal outstanding for loans and advances, and losses arising from forgeries, frauds and the correction of operational issues.
The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at 30 September 2017, taking
into account the risks and uncertainties that surround the events and circumstances that affect the provision.
Reconciliation of movements in provision
Operational risk event losses (1)
Balance at beginning of year
Provisions made
Payments out of provisions
Provisions no longer required and net foreign currency movements (2)
Balance at end of year
Group
Company
2017
$m
12
1,022
(271)
22
785
2016
$m
2,177
840
(819)
(2,186)
12
2017
$m
2016
$m
5
994
(268)
24
755
21
833
(819)
(30)
5
(1)
(2)
Operational risk event losses includes claims pursuant to the Conduct Indemnity Deed. Refer to Note 32 Contingent liabilities and credit commitments for further details.
The Group 2016 reconciliation items disclosed as "Provisions no longer required and net foreign currency movements” includes primarily provisions deconsolidated as part of the CYBG demerger.
Restructuring costs
Provisions for restructuring costs include provisions for costs incurred but not yet paid and future costs that will arise as a direct consequence of
decisions already made. A provision for restructuring costs is only made where the Group has made a commitment and entered into an obligation such
that the Group has no realistic alternative but to carry out the restructure and make future payments to settle the obligation. A provision for restructuring
costs is only recognised when a detailed plan has been approved and the restructuring has either commenced or has been publicly announced. This
includes the cost of staff termination benefits and surplus lease space. Costs related to ongoing activities and future operating losses are not provided
for.
25 Other liabilities
Accrued interest payable (1)
Payables and accrued expenses
Cash collateral received from third parties
Other (2)
Total other liabilities
Group
Company
2017
$m
2,283
3,119
1,045
1,533
7,980
2016
$m
2,307
2,192
1,311
1,864
7,674
2017
$m
1,944
2,721
1,044
1,233
6,942
2016
$m
1,857
1,751
1,309
1,752
6,669
(1)
(2)
The 2016 comparative information has been restated to reflect a change in presentation of interest accrual on certain derivative assets and derivative liabilities, which is now presented within derivative
assets and derivative liabilities (previously included in other assets and other liabilities).
Other includes payables relating to settlements clearing and unpresented bank cheques.
2017 Annual Financial Report
97
Notes to the financial statements
Capital management
26 Contributed equity
In accordance with the Corporations Act 2001 (Cth), the Company does not have authorised capital and all ordinary shares have no par value. Ordinary
shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are included within equity. Holders of
ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote on a show of hands or, on a poll, one vote for
each fully paid ordinary share held at shareholders’ meetings. In the event of a winding-up of the Company, ordinary shareholders rank after all other
shareholders and creditors and are fully entitled to any residual proceeds of liquidation.
Issued and paid-up ordinary share capital
Ordinary shares, fully paid
Other contributed equity
National Income Securities
Trust Preferred Securities
National Capital Instruments
Total contributed equity
Ordinary Shares
Reconciliation of movement in ordinary shares
Balance at beginning of year
Shares issued:
Dividend reinvestment plan (DRP)
Transfer from equity-based compensation reserve
Capital distribution on CYBG demerger
Treasury shares sold relating to life insurance business (1)
Balance at end of year
Group
Company
2017
$m
2016
$m
2017
$m
2016
$m
31,707
30,968
30,921
30,182
1,945
975
-
34,627
1,945
975
397
34,285
1,945
-
-
32,866
Group
Company
2017
$m
30,968
569
170
-
-
31,707
2016
$m
31,334
596
166
(2,645)
1,517
30,968
2017
$m
30,182
569
170
-
-
30,921
1,945
-
397
32,524
2016
$m
32,065
596
166
(2,645)
-
30,182
(1)
Relates to shares in NAB previously held by Wealth's life insurance business which are no longer held by a controlled entity of the Group.
The number of ordinary shares on issue for the last two years at 30 September was as follows:
Ordinary shares, fully paid
Balance at beginning of year
Shares issued:
Dividend reinvestment plan (DRP)
Bonus share plan
Employee share plans
Performance rights
Paying up of partly paid shares
Total ordinary shares, fully paid
Ordinary shares, partly paid to 25 cents
Balance at beginning of year
Paying up of partly paid shares
Total ordinary shares, partly paid to 25 cents
Total number of ordinary shares on issue at end of year (including treasury shares)
Deduct: Treasury shares
Total number of ordinary shares on issue at end of year (excluding treasury shares)
National Income Securities
Company
2017
No. ’000
2016
No. ’000
2,656,976
2,625,764
19,794
2,203
6,249
241
6
21,325
2,052
7,461
359
15
2,685,469
2,656,976
49
(6)
43
2,685,512
(9,643)
2,675,869
64
(15)
49
2,657,025
(9,504)
2,647,521
On 29 June 1999, the Company issued 20,000,000 National Income Securities (NIS) at $100 each. These securities are stapled securities, comprising
one fully paid note of $100 issued by the Company through its New York branch and one unpaid preference share issued by the Company (NIS
preference share). The amount unpaid on a NIS preference share will become due in certain limited circumstances, such as if an event of default
occurs. Each holder of NIS is entitled to non-cumulative distributions based on a rate equal to the Australian 3 month bank bill rate plus 1.25% per
annum, payable quarterly in arrears.
With the prior written consent of APRA, the Company may redeem each note for $100 (plus any accrued distributions) and buy back or cancel the NIS
preference share stapled to the note for no consideration. NIS have no maturity date and are quoted on the Australian Securities Exchange (ASX). NIS
qualify as Additional Tier 1 capital, subject to transitional Basel III treatment.
98 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Capital management (continued)
Trust Preferred Securities
On 29 September 2003, the Group raised GBP400 million through the issue by National Capital Trust I, of 400,000 Trust Preferred Securities at
GBP1,000 each, to be used by the Company’s London branch. Each Trust Preferred Security earns a non-cumulative distribution, payable semi-
annually in arrears until 17 December 2018, equal to 5.62% per annum and, in respect of each five year period after that date, a non-cumulative
distribution payable semi-annually in arrears at a rate equal to the sum of the yield to maturity of the five year benchmark UK Government bond at the
start of that period plus 1.93%.
With the prior written consent of APRA, the Trust Preferred Securities may be redeemed on 17 December 2018 and on every subsequent fifth
anniversary. In this case, the redemption price is GBP1,000 per Trust Preferred Security plus the unpaid distributions for the last six month distribution
period. The Trust Preferred Securities may also be redeemed earlier in certain circumstances, in which case the redemption price will, in some cases,
be subject to a make-whole adjustment for the costs of reinvestment as a result of the early redemption. Trust Preferred Securities qualify as Additional
Tier 1 capital, subject to transitional Basel III treatment.
National Capital Instruments
On 18 September 2006, the Group raised $400 million (prior to issuance costs) through the issue by National Capital Trust III of 8,000 National Capital
Instruments (Australian NCIs) at $50,000 each. Each Australian NCI earned a non-cumulative distribution, payable quarterly in arrears at a rate equal to
the bank bill rate plus a margin of 0.95% per annum until the first optional redemption date. On 4 October 2016, with the prior consent of APRA, the
Group at its option, fully redeemed the Australian NCIs. Prior to their redemption, Australian NCIs qualified as Additional Tier 1 capital subject to
transitional Basel III treatment.
27 Reserves
Foreign currency translation reserve
Asset revaluation reserve
Cash flow hedge reserve
Equity-based compensation reserve
General reserve for credit losses
Debt instruments at fair value through other comprehensive income reserve
Equity instruments at fair value through other comprehensive income reserve
Total reserves
Foreign currency translation reserve
Balance at beginning of year
Currency adjustments on translation of foreign operations, net of hedging
Transfer to the income statement on disposal of foreign operations (1)
Tax on foreign currency translation reserve
Balance at end of year
Group
Company
2017
$m
(338)
2016
$m
(71)
2017
$m
(241)
83
46
273
-
89
84
237
83
143
234
75
80
85
629
-
5
273
-
89
64
190
Group
Company
2017
$m
(71)
(269)
(10)
12
(338)
2016
$m
(1,091)
(329)
1,368
(19)
(71)
2017
$m
(209)
(32)
-
-
2016
$m
(209)
-
57
234
75
80
72
309
2016
$m
(160)
(49)
-
-
(241)
(209)
(1)
The 2016 balance represents foreign currency translation reserve released on divestment of discontinued operations.
The foreign currency translation reserve records foreign currency differences arising from the translation of foreign operations, the translation of
transactions that hedge the NAB’s net investment in a foreign operation or the translation of foreign currency monetary items forming part of the net
investment in a foreign operation.
The results and financial position of all Group entities that have a functional currency different from the Australian dollar are translated into Australian
dollars as follows:
• Assets and liabilities are translated at the closing rate at the date of the balance sheet.
•
• All resulting exchange differences are recognised in the foreign currency translation reserve.
Income and expenses are translated at average exchange rates for the period, unless the average is not a reasonable approximation.
When a foreign operation is disposed of, any such exchange differences are recognised in the income statement as part of the gain or loss on disposal.
Asset revaluation reserve
The asset revaluation reserve records revaluation increments and decrements arising from the revaluation of land and buildings.
Cash flow hedge reserve
The cash flow hedge reserve records the effective portion of changes in the fair valuation of derivatives designated as cash flow hedging instruments.
2017 Annual Financial Report
99
Notes to the financial statements
Capital management (continued)
Equity-based compensation reserve
The equity-based compensation reserve records the value of equity benefits provided to employees as part of their remuneration.
Share capital tainting rules contained in Australian tax legislation apply prospectively from 26 May 2006 to discourage companies from distributing
profits to shareholders as preferentially taxed capital rather than dividends. The focus of the tax legislation is on the transfer of amounts to a share
capital account from another account. The tainting rules are inconsistent with AASB 2 "Share-based Payment" which allows transfers between equity
accounts upon the vesting of employee equity-based payments (i.e. when all conditions have been met by the employee).
During 2009, the Group received a private binding ruling from the Australian Taxation Office on this matter. The ruling allows, under certain
circumstances, vested employee shares to be reversed from the equity-based compensation reserve and ultimately recorded in paid-up capital without
giving rise to a tainting of the NAB’s share capital account for tax purposes. The share capital tainting rules and private binding ruling have no impact on
the regulatory capital of the Group.
General reserve for credit losses
APRA Prudential Standard APS 220 “Credit Quality” requires a reserve to be held to cover credit losses estimated but not certain to arise in the future
over the full life of all individual facilities. The general reserve for credit losses (GRCL) is calculated using a prudential expected loss methodology that
differs to that used for AASB 9 “Financial Instruments” expected credit loss provisions. The GRCL represents an appropriation of retained profits to non-
distributable reserves when the regulatory reserve is greater than the accounting provision. The purpose of the GRCL is to provide the Group with freely
available capital which can be used to meet credit losses that may subsequently materialise.
Debt instruments at fair value through other comprehensive income reserve
Debt instruments at fair value through other comprehensive income reserve includes all changes in the fair value of investments in debt instruments
except for impairment based on the three-stage expected credit loss model, foreign exchange gains and losses and interest income. The changes
recognised in reserve are transferred to profit or loss when the asset is derecognised or impaired.
Equity instruments at fair value through other comprehensive income reserve
Investments in equity instruments that are neither held for trading nor contingent consideration recognised by the Group in a business combination to
which AASB 3 "Business Combinations" applies are measured at fair value through other comprehensive income, where an irrevocable election has
been made by management. Amounts in the reserve are subsequently transferred to retained earnings, and not profit or loss, when the asset is
derecognised. Dividends on such investments are recognised in profit or loss unless the dividend clearly represents a recovery of part of the cost of the
investment.
28 Retained profits
Balance at beginning of year
Net profit attributable to owners of NAB from continuing operations
Net loss attributable to owners of NAB from discontinued operations
Dividends paid
Distributions on other equity instruments
Fair value changes on financial liabilities designated at fair value attributable to the Group's own credit risk
Reclassification of National Capital Instruments transaction costs
Actuarial gains on defined benefit superannuation plans
Gains on disposal of interest in subsidiary (1)
Transfer from asset revaluation reserve
Transfer (to) / from equity-based compensation reserve (2)
Transfer from / (to) general reserve for credit losses
Transfer from equity instruments at fair value through other comprehensive income reserve
Tax on items taken directly to / (from) equity
Balance at end of year
Group
Company
2017
$m
16,378
6,178
(893)
(5,216)
(98)
11
(3)
-
-
-
(22)
75
-
32
2016
$m
21,205
6,420
(6,068)
(5,060)
(124)
(113)
-
31
6
1
7
(11)
94
(10)
2017
$m
15,719
4,975
-
(5,216)
(60)
55
(3)
-
-
-
(22)
75
-
22
2016
$m
20,470
519
-
(5,161)
(68)
(131)
-
-
-
-
7
(11)
94
-
16,442
16,378
15,545
15,719
(1)
(2)
Represents gains from discontinued operations recognised directly in retained profits.
Transfer (to) / from equity-based compensation reserve relates to lapsed options and rights. In addition, the 2017 balance for the Group and the Company includes an adjustment related to prior period
equity-based compensation.
100 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Capital management (continued)
29 Dividends and distributions
Dividends on ordinary shares recognised by the Group and Company for the year ended 30 September:
2017
Final dividend declared in respect of the year ended 30 September 2016
Interim dividend declared in respect of the year ended 30 September 2017
Deduct: Bonus shares in lieu of dividend
Dividends paid by the Company during the year ended 30 September 2017
Add: Dividends paid to non-controlling interests in controlled entities
Dividends paid by the Group (Before dividend reinvestment plan)
2016
Final dividend declared in respect of the year ended 30 September 2015
Interim dividend declared in respect of the year ended 30 September 2016
Deduct: Bonus shares in lieu of dividend
Dividends paid by the Company during the year ended 30 September 2016
Deduct: Dividends on treasury shares (1)
Add: Dividends paid to non-controlling interests in controlled entities
Dividends paid by the Group (Before dividend reinvestment plan)
Amount per
share
cents
99
Total
amount
$m
2,630
99
n/a
99
99
n/a
2,649
(63)
5,216
5
5,221
2,600
2,618
(57)
5,161
(101)
5
5,065
(1)
Excludes any treasury shares held in trust by a controlled entity of the Group in respect of employee incentive schemes.
Franked dividends declared or paid during 2017 were fully franked at a tax rate of 30% (2016: 30%).
In 2016, the CYBG demerger resulted in the distribution of CYBG shares valued at $2,645 million to NAB shareholders.
Final dividend
On 2 November 2017, the directors declared the following dividend:
Final dividend declared in respect of the year ended 30 September 2017
Amount per
share
cents
99
Total
amount
$m
2,659
Franked
amount per
share
%
100
The final 2017 ordinary dividend is payable on 13 December 2017. The Group will offer a 1.5% discount on the Dividend Reinvestment Plan, with no
participation limit. The financial effect of this dividend has not been brought to account in the financial statements for the year ended 30 September 2017
and will be recognised in subsequent financial reports.
Australian franking credits
The franking credits available to the Group at 30 September 2017, after allowing for Australian tax payable in respect of the current reporting period’s
profit and the receipt of dividends recognised as a receivable at reporting date, are estimated to be $1,115 million (2016: $1,476 million). Franking
credits to be utilised as a result of the payment of the proposed final dividend are $1,139 million (2016: $1,127 million). Due to the timing of the dividend
payment, and the monthly tax instalments that will fall due before the dividend is paid, the franking credits available to the Group immediately after the
payment of the dividend will be $230 million. The extent to which future dividends will be franked will depend on a number of factors including the level
of the profits that will be subject to Australian income tax.
New Zealand imputation credits
The Company is able to attach available New Zealand imputation credits to dividends paid. As a result, New Zealand imputation credits of NZ$0.10 per
share will be attached to the final 2017 ordinary dividend payable by the Company. New Zealand imputation credits are only relevant for shareholders
who are required to file New Zealand income tax returns.
Distributions on other equity instruments
National Income Securities
Trust Preferred Securities (1)
National Capital Instruments (2)
Total distributions on other equity instruments
(1)
(2)
$A Equivalent.
National Capital Instruments were fully redeemed on 4 October 2016.
Group
Company
2017
$m
60
38
-
98
2016
$m
68
43
13
124
2017
$m
60
-
-
60
2016
$m
68
-
-
68
2017 Annual Financial Report
101
Notes to the financial statements
Cash flow information
30 Notes to the cash flow statements
(a) Reconciliation of net profit attributable to owners of NAB to net cash provided by operating activities
Group
Company
Net profit attributable to owners of NAB
Add / (deduct) non-cash items in the income statement:
(Increase) / decrease in interest receivable
(Decrease) / increase in interest payable
Decrease in unearned income and deferred net fee income
2017
$m
5,285
(107)
(94)
(139)
2016
$m
352
146
(607)
(209)
Fair value movements on assets, liabilities and derivatives held at fair value
(3,777)
(4,233)
Decrease in personnel provisions
Increase / (decrease) in other operating provisions
Equity-based compensation recognised in equity or reserves
Superannuation costs - defined benefit plans
Impairment losses on non-financial assets
Charge to provide for bad and doubtful debts
Depreciation and amortisation expense
Movement in life insurance policyholder liabilities
Unrealised loss / (gain) on investments relating to life insurance business
Decrease in other assets
Increase / (decrease) in other liabilities
Increase / (decrease) in income tax payable
(Increase) / decrease in deferred tax assets
(Increase) / decrease in deferred tax liabilities
Operating cash flow items not included in profit (1)
Investing or financing cash flows included in profit
(Gain) / Loss on sale of controlled entities, before income tax
Loss on sale of property, plant, equipment and other assets
Net cash provided by operating activities
2017
$m
4,975
(117)
8
(240)
(3,670)
(76)
653
187
-
129
731
476
-
-
250
(14)
(8)
(30)
(43)
2016
$m
519
249
(202)
(178)
(3,159)
(1)
345
203
-
359
702
369
-
-
425
(645)
(745)
(155)
69
(89)
632
187
-
20
824
734
(3)
2
308
40
18
(67)
(25)
(96)
(547)
203
23
5
883
679
1,868
(1,446)
111
(645)
(480)
113
(269)
9,503
13,046
11,350
10,941
(44)
9
13,217
5,555
8
14,460
-
1
14,562
4,923
1
14,020
(1)
Cash flows relating to bonds, notes and subordinated debt at fair value that occurred in the year ended 30 September 2016 have been reclassified from net receipts from / (payments for) other financial
liabilities at fair value, to repayments of and proceeds from bonds, notes and subordinated debt.
(b) Reconciliation of cash and cash equivalents
For the purposes of the cash flow statement, cash and cash equivalents includes cash and liquid assets and amounts due from other banks (including
reverse repurchase agreements and short-term government securities) net of amounts due to other banks that are readily convertible to known amounts
of cash within three months.
Cash and cash equivalents as shown in the cash flow statement is reconciled to the related items on the balance sheet as follows:
Cash and cash equivalents
Assets
Cash and liquid assets (excluding money at short call)
Treasury and other eligible bills
Due from other banks (excluding mandatory deposits with supervisory central banks)
Total cash and cash equivalent assets
Liabilities
Due to other banks
Total cash and cash equivalents
Group
Company
2017
$m
43,826
762
31,703
76,291
2016
$m
30,630
574
37,349
68,553
2017
$m
2016
$m
42,152
28,717
-
29,688
71,840
-
35,472
64,189
(36,491)
39,800
(40,593)
27,960
(35,009)
36,831
(39,339)
24,850
Included within due from other banks is the cash deposit of $877 million (GBP513 million) held with The Bank of England in connection with the CYBG
demerger, that is required to collateralise NAB's obligations under the Capped Indemnity as agreed with the United Kingdom Prudential Regulation
Authority (PRA).
(c) Non-cash financing and investing activities
New share issues
Dividend reinvestment plan
New debt issues
Subordinated medium-term notes reinvestment offer
102 NATIONAL AUSTRALIA BANK
Group
Company
2017
$m
2016
$m
2017
$m
2016
$m
569
539
596
-
569
539
596
-
Notes to the financial statements
Group structure
31 Interest in subsidiaries and other entities
a) Investment in controlled entities
The consolidated financial report comprises the financial report of the Company and its controlled entities. Controlled entities are all those entities
(including structured entities) over which the Company is exposed, or has rights, to variable returns from its involvement with the entity and has the
ability to affect those returns through its power over the entity. An assessment of control is performed on an ongoing basis. Entities are consolidated
from the date on which control is transferred to the Group. Entities are deconsolidated from the date that control ceases. The effects of transactions
between entities within the Group are eliminated in full upon consolidation. External interest in the equity and results of the entities that are controlled by
the Group are shown as non-controlling interests in controlled entities in the equity section of the consolidated balance sheet.
Investments in controlled entities are recorded at cost less any provision for impairment in the financial statements of the Company.
Gross carrying amount
Deduct: Provision for diminution in value
Total investments in controlled entities
Company
2017
$m
10,057
(1,384)
8,673
2016
$m
10,771
(1,278)
9,493
The following table presents the material controlled entities of the Group as at 30 September 2017 and 30 September 2016. Investment vehicles holding
life policyholder assets are excluded from the list below.
Entity name
National Australia Bank Limited
National Equities Limited (1) (2)
National Australia Group (NZ) Limited
Bank of New Zealand
BNZ International Funding Limited
National Wealth Management Holdings Limited
MLC Investments Ltd
NULIS Nominees (Australia) Limited
NBA Properties Limited (1)
Ownership
%
Incorporated
/ formed in
Australia
100
100
100
100
100
100
100
100
Australia
New Zealand
New Zealand
New Zealand
Australia
Australia
Australia
Australia
(1)
(2)
For the year ended 30 September 2016, these controlled entities and certain other subsidiaries within the Group were parties to a deed of cross guarantee with the Company and National Australia Trustees
Limited as trustees, and pursuant to ASIC Class Order 98/1418 dated 13 August 1998 were granted relief from the Corporations Act 2001 (Cth) requirements for preparation, audit and publication of an
annual financial report. The deed of cross guarantee was revoked effective 29 September 2017 - Refer to Note 32 (d) Contingent liabilities and credit commitment for further details.
On 8 February 2016, the Group lost control of CYBG - Refer to Note 41 Discontinued operations for further details.
Significant restrictions
Subsidiary companies that are subject to prudential regulation are required to maintain minimum capital and other regulatory requirements that may
restrict the ability of these entities to make distributions of cash or other assets to the parent company. These restrictions are managed in accordance
with the Group’s normal risk management policies set out in Note 34 Financial risk management and capital adequacy requirements in Note 40 Capital
adequacy.
b) Investment in associates
An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating
policy decisions of the investee but does not have control or joint control over these policies. The Group's investments in associates are accounted for
using the equity method.
The Group's investments in associates include a 20% interest in MLC Limited, a provider of life insurance products in Australia. MLC Limited was a
wholly owned subsidiary of the Group until 30 September 2016 when the Group lost control following the sale of 80% of MLC Limited to Nippon Life. Set
out below is the summarised financial information of MLC Limited based on its financial information (and not the Group’s 20% share of those amounts)
and includes income statement information for the year ended 30 September 2017, and balance sheet information as at 30 September 2017 and
30 September 2016.
Summarised income statement of MLC Limited
Revenue
Net profit for the period
Total comprehensive income for the period
2017
$m
1,685
77
77
2017 Annual Financial Report
103
Notes to the financial statements
Group structure (continued)
Reconciliation to the Group's share of profit
MLC Limited's net profit for the period
Prima facie share of profit at 20%
Deduct amortisation of intangible assets recognised at acquisition, net of tax
Group's share of profit for the period
The Group received dividends from MLC Limited of $9.1 million during the year.
Summarised balance sheet of MLC Limited
Total assets
Total liabilities
Net assets
Reconciliation to the Group's investment in MLC Limited
MLC Limited's net assets
Prima facie share of net assets at 20%
Add intangible assets recognised at acquisition, net of deferred tax
Group's carrying amount of the investment in MLC Limited
Significant restrictions
2017
$m
77
15
(7)
8
2016
$m
6,130
4,157
1,973
2016
$m
1,973
395
155
550
2017
$m
5,834
3,829
2,005
2017
$m
2,005
401
148
549
Assets in a statutory fund of MLC Limited can only be used to meet the liabilities and expenses of that fund, to acquire investments to further the
business of that fund, or to make profit distributions when solvency and capital adequacy requirements of the Life Insurance Act 1995 (Cth) are met.
This may impact MLC Limited's ability to transfer funds to the Group in the form of dividends. In addition, in certain circumstances the payment of
dividends may require approval by APRA.
Transactions
As part of a long term partnership with Nippon Life, the Group distributes MLC Limited life insurance products to retail and group customers through
NAB's owned and aligned distribution network under a long-term distribution agreement.
Under a financial services agreement and certain linked arrangements, the Group provides MLC Limited with certain financial services, including:
• On an exclusive basis: custody, transactional banking facilities, unit pricing, fixed income, commodity and currency services.
• On a non-exclusive basis: investment portfolio management.
Under a transitional services agreement, the Group provides certain support services until such time as MLC Limited establishes its own standalone
environment and capability. These services include payroll, financial and investment reporting, infrastructure services, major systems and contact
centres.
All services are provided on an arm's length basis.
c) Structured entities
A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity.
Structured entities generally have restricted activities and a narrow and well defined objective which is created through contractual arrangements.
Depending on the Group’s power over the relevant activities of the structured entity and its exposure to and ability to influence its own returns, it may or
may not consolidate the entity.
i) Consolidated structured entities
The Group has interests in the following types of consolidated structured entities:
Securitisation
The Group engages in securitisation activities for funding and liquidity purposes. The Group principally packages and sells residential mortgage loans as
securities to investors through a series of securitisation vehicles. The Group is entitled to any residual income after all payments to investors and costs
related to the program have been met. The note holders only have recourse to the pool of assets. The Group is considered to hold the majority of the
residual risks and benefits of the vehicles. All relevant financial assets continue to be held on the Group balance sheet, and a liability is recognised for
the proceeds of the funding transaction.
The Group provides liquidity facilities to the securitisation vehicles. The facilities can only be drawn to manage the timing mismatch of cash inflows from
securitised loans and cash outflows due to investors. The liquidity facility limit as at 30 September 2017 is $1,488 million.
Pursuant to ASIC instrument 15-0330 dated 29 May 2015, the Company is relieved from this requirement in respect of certain securitisation structured
entities to which the Group provides funding to and which are consolidated by the Company. With respect to each securitisation structured entity, relief is
104 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Group structure (continued)
granted until 30 September 2018. Each securitisation structured entity prepares an audited financial report following its year end and in accordance with
its transaction documents.
Covered bonds
The Group issues covered bonds for funding purposes. Housing loans are assigned to a bankruptcy remote structured entity to provide security for the
obligations payable on the covered bonds issued by the Group. Similar to securitisation programs, the Group is entitled to any residual income after all
payments due to covered bonds investors and costs related to the program have been met. The covered bond holders have dual recourse to the Group
and the cover pool assets.
ii) Unconsolidated structured entities
Unconsolidated structured entities refer to all structured entities that are not controlled by the Group. The Group enters into transactions with
unconsolidated structured entities in the normal course of business to facilitate customer transactions or for specific investment opportunities.
Interests in unconsolidated structured entities include, but are not limited to, debt and equity investments, guarantees, liquidity arrangements,
commitments, fees from investment structures, and derivative instruments that expose the Group to the risks of the unconsolidated structured entity.
Interests do not include plain vanilla derivatives (e.g. interest rate swaps and cross currency swaps) and positions where the Group:
• Creates rather than absorbs variability of the unconsolidated structured entity.
• Provides administrative, trustee or other services as agent to third party managed structured entities.
Involvement is considered on a case by case basis, taking into account the nature of the structured entity’s activity. This excludes involvements that
exist only because of typical customer-supplier relationships.
Securitisation
The Group engages with third party (client) securitisation vehicles by providing warehouse facilities, liquidity support and derivatives. The Group invests
in residential mortgage and asset-backed securities.
Other financing
The Group provides tailored lending to limited recourse single purpose vehicles which are established to facilitate asset financing for clients. The assets
are pledged as collateral to the Group. The Group engages in raising finance for leasing assets such as aircraft, trains, shipping vessels and other
infrastructure assets. The Group may act as a lender, arranger or derivative counterparty to these vehicles.
Other financing transactions are generally senior, secured self-liquidating facilities in compliance with Group credit lending policies. Regular credit and
financial reviews of the borrowers are conducted to ensure collateral is sufficient to support the Group’s maximum exposures.
Investment funds
The Group has direct interests in unconsolidated investment funds. The Group’s interests include holding units and receiving fees for services. The
Group’s interest in unconsolidated investment funds is immaterial.
The table below shows the carrying value and maximum exposure to loss of the Group’s interests in unconsolidated structured entities.
2017
2016
Securitisations Other financing Total Securitisations Other financing
$m
-
$m
610
$m
37
$m
37
$m
-
Trading securities
Other financial assets at fair value
Loans and advances
Debt instruments through fair value through other comprehensive income
Total carrying value of assets in unconsolidated structured entities
Commitment / Contingencies
Total maximum exposure to loss in unconsolidated structured entities
46
7,234
10,332
17,649
4,254
21,903
-
46
4,407
11,641
-
10,332
4,407
22,056
1,030
5,284
5,437
27,340
271
8,513
8,218
17,612
3,396
21,008
Total
$m
610
271
-
3,707
12,220
-
8,218
3,707
1,223
4,930
21,319
4,619
25,938
The total assets of unconsolidated structured entities are not considered meaningful for the purpose of understanding the Group’s financial risks
associated with these entities and so have not been presented. Unless specified otherwise, the Group’s maximum exposure to loss is the total of its on-
balance sheet positions and its off-balance sheet arrangements, being loan commitments, financial guarantees, and liquidity support. Exposure to loss
is managed as part of the enterprise Group-wide risk management framework. Refer to Note 34 Financial risk management for further details. Income
earned from interests in unconsolidated structured entities primarily result from interest income, mark-to-market movements and fees and commissions.
The majority of the Group’s exposures are senior investment grade, but in some limited cases, the Group may be required to absorb losses from
unconsolidated structured entities before other parties because the Group’s interests are subordinated to others in the ownership structure. The table
below shows the credit quality of the Group’s exposures in unconsolidated structured entities:
2017
2016
Senior investment grade
Investment grade
Sub-investment grade
Total (1)
Securitisations Other financing Total Securitisations Other financing
$m
1,212
$m
18,516
$m
17,158
$m
17,495
$m
1,021
133
21
17,649
2,978
3,111
408
429
4,407
22,056
428
26
17,612
Total
$m
18,370
2,472
477
2,044
451
3,707
21,319
(1)
Of the total, $22,013 million (2016: $21,293 million) represents the Group's interest in senior notes and $43 million in subordinated notes (2016: $26 million).
2017 Annual Financial Report
105
Notes to the financial statements
Unrecognised items
32 Contingent liabilities and credit commitments
(a) Financial assets pledged
Financial assets are pledged as collateral predominantly under repurchase agreements with other banks. The financial assets pledged by the Group are
strictly for the purpose of providing collateral for the counterparty. These transactions are conducted under terms that are usual and customary to
standard lending and securities borrowing and lending activities, as well as requirements determined by exchanges where the Group acts as an
intermediary. Repurchase agreements that do not qualify for derecognition are reported in Note 36 Financial asset transfers and securitisations.
(b) Contingent liabilities
(i) Bank guarantees and letters of credit
The Group’s exposure to potential loss in the event of non-performance by a counterparty in respect of commitments to extend credit, letters of credit
and financial guarantees written is represented by the contractual notional principal amount of those instruments less any amounts that may be
recovered under recourse provisions. The Group uses the same credit policies and assessment criteria in making commitments and conditional
obligations for off-balance sheet risks as it does for on-balance sheet loan assets.
The Group provides guarantees in its normal course of business on behalf of its customers. Guarantees written are conditional commitments issued by
the Group to guarantee the performance of a customer to a third party. Guarantees are primarily issued to support direct financial obligations such as
commercial bills or other debt instruments issued by a counterparty. It is the credit rating of the Group as a guarantee provider that enhances the
marketability of the paper issued by the counterparty in these circumstances. Guarantees are also provided on behalf of counterparties as performance
bonds and ongoing obligations to government entities. The Group has four principal types of guarantees:
• Bank guarantees – a financial guarantee that is an agreement by which the Group agrees to pay an amount of money on demand on behalf of a
customer to a third party during the life of the guarantee.
• Standby letters of credit – an obligation of the Group on behalf of a customer to make payment to a third party in the event that the customer fails to
meet an outstanding financial obligation.
• Documentary letters of credit – a guarantee that is established to indemnify exporters and importers in their trade transactions where the Group
agrees to make certain trade payments on behalf of a specified customer under specific conditions.
• Performance-related contingencies – a guarantee given by the Group that undertakes to pay a sum of money to a third party where the customer
fails to carry out certain terms and conditions of a contract.
The credit risk involved in issuing guarantees is essentially the same as that involved in extending loan facilities to customers. Apart from the normal
documentation for a facility of this type, the customer must also provide the Group with a written indemnity, undertaking that, in the event the Group is
called upon to pay, the Group will be fully reimbursed by the customer.
A financial guarantee contract is initially recorded at fair value which is equal to the premium received or receivable, unless there is evidence to the
contrary. Subsequently, financial guarantee contracts are measured at the higher of:
• The liability for the estimated amount of the loss payable where it is likely that a loss will be incurred as a result of issuing the contract; or
• The amount initially recognised less, when appropriate, amortisation of the fee over the life of the guarantee.
The following table shows details of the Group’s contingent liabilities in relation to bank guarantees and letters of credit for the last two financial years as
at 30 September:
Bank guarantees and letters of credit
Bank guarantees
Standby letters of credit
Documentary letters of credit
Performance-related contingencies
Total bank guarantees and letters of credit
(ii) Clearing and settlement obligations
Group
Company
2017
$m
4,683
5,456
750
8,683
2016
$m
4,802
5,953
715
7,435
2017
$m
4,645
5,456
408
8,098
2016
$m
4,776
5,953
318
6,990
19,572
18,905
18,607
18,037
The Group is subject to a commitment in accordance with the rules governing clearing and settlement arrangements contained in the Australian
Payments Clearing Association Limited Regulations for the Australian Paper Clearing System, the Bulk Electronic Clearing System, the Consumer
Electronic Clearing System and the High Value Clearing System which could result in a credit risk exposure and loss in the event of a failure to settle by
a member institution. The Group also has a commitment in accordance with the Austraclear System Regulations and the Continuous Linked Settlement
Bank Rules to participate in loss-sharing arrangements in the event that another financial institution fails to settle.
The Group is a member of various central clearing houses, most notably the London Clearing House (LCH) SwapClear and RepoClear platforms and
the ASX OTC CCP, which enables the Group to centrally clear derivative and repurchase agreement instruments respectively. As a member of these
central clearing houses, the Group is required to make a default fund contribution. The exposure to risk associated with this commitment is reflected for
Capital Adequacy purposes in the Group’s Pillar 3 reporting. In the event of a default of another clearing member, the Group could be required to
commit additional funds to the default fund contribution.
106 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Unrecognised items (continued)
(iii) Legal proceedings - general
Entities within the Group are defendants from time to time in legal proceedings arising from the conduct of their business.
There are contingent liabilities in respect of claims, potential claims and court proceedings against entities of the Group. Where appropriate, provisions
have been made. The aggregate of potential liability in respect thereof cannot be accurately assessed.
(iv) Legal proceedings - specific
Bank Bill Swap Reference Rate
Following an industry-wide review by ASIC into participants in the Bank Bill Swap Reference Rate (BBSW) market, ASIC commenced Federal Court
proceedings against NAB on 7 June 2016. ASIC has also commenced similar proceedings against two other major Australian banks. ASIC's allegations
against NAB include claims of market manipulation and unconscionable conduct in relation to trading in the BBSW market during the period from June
2010 to December 2012. NAB has agreed a settlement with ASIC (refer to Note 42 Events subsequent to reporting date). The financial impact of this
settlement has been reflected in the Group's 2017 full year results.
BBSW class action
In August 2016, a class action complaint was filed in the United States District Court for the Southern District of New York regarding alleged conduct
concerning BBSW. The complaint named a number of defendants, including NAB, ANZ, CBA and Westpac, and references the proceedings brought by
ASIC against NAB, ANZ and Westpac in relation to BBSW. The potential outcome of these proceedings cannot be determined with any certainty at this
stage.
NZ fee class action
On 20 August 2014, a representative action was filed against Bank of New Zealand (BNZ) in relation to certain fees. On 8 May 2017, Fair Play on Fees
agreed not to continue that representative action. BNZ agreed to make a contribution towards costs incurred in commencing the action. BNZ has not
admitted any liability.
(v) Regulatory compliance investigations - general
Entities within the Group are subject from time to time to regulatory investigations arising from the conduct of their business. This includes regulatory
investigations in relation to actual or potential breaches of law or regulations. In addition to situations where the relevant regulatory authority is carrying
out the investigation, this includes situations where the Group is carrying out the investigation itself or a third party has been engaged to carry out the
investigation.
There are contingent liabilities in respect of regulatory investigations involving entities of the Group. Where appropriate, provisions have been made.
The outcome of such regulatory investigations, including whether enforcement action will be taken or other legal proceedings initiated, is typically
uncertain and the aggregate of potential liability in respect thereof cannot be accurately assessed.
(vi) Regulatory compliance investigations - specific
Adviser service fees
ASIC is conducting an industry-wide investigation into financial advice fees paid by customers pursuant to ongoing service arrangements with financial
advice firms, including members of the NAB Group. Under the service arrangements, customers generally pay an adviser service fee in consideration
for a range of services provided to the customer. NAB is investigating whether customers who have paid to receive ongoing services have been
provided with the agreed services in accordance with the relevant service agreement with a member of the NAB Group. NAB continues to engage with
ASIC on the design of the methodology for investigating and assessing this matter; however, agreement with ASIC has not yet been reached due to
different views about aspects of NAB's proposed approach. The outcomes of the investigation are uncertain at this time.
Plan Service Fees
Further to ASIC’s May 2017 report about its industry-wide investigation into financial advice fees, NAB has finalised refunds to customers who did not
have a plan adviser attached to their superannuation account and were incorrectly charged Plan Service Fees. ASIC has requested NAB consider
certain circumstances regarding continuity of service where a Plan Service Fee continues to be charged and paid to a plan adviser after a
superannuation fund member leaves an employer and a change to the member's superannuation plan occurs as a result. NAB continues to engage with
ASIC on this matter. The outcomes of the investigation are uncertain at this time.
Wealth advice review
In October 2015, NAB began contacting certain groups of customers where there was a concern that they may have received non-compliant advice
since 2009 to: (a) assess the appropriateness of that advice; and (b) identify whether customers had suffered loss as a result of non-compliant advice
that would warrant compensation. These cases are progressing through the Customer Response Initiative review program with compensation in some
cases offered and paid.
The outcomes and total costs associated with this work are uncertain. Plaintiff law firms continue to encourage NAB customers who have suffered
losses as a result of financial advice received from NAB advisers to contact them for legal advice. No class actions have been taken against the Group
in this regard.
2017 Annual Financial Report
107
Notes to the financial statements
Unrecognised items (continued)
NZ Ministry of Business, Innovation and Employment compliance audit
The Labour Inspectorate of the New Zealand Ministry of Business, Innovation and Employment is currently undertaking a program of compliance audits
of a number of New Zealand organisations in respect of the New Zealand Holidays Act 2003 (the "Holidays Act"). BNZ requested early participation in
this program in May 2016 and received the Labour Inspectorate's final report, which set out its findings regarding BNZ's compliance with the Holidays
Act, on 18 January 2017. The findings indicated that BNZ has not complied with certain requirements of the Holidays Act, including in respect of annual
and public holiday payments to certain employees. BNZ is reviewing the findings and is working with the Labour Inspectorate to reach an appropriate
resolution. At this stage, the final outcome of the audit, including possible remediation, cannot be determined with any certainty.
Anti-Money Laundering and Counter-Terrorist Financing Program Uplift Work
Since July 2016, NAB has been progressing a program of work to uplift and strengthen the Group Anti-Money Laundering (AML) and Counter-Terrorist
Financing (CTF) Program and its implementation. The work involves significant investment in systems, ensuring an effective and efficient control
environment and uplifting compliance capability. In addition to a general uplift in capability, the program of work aims to remediate specific compliance
issues and weaknesses if they are identified.
Where significant AML/CTF compliance issues are identified, they are notified to AUSTRAC or equivalent foreign regulators, and those regulators are
typically consulted and updated about progress in investigating and remediating the relevant issues. The Group is currently investigating and
remediating a number of identified issues, including certain weaknesses with the implementation of ‘Know Your Customer’ requirements and systems
and process issues that impacted transaction monitoring and reporting for some specific areas.
It is possible that, as the work progresses, further issues may be identified and additional strengthening may be required. The outcomes of the
investigation and remediation process for specific issues identified to date, and for any issues identified in the future, are uncertain.
(vii) Contractual commitments
Insurance claims
NAB is in the process of making insurance claims in relation to certain conduct-related losses suffered by the Group. The insurance claims are
accounted for by NAB as a contingent asset. The outcome of such claims cannot be determined with any certainty at this stage.
Contracts - general
Entities within the Group enter into contractual agreements from time to time, which sometimes involve giving contingent commitments such as
warranties, indemnities or guarantees.
There are contingent liabilities in respect of such commitments. Where appropriate, provisions have been made. The aggregate potential liability in
respect thereof cannot be accurately assessed.
UK conduct issues and the Conduct Indemnity Deed
As part of the arrangements relating to the CYBG demerger, NAB and CYBG entered into a Conduct Indemnity Deed under which NAB agreed, subject
to certain limitations, to provide an indemnity in respect of certain historic conduct liabilities (Capped Indemnity) up to a cap of £1.115 billion (Capped
Indemnity Amount). The Capped Indemnity provides CYBG with economic protection against certain costs and liabilities (including financial penalties
imposed by a regulator) resulting from conduct issues relating to:
• payment protection insurance (PPI), certain interest rate hedging products (IRHP) and certain fixed rate tailored business loans (FRTBLs); and
• other conduct matters, measured by reference to the following thresholds: (a) claims relating to an industry wide compensation customer redress
program entered into as part of a settlement with a regulator exceeding
• £2.5 million, in aggregate; and (b) all other claims that exceed £5 million, in aggregate, and affect more than 50 customers,
which, in each case, relate to conduct in the period prior to 8 February 2016 (the Demerger Date) whether or not known at the Demerger Date. Such
conduct issues include acts, omissions and agreements by or on behalf of CYBG Group with respect to customers which either constitute a breach of or
failure to comply with applicable law or regulations, or are determined by CYBG in good faith to be reasonably likely on a balance of probabilities to
constitute a breach of or failure to comply with applicable law or regulations. Certain other conduct matters, including matters arising from a review of
investment advice sales, have now satisfied the thresholds for inclusion as conduct issues covered by the Capped Indemnity.
It is not expected that payments to CYBG under the Capped Indemnity will be taxable in the hands of CYBG Group, but if tax were to be payable then
the Conduct Indemnity Deed contains provisions pursuant to which NAB has agreed to compensate CYBG for any actual tax incurred that would not
have been incurred but for the receipt of amounts under the Capped Indemnity.
Claims may be made by CYBG under the Capped Indemnity when it or any member of CYBG Group raises a new provision or increases an existing
provision in respect of any such conduct issues. Under a loss sharing arrangement, CYBG will be responsible for 9.7% of the liabilities under any
provision for such conduct issues with NAB responsible for the remainder under the Capped Indemnity up to the Capped Indemnity Amount. The
Capped Indemnity is perpetual in nature, although NAB has rights in certain circumstances to negotiate arrangements to terminate the Capped
Indemnity subject to the approval of the PRA.
For the year ended 30 September 2017, CYBG has made claims under the Capped Indemnity for £171 million, leaving £511 million outstanding as
available support under the Capped Indemnity (Unutilised Indemnity Amount). In addition, NAB has increased the amount of provisions held for
expected future claims under the Conduct Indemnity Deed by £343 million (representing the portion of any increased CYBG provision for which NAB
would be responsible under the loss sharing arrangement). If CYBG makes claims under the Conduct Indemnity Deed for this amount, it would reduce
the Unutilised Indemnity Amount to £168 million.
108 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Unrecognised items (continued)
The Unutilised Indemnity Amount at any point in time is accounted for by NAB as a contingent liability, with any potential future losses incurred under the
indemnity expensed within discontinued operations. The frequency and timing of any potential future losses is presently unknown. The amount of the
Capped Indemnity that will be utilised by any potential future losses cannot be determined with any certainty at this stage.
NAB collateralised its obligations under the Capped Indemnity by placing a cash deposit of £1.115 billion with The Bank of England from the Demerger
Date. The cash deposit with The Bank of England has been reduced commensurate with the amounts claimed under the Capped Indemnity such that
the cash deposit amount is equal to the Unutilised Indemnity Amount (plus accrued interest). The Unutilised Indemnity Amount is treated as a Common
Equity Tier 1 (CET1) deduction for NAB.
Except for the Capped Indemnity and the tax provisions set out in the Conduct Indemnity Deed, CYBG has agreed to release NAB from liability for any
other conduct-related claims by any member of CYBG Group against NAB.
(c) Credit-related commitments
Binding commitments to extend credit are agreements to lend to a customer so long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Since many of the
commitments are expected to expire without being drawn down, the total commitment amounts do not necessarily represent future cash requirements.
Refer to Note 16 Loans and advances for a description of collateral held as security and other credit enhancements.
The following tables show details of the notional amount of credit-related commitments as at 30 September 2017 and 30 September 2016:
Credit-related commitments
Underwriting facilities
Binding credit commitments
Total credit-related commitments
Australia
New Zealand
Other International
Total
Group
Company
2017
$m
2016
$m
2017
$m
2
151,375
151,377
2
146,801
146,803
2
134,267
134,269
2016
$m
2
129,487
129,489
Group
Company
2017
$m
123,599
16,439
11,339
151,377
2016
$m
120,534
16,651
9,618
146,803
2017
$m
122,930
-
11,339
134,269
2016
$m
119,871
-
9,618
129,489
(d) Parent entity guarantee and undertakings
The Company has provided the following guarantees and undertakings relating to entities in the Group. These guarantees and undertakings are
not included in previous tables in the note.
• The Company will guarantee up to $25,505 million (2016: $26,224 million) of commercial paper issuances by National Australia Funding (Delaware)
Inc. Commercial paper of $189 million (2016: $301 million) has been issued.
• The Company is responsible to its customers for any direct loss suffered as a result of National Nominees Limited failing to perform its obligations to
the Company.
• The Company and National Wealth Management Services Limited (NWMSL) have been granted licences by the Safety, Rehabilitation and
Compensation Commission (the Commission) to operate as self-insurers under the Commonwealth Government Comcare Scheme. Under these
arrangements, the Company has agreed that, in the event it is proposed that NWMSL no longer continues as a wholly owned controlled entity of the
Company, the Company will provide the Commission with a guarantee of the then current workers’ compensation liabilities of NWMSL.
• The Company has issued letters of support in respect of certain subsidiaries in the normal course of business. The letters recognise that the
Company has a responsibility to ensure that those subsidiaries continue to meet their obligations.
The Company is no longer party to nor has any outstanding liabilities under a deed of cross guarantee with certain controlled entities. Previously,
pursuant to Australian Securities and Investment Commission Class Order 98/1418 dated 13 August 1998 (Class Order), relief was granted to certain
controlled entities from the Corporations Act 2001 (Cth) requirements for preparation, audit and publication of annual financial reports. It was a condition
of the Class Order that the Company and each of the controlled entities enter into a deed of cross guarantee. On 28 September 2016, ASIC issued a
new relief instrument replacing the Class Order, under which APRA regulated entities can no longer be a party to a deed of cross guarantee. As a result
the deed of guarantee between the Company and certain controlled entities was revoked, with the deed of revocation taking effect on 29 September
2017.
2017 Annual Financial Report
109
Notes to the financial statements
Unrecognised items (continued)
33 Operating leases
At the inception of an arrangement, the Group determines whether the arrangement is, or contains, a lease. A specific asset is the subject of a lease if
fulfilment of the arrangement is dependent on the use of that specified asset and the arrangement conveys a right to use the asset. At inception or upon
reassessment of an arrangement, the Group separates payment and other consideration required by such an arrangement into those for the lease and
those for other elements on the basis of their relative fair values.
Leases where the Group assumes substantially all risks and rewards of ownership are classified as finance leases. All other leases are classified as
operating leases.
Where the Group is the lessee, the future minimum lease payments under non-cancellable operating leases are:
Due within one year
Due after one year but no later than five years
Due after five years
Total non-cancellable operating lease commitments
Group
Company
2017
$m
393
976
558
1,927
2016
$m
371
963
613
1,947
2017
$m
336
849
524
1,709
2016
$m
322
833
575
1,730
The Group leases various offices, stores and other premises under non-cancellable operating lease arrangements. The leases have various terms,
escalation and renewal rights. There are no contingent rents payable. The Group also leases data processing and other equipment under non-
cancellable lease arrangements.
110 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Risk disclosures
34 Financial risk management
The Group is a major participant in the banking and financial services industry in Australia and New Zealand. The financial risks associated with these
activities are a significant component of the Group’s overall risk exposure. The key financial risks faced by the Group are:
• Credit risk.
• Market risk - trading.
• Market risk - non-trading / banking positions.
• Liquidity risk.
Further details regarding the nature and extent of each key financial risk faced by the Group and how these risks are managed are outlined as part of
this note. Financial risks together with other material risks faced by the Group, including operational, compliance and regulatory risks, are managed and
overseen as part of the Group’s broader corporate governance structure and risk management framework as follows:
Board Governance
A transparent and robust corporate governance structure is in place for the Group with supporting processes aimed to meet the needs and expectations
of shareholders and stakeholders. The Board’s key role is to create and deliver value to shareholders by effectively governing the Group, while having
regard to the interests of all stakeholders. The Board has established a number of committees to assist it in carrying out its responsibilities and these
operate under specific delegated authority granted by the Board and provide specialised focus on particular areas as articulated in their governance
charters.
The Board Risk Committee (BRC) supports the framework for risk management across the Group by:
• Overseeing the risk profile and risk management of the Group within the context of the Board determined risk appetite.
• Making recommendations to the Board concerning the Group’s risk appetite, risk management strategy and particular risks or risk management
practices.
• Reviewing management’s plans for mitigation of material risks faced by the Group.
• Overseeing the implementation and review of the risk management framework and internal compliance and control systems throughout the Group.
• Promoting awareness of a risk-based culture and the achievement of a balance between risk and return for risks accepted.
Executive Governance
The Board delegates responsibility to the Group CEO to manage the day to day operations of the Group. At an executive level, risk management is led
by the Group CEO and the Group Risk Return Management Committee (GRRMC) which is accountable for matters relating to culture, risk strategy and
performance and integrated governance processes. A number of sub-committees support the GRRMC in governing specific material risks, as follows:
• Group Asset & Liability Committee (GALCO): balance sheet structure.
• Group Credit and Market Risk Committee (GCMRC): credit and traded market risk portfolio.
• Group Models Risk Committee (GMRC): models risk.
• Group Regulatory, Compliance and Operational Risk Committee (GRCORC): operational, regulatory and compliance risk.
First Line risk committees provide governance in support of the management of risk matters, including material risks across the value chain. Second
Line risk specialists are members of these committees to provide oversight, review and challenge.
Risk management
Effective risk management, including a sound risk culture, is essential to achieving the Group's vision to be Australia and New Zealand’s most respected
bank. Maintaining focus on risk and compliance is a ‘non-negotiable’, with risk being one of the three foundations of the One NAB Plan.
The Group undertakes annual strategic planning to establish the strategic objectives and ensure that risk appetite and strategy are aligned.
The approach to risk management is based on a Three Lines of Defence model. Risk Management Accountabilities are allocated for risk ownership (first
line) and functionally independent oversight (second line) and assurance (third line).
Further details of risk accountabilities across the Group are disclosed in the Corporate Governance section of the Group’s website at www.nab.com.au/
about-us/corporate-governance.
The key financial risks faced by the Group are set out in detail in this note.
Credit risk
Credit is any transaction that creates an actual or potential obligation for a counterparty or customer to pay the Group. Credit risk is the potential that a
counterparty or customer will fail to meet its obligations to the Group in accordance with agreed terms. Bank lending activities account for most of the
Group’s credit risk, however other sources of credit risk also exist throughout the activities of the Group. These activities include the banking book, the
trading book, and other financial instruments and loans (including, but not limited to, acceptances, placements, inter-bank transactions, trade financing,
foreign exchange transactions, swaps, bonds and options), as well as in the extension of commitments and guarantees and the settlement of
transactions.
The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to existing or potential
counterparties or customers, groups of related counterparties or groups of related customers, and to geographical and industry segments. Such risks
are monitored on an ongoing basis and are subject to an annual or more frequent review.
2017 Annual Financial Report
111
Notes to the financial statements
Risk disclosures (continued)
In general, the Group does not take possession of collateral it holds as security or call on other credit enhancements that would result in recognition of
an asset on the balance sheet.
Exposure to credit risk is managed through regular analysis of the ability of existing or potential counterparties, customers, groups of related
counterparties or groups of related customers to meet interest and capital repayment obligations and by changing lending limits where appropriate.
Exposure to credit risk is also managed in part by obtaining collateral and corporate and personal guarantees.
The Group further restricts its exposure to credit losses by entering into master netting arrangements with counterparties with which it undertakes a
significant volume of transactions. Master netting arrangements do not generally result in an offset of balance sheet assets and liabilities, as
transactions are usually settled on a gross basis. However, the credit risk associated with favourable contracts is reduced by a master netting
arrangement to the extent that if any counterparty failed to meet its obligations in accordance with agreed terms, all amounts with the counterparty are
terminated and settled on a net basis.
Further quantitative details around the effect of such netting arrangements are outlined in the Offsetting of financial assets and liabilities disclosures on
page 114.
Maximum exposure to credit risk
The table below shows the maximum exposure to credit risk for recognised and unrecognised financial instruments. The maximum exposure is shown
gross before both the effect of mitigation through use of master netting and collateral arrangements. The extent to which collateral and other credit
enhancements mitigate the maximum exposure to credit risk is described in the footnotes to the table.
For financial assets recognised on the balance sheet, the maximum exposure to credit risk equals their carrying amount.
For financial guarantees granted, the maximum exposure to credit risk is the maximum amount that the Group would have to pay if the guarantees are
called upon. For loan commitments and other credit related commitments that are irrevocable over the life of the respective facilities, the maximum
exposure to credit risk is the full amount of the committed facilities.
Financial assets
Cash and liquid assets
Due from other banks
Trading derivatives
Trading securities
Debt instruments at fair value through other comprehensive income
Other financial assets at fair value
Hedging derivatives
Loans and advances
Due from customers on acceptances
Due from controlled entities
Other assets
Total
Contingent liabilities
Credit-related commitments
Total
Total credit risk exposure
Footnote
Group
Company
2017
$m
2016
$m
2017
$m
2016
$m
(a)
(b)
(c)
(d)
(d)
(e)
(c)
(e)
(e)
(f)
(f)
(g)
(g)
42,664
37,066
29,137
50,954
42,131
16,058
3,892
543,764
6,786
-
7,649
780,101
19,572
151,377
170,949
951,050
29,606
45,236
43,146
45,971
40,689
21,496
6,741
513,691
12,205
-
9,461
768,242
18,905
146,803
165,708
933,950
41,117
35,030
30,383
45,637
42,029
11,825
3,816
471,451
6,786
109,163
5,920
803,157
18,607
134,269
152,876
956,033
27,822
43,359
42,467
41,513
40,580
14,831
6,319
444,646
12,205
119,414
7,725
800,881
18,037
129,489
147,526
948,407
a) The balance of Cash and liquid assets which is exposed to credit risk is comprised primarily of reverse repurchase agreements and securities
borrowing agreements. These are collateralised with highly liquid securities and the collateral is in excess of the borrowed or loaned amount. The fair
value of the securities pledged as collateral by the counterparty under these agreements is disclosed in Note 10 Cash and cash equivalents.
b) The balance of Due from other banks which is exposed to credit risk is comprised primarily of securities borrowing agreements and reverse
repurchase agreements, as well as balances held with central supervisory banks and other interest earning assets. Securities borrowing agreements
and reverse repurchase agreements are collateralised with highly liquid securities and the collateral is in excess of the borrowed or loaned amount. The
fair value of the securities pledged as collateral by the counterparty under these agreements is disclosed in Note 10 Cash and cash equivalents.
Balances held with central supervisory banks and other interest earning assets that are due from other banks are managed based on the counterparty's
creditworthiness. The Group will utilise master netting arrangements where possible to reduce its exposure to credit risk. Details on the credit grading of
Due from other banks balances held by the Group is disclosed in the credit quality table included within the Financial assets neither past due nor
impaired disclosure beginning on page 117.
c) At any one time, the maximum exposure to credit risk from Trading and hedging derivatives is limited to the current fair value of instruments that
are favourable to the Group less collateral obtained. This credit risk is managed as part of the overall lending limits with customers, together with
potential exposures from market movements.
The Group uses documentation including International Swaps and Derivatives Association (ISDA) Master Agreements to document derivative activities.
Under the ISDA Master Agreements, if a default of a counterparty occurs, all contracts with the counterparty are terminated. They are then settled on a
net basis at market levels current at the time of default. The Group also executes Credit Support Annexes in conjunction with ISDA Master Agreements.
112 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Risk disclosures (continued)
Credit risk from over-the-counter trading and hedging derivatives is mitigated where possible through netting arrangements whereby derivative assets
and liabilities with the same counterparty can be offset in certain circumstances. Derivatives that are cleared through a central clearing counterparty or
an exchange have less credit risk than over the counter derivatives and are subject to relevant netting and collateral agreements.
Collateral is obtained against derivative assets, depending on the creditworthiness of the counterparty and / or the nature of the transaction.
d) Trading securities and Debt instruments at fair value through other comprehensive income are generally comprised of similar financial
instruments being Government, Semi-government, Corporate and Financial institution bonds, notes and securities. The amount of collateral held against
such instruments will depend on the counterparty and the nature of the specific financial instrument.
The Group may utilise Credit Default Swaps (CDS), guarantees provided by central banks, other forms of credit enhancements or collateral in order to
minimise the Group’s exposure to credit risk. The credit grading of Debt instruments at fair value through other comprehensive income are disclosed in
the credit quality table included within the Financial assets neither past due nor impaired disclosure beginning on page 117.
e) Other financial assets at fair value, Loans and advances and Due from customers on acceptances, mainly comprise general lending and line
of credit products. The distinction in classification reflects the type of lending product or is due to an accounting designation. These lending products will
generally have a significant level of collateralisation depending on the nature of the product.
Other lending to non-retail customers may be provided on an unsecured basis or secured (partially or fully) by acceptable collateral defined in specific
Group credit policy and business unit procedures. Collateral is generally comprised of business assets, inventories and in some cases personal assets
of the borrower. The Group manages its exposure to these products by completing a credit evaluation to assess the customer’s character, industry,
business model and capacity to meet their commitments without distress. Collateral provides a secondary source of repayment for funds advanced in
the event that a customer cannot meet their contractual repayment obligations. For amounts due from customers on acceptance the Group generally
has recourse to guarantees, underlying inventories or other assets in the event of default which significantly mitigates the credit risk associated with
accepting the customer’s credit facility with a third party.
Housing loans are secured against residential property as collateral, and where applicable, Lenders Mortgage Insurance (LMI) is obtained by the Group
(mostly in Australia) in order to cover any shortfall in outstanding loan principal and accrued interest. LMI is generally obtained for residential mortgages
with a Loan to Valuation Ratio (LVR) in excess of 80%. The financial effect of these measures is that remaining credit risk on residential mortgage loans
is minimal. Other retail lending products are mostly unsecured (e.g. credit card outstandings and other personal lending).
f) The balance of Other assets which is exposed to credit risk is primarily comprised of investments relating to life insurance business, interest
receivable accruals and other receivables. Interest receivable accruals are subject to the same collateral as the underlying borrowings. Other
receivables will mostly be unsecured. There are typically no collateral or other credit enhancements obtained in respect of amounts Due from
controlled entities.
g) Contingent liabilities and credit-related commitments are comprised mainly of guarantees to customers, standby or documentary letters of credit,
performance related contingencies and binding credit commitments. The Group will typically have recourse to specific assets pledged as collateral in the
event of a default by a party for which the Group has guaranteed its obligations to a third party and therefore tend to carry the same credit risk as loans.
With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss of an amount equal to the total unused
commitments. However, the likely amount of loss is generally less than the total unused commitments, as most commitments to extend credit are
contingent upon customers maintaining specific credit standards. The Group monitors the term to maturity of credit commitments because, in general,
longer term commitments have a greater degree of credit risk than shorter term commitments.
Features of the guarantees, letters of credit, performance-related contingencies and credit-related commitments are described in Note 32 Contingent
liabilities and credit commitments.
2017 Annual Financial Report
113
Notes to the financial statements
Risk disclosures (continued)
Offsetting of financial assets and liabilities
The table below illustrates the amounts of financial instruments that have been offset on the balance sheet and also those amounts that are subject to
enforceable master netting arrangements or similar agreements (i.e. offsetting agreements and any related financial collateral). The table excludes
financial instruments not subject to offset and that are only subject to collateral arrangements (e.g. loans and advances).
The “Net Amounts” presented in the table are not intended to represent the Group’s actual exposure to credit risk, as the Group will utilise a wide range
of strategies to mitigate credit risk in addition to netting and collateral arrangements. The offsetting and collateral arrangements and other credit risk
mitigation strategies are further explained beginning on page 111.
The amounts recognised on the balance sheet comprise of the sum of the ‘Net amounts reported on balance sheet’ and ‘Amounts not subject to
enforceable netting arrangements’ included in the table below.
2017
Amount subject to enforceable netting arrangements
Effect of offsetting on balance sheet
Related amounts not offset
Gross
amounts
$m
46,967
72,281
119,248
46,770
67,417
114,187
Amount
offset(2)
$m
21,160
Net amounts
reported on
balance sheet
$m
25,807
23,972
45,132
21,160
23,972
45,132
48,309
74,116
25,610
43,445
69,055
Financial
Instruments(3)
Non Cash
Collateral(4)
$m
17,149
-
17,149
17,149
-
17,149
$m
181
48,309
48,490
406
43,445
43,851
Cash
Collateral(4) Net Amount
$m
2,349
$m
6,128
-
6,128
5,247
-
5,247
-
2,349
2,808
-
2,808
Amounts not
subject to
enforceable
netting
arrangements(1)
$m
7,222
-
7,222
3,251
-
3,251
Group
Derivative financial assets (5)
Reverse repurchase
agreements (6)
Total assets
Derivative financial liabilities (7)
Repurchase agreements (8)
Total liabilities
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Amounts not subject to enforceable netting arrangements relate to items which do not have an enforceable netting arrangement in place or there is uncertainty as to the legal enforceability of a close out
netting arrangement in a default or liquidation under the laws of a specific jurisdiction.
Amount offset comprises of certain centrally cleared derivatives and their associated collateral amounts which are deemed to satisfy the AASB 132 "Financial Instruments: Presentation" offsetting criteria.
Associated collateral amounts in the Group of $1,729 million and $358 million were netted against Other assets and Other liabilities, respectively, and in the Company $1,391 million and $358 million,
respectively.
Financial instruments include recognised financial instruments amounts on the balance sheet.
Collateral amounts (cash and non-cash financial collateral) included are reflected at their fair value; however this amount is limited to the net balance sheet exposure in order to not include any over-
collateralisation.
Derivative financial assets comprise of both trading and hedging derivatives assets reported on the Group balance sheet as $29,137 million and $3,892 million, respectively (2016: $43,146 million and $6,741
million), and on the Company balance sheet as $30,383 million and $3,816 million, respectively (2016: $42,467 million and $6,319 million).
Reverse repurchase agreements of $48,309 million (2016: $37,283 million) are reported on the Group balance sheet within Cash and liquid assets of $40,766 million (2016: $28,219 million) and Due from
other banks of $7,543 million (2016: $9,064 million). Reverse repurchase agreements of $48,006 million (2016: $36,662 million) are reported on the Company balance sheet within Cash and liquid assets of
$40,627 million (2016: $27,762 million) and Due from other banks of $7,379 million (2016: $8,900 million).
Derivative financial liabilities comprise of both trading and hedging derivatives liabilities reported on the Group balance sheet as $27,187 million and $1,674 million, respectively (2016: $41,559 million and
$3,402 million) and on the Company balance sheet as $27,065 million and $3,859 million, respectively (2016: $38,901 million and $6,701 million).
Repurchase agreements of $43,445 million (2016: $34,422 million) are reported on the Group balance sheet within Due to other banks of $19,952 million (2016: $18,358 million) and Deposits and other
borrowings of $23,493 million (2016: $16,064 million). Repurchase agreements of $43,822 million (2016: $34,249 million) are reported on the Company balance sheet within Due to other banks of $20,329
million (2016: $18,185 million) and Deposits and other borrowings of $23,493 million (2016: $16,064 million).
114 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Risk disclosures (continued)
2016 (1)
Amount subject to enforceable netting arrangements
Effect of offsetting on balance sheet
Related amounts not offset
Gross
amounts
$m
72,789
58,812
131,601
71,040
55,951
126,991
Amount
offset
$m
30,998
21,529
52,527
30,998
21,529
52,527
Net amounts
reported on
balance sheet
$m
41,791
37,283
79,074
40,042
34,422
74,464
Financial
Instruments
$m
30,356
Non Cash
Collateral
$m
290
Cash
Collateral Net Amount
$m
3,359
$m
7,786
-
30,356
30,356
-
30,356
37,283
37,573
230
34,422
34,652
-
7,786
8,623
-
8,623
-
3,359
833
-
833
Group (2)
Derivative financial assets
Reverse repurchase agreements
Total assets
Derivative financial liabilities
Repurchase agreements
Total liabilities
2017
Amount subject to enforceable netting arrangements
Effect of offsetting on balance sheet
Related amounts not offset
Gross
amounts
Amount
offset
Net amounts
reported on
balance sheet
Financial
Instruments
Non Cash
Collateral
Cash
Collateral Net Amount
Company (2)
Derivative financial assets
Reverse repurchase
agreements
Total assets
Derivative financial liabilities
Repurchase agreements
Total liabilities
$m
46,375
71,978
118,353
46,977
67,794
114,771
$m
19,182
23,972
43,154
19,182
23,972
43,154
$m
27,193
48,006
75,199
27,795
43,822
71,617
$m
17,274
-
17,274
17,274
-
17,274
$m
181
48,006
48,187
406
43,822
44,228
$m
5,833
-
5,833
5,062
-
5,062
$m
3,905
-
3,905
5,053
-
5,053
2016 (1)
Amount subject to enforceable netting arrangements
Effect of offsetting on balance sheet
Related amounts not offset
Gross
amounts
$m
72,668
58,191
130,859
72,237
55,778
128,015
Amount
offset
$m
30,998
21,529
52,527
30,998
21,529
52,527
Net amounts
reported on
balance sheet
$m
41,670
36,662
78,332
41,239
34,249
75,488
Financial
Instruments
$m
28,557
Non Cash
Collateral
$m
290
Cash
Collateral Net Amount
$m
5,307
$m
7,516
-
28,557
28,557
-
28,557
36,662
36,952
230
34,249
34,479
-
7,516
7,407
-
7,407
-
5,307
5,045
-
5,045
Company (2)
Derivative financial assets
Reverse repurchase agreements
Total assets
Derivative financial liabilities
Repurchase agreements
Total liabilities
Amounts not
subject to
enforceable
netting
arrangements
$m
8,096
-
8,096
4,919
-
4,919
Amounts not
subject to
enforceable
netting
arrangements
$m
7,006
-
7,006
3,129
-
3,129
Amounts not
subject to
enforceable
netting
arrangements
$m
7,116
-
7,116
4,363
-
4,363
(1)
(2)
Comparative information has been restated to reflect a change in presentation of interest accrual on certain derivative assets and derivative liabilities, which is now presented within derivative assets and
derivative liabilities (previously included in other assets and other liabilities).
Refer to the footnotes on the 2017 Group table (on the previous page) for further details.
Derivative financial assets and liabilities
Derivative financial instrument contracts are typically subject to International Swaps and Derivatives Association (ISDA) Master Agreements, and also
relevant Credit Support Annexes (CSA) pertaining to collateral arrangements attached to those ISDA agreements, or derivative exchange or clearing
counterparty agreements if contracts are settled via an exchange or clearing house.
Derivative amounts will only be offset on the balance sheet where the Group has a legally enforceable right of offset in all circumstances and there is an
intention to settle the asset and liability on a net basis, or to realise the asset and settle the liability simultaneously. During 2017, the Group has applied
offsetting of certain centrally cleared derivatives and their associated collateral amounts which were deemed to satisfy the AASB 132 "Financial
Instruments: Presentation" requirements.
The amounts included in the Financial Instruments column refers to amounts that are subject to relevant close out netting arrangements under a
relevant ISDA agreement. The Cash Collateral and Non Cash Collateral columns include amounts of cash and non-cash collateral, respectively, which
are either obtained or pledged, to cover the net exposure to the counterparty in the event of default or insolvency.
2017 Annual Financial Report
115
Notes to the financial statements
Risk disclosures (continued)
Reverse repurchase and Repurchase agreements
Reverse repurchase and Repurchase agreements will typically be subject to Global Master Repurchase Agreements (GMRAs) or similar agreements
whereby all outstanding transactions with the same counterparty can only be offset and closed out upon a default or insolvency event. In some
instances the agreement provides the Group with a legally enforceable right of offset in all circumstances. In such a case and where there is an intention
to settle the asset and liability on a net basis, or to realise the asset and settle the liability simultaneously, the amounts with that counterparty will be
offset on the balance sheet.
Where the Group has a right of offset on default or insolvency only, the related non cash collateral amounts comprise highly liquid securities, either
obtained or pledged, which can be realised in the event of a default or insolvency by one of the counterparties. The value of such securities obtained or
pledged must at least equate to the value of the exposure to the counterparty, therefore the net exposure is considered to be nil.
Credit quality of financial assets
The Group has an internally developed credit rating master-scale derived from historical default data drawn from a number of sources to assess the
potential default risk in lending or through providing other financial services products to counterparties or customers. The Group has pre-defined
counterparty probabilities of default across almost all retail and non-retail loans and advances. For non-retail, these can be broadly mapped to external
rating agencies and comprises performing (pre-default) and non-performing (post-default) grades.
Inputs, assumptions and techniques used for estimating impairment
In assessing the impairment of financial assets under the expected credit loss model, the Group defines default in accordance with its Credit Policy and
Procedures, which includes defaulted assets and impaired assets as described below. Default occurs when a loan obligation is 90 days or more past
due, or when it is considered unlikely that the credit obligation to the Group will be paid in full without recourse to actions, such as realisation of security.
Impaired exposures under the expected credit loss model consist of:
• Retail loans (excluding unsecured portfolio managed facilities) which are contractually 90 days or more past due with insufficient security to cover
principal and arrears of interest revenue.
• Non-retail loans that are contractually 90 days or more past due and / or sufficient doubt exists about the ability to collect principal and interest in a
timely manner.
• Off-balance sheet credit exposures where current circumstances indicate that losses may be incurred.
• Unsecured portfolio managed facilities which are 180 days past due (if not written off).
Assessment of significant increase in credit risk
When determining whether the risk of default has increased significantly since initial recognition, the Group considers both quantitative and qualitative
information and analysis based on the Group’s historical experience and expert credit risk assessment, including forward-looking information. Retail
facilities use the number of days past due (DPD) to determine significant increase in credit risk. For non-retail facilities, internally derived credit ratings
as described above have been identified as representing the best available determinant of credit risk. The Group assigns each facility a credit rating at
initial recognition based on available information about the borrower. Credit risk is deemed to have increased significantly if the credit rating has
significantly deteriorated at the reporting date relative to the credit rating at the date of initial recognition. In addition, as a backstop, the Group considers
that significant increase in credit risk occurs when an asset is more than 30 DPD.
Calculation of expected credit losses
Expected credit losses (ECLs) are calculated using three main components, i.e. a probability of default (PD), a loss given default (LGD) and an
exposure at default (EAD). These parameters are generally derived from internally developed statistical models combined with historical, current and
forward-looking customer and macro-economic data. For accounting purposes, the 12-months and lifetime PD represent the expected point-in-time
probability of a default over the next 12 months and remaining lifetime of the financial instrument, respectively, based on conditions existing at the
balance sheet date and future economic conditions that affect credit risk. The LGD represents expected loss conditional on default, taking into account
the mitigating effect of collateral, its expected value when realised and the time value of money. The EAD represents the expected exposure at default,
taking into account the repayment of principal and interest from the balance sheet date to the default event together with any expected drawdown of a
facility. The 12-months ECL is equal to the discounted sum over the next 12-months of monthly PD multiplied by LGD and EAD. Lifetime ECL is
calculated using the discounted sum of monthly PD over the full remaining life multiplied by LGD and EAD.
Incorporation of forward-looking information
The Group has established an expert panel who considers a range of relevant forward-looking macro-economic assumptions for the determination of
unbiased general industry adjustments and any related specific industry adjustments, that support the calculation of ECLs. The expert panel consists of
senior executives from risk, finance and economics functions. Relevant regional and industry specific adjustments are applied to capture variations from
general industry scenarios. These reflect reasonable and supportable forecasts of future macro-economic conditions that are not captured within the
base ECL calculations. Macro-economic factors taken into consideration include, but are not limited to, unemployment, interest rates, gross domestic
product, inflation and commercial property prices, and require an evaluation of both the current and forecast direction of the macro-economic cycle.
Incorporating forward-looking information increases the degree of judgement required as to how changes in these macro-economic factors will affect
ECLs. The methodologies and assumptions including any forecasts of future economic conditions are reviewed regularly.
116 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Risk disclosures (continued)
Financial assets neither past due nor impaired
The credit quality of the portfolio of financial assets that are neither past due nor impaired can be assessed by reference to the Group’s standard credit
rating. The credit rating system is supported by a variety of financial analytics, non-financial information, combined with processed market information to
provide the main inputs for the measurement of counterparty / customer risk. All internal risk ratings are tailored to the various categories and are
derived in accordance with the Group’s rating policy. Refer to Note 1 (g) Financial instruments (vi) - Impairment of financial assets for details on the
assessment of credit deterioration.
The tables below represent an analysis of the credit quality of relevant financial assets that are neither past due nor impaired, based on the following
grades:
• Senior investment grade: broadly corresponds with Standard & Poor’s ratings of AAA to A- (internal rating 1 to 5).
•
Investment grade: broadly corresponds with Standard & Poor’s ratings of BBB+ to BBB- (internal rating 6 to 11).
• Sub-investment grade: broadly corresponds with Standard & Poor’s ratings of BB+ up to but not including defaulted or impaired (internal rating 12 to
23).
Senior investment grade
Investment grade
Sub-investment grade
Total
(1)
Group
Loans and advances (1)
2016
$m
120,988
2017
$m
88,898
244,231
197,525
530,654
199,305
180,263
500,556
Company
Loans and advances (1)
2016
$m
104,680
2017
$m
70,213
222,115
167,249
459,577
178,473
150,166
433,319
Group
Acceptances
Company
Acceptances
2017
$m
46
1,649
5,091
6,786
2016
$m
49
2,871
9,285
12,205
2017
$m
46
1,649
5,091
6,786
2016
$m
49
2,871
9,285
12,205
For the year ended 30 September 2017, mortgages previously classified as Senior investment grade, have been reclassified as Investment grade and Sub-investment grade reflecting the impact of a model
change for the Australian mortgage portfolio implemented during the September 2017 full year. Prior year comparatives have not been restated to reflect these changes.
Group
Company
Due from other banks
Due from other banks
2017
$m
34,934
2,064
68
37,066
2016
$m
42,593
2,599
44
45,236
2017
$m
32,898
2,064
68
35,030
2016
$m
40,716
2,599
44
43,359
Group
Debt instruments at
FVOCI
Company
Debt instruments at
FVOCI
2017
$m
41,842
289
-
2016
$m
40,353
336
-
2017
$m
41,754
275
-
2016
$m
40,262
318
-
42,131
40,689
42,029
40,580
Senior investment grade
Investment grade
Sub-investment grade
Total
Credit risk exposures by risk grade
The tables below show significant exposures to credit risk to which the expected credit loss model is applied, for recognised and unrecognised financial
assets, based on the following risk grades:
• Senior investment grade: broadly corresponds with Standard & Poor’s ratings of AAA to A- (internal rating 1 to 5).
•
Investment grade: broadly corresponds with Standard & Poor’s ratings of BBB+ to BBB- (internal rating 6 to 11).
• Sub-investment grade: broadly corresponds with Standard & Poor’s ratings of BB+ (internal rating 12 to 23).
• Default: broadly corresponds with Standard & Poor’s rating of D (internal rating 98 and 99).
Loans and advances and loan commitments for which the loss allowance is measured at: (1)
Stage 1
12-months expected
credit loss
Not credit impaired
Stage 2
Lifetime expected credit
losses
Not credit impaired
Stage 3
Lifetime expected credit
losses
Credit impaired
Total
2017
$m
148,251
308,478
163,655
-
2016
$m
180,034
261,122
152,435
-
620,384
593,591
2017
$m
-
4,142
82,123
1,971
88,236
2016
$m
-
2,486
74,316
1,618
78,420
2017
$m
-
-
-
5,658
5,658
2016
$m
-
-
-
6,152
6,152
2017
$m
148,251
312,620
245,778
7,629
714,278
2016
$m
180,034
263,608
226,751
7,770
678,163
Group
Senior investment grade
Investment grade
Sub-investment grade
Default
Total
(1)
For the year ended 30 September 2017, mortgages previously classified as Senior investment grade, have been reclassified as Investment grade and Sub-investment grade reflecting the impact of a model
change for the Australian mortgage portfolio implemented during the September 2017 full year. Prior year comparatives have not been restated to reflect these changes.
2017 Annual Financial Report
117
Notes to the financial statements
Risk disclosures (continued)
Acceptances for which the loss allowance is measured at:
Stage 1
12-months expected
credit loss
Not credit impaired
Stage 2
Lifetime expected credit
losses
Not credit impaired
Stage 3
Lifetime expected credit
losses
Credit impaired
Total
2017
$m
48
1,661
2,413
-
4,122
2016
$m
52
2,916
5,154
-
8,122
2017
$m
-
89
2,980
-
3,069
2016
$m
-
264
5,022
-
5,286
2017
$m
-
-
-
30
30
2016
$m
-
-
-
33
33
2017
$m
48
1,750
5,393
30
7,221
2016
$m
52
3,180
10,176
33
13,441
Debt instruments at fair value through other comprehensive income for which the loss allowance is
measured at:
Stage 1
12-months expected
credit loss
Not credit impaired
Stage 2
Lifetime expected credit
losses
Not credit impaired
Stage 3
Lifetime expected credit
losses
Credit impaired
2017
$m
41,842
289
-
-
2016
$m
40,353
336
-
-
42,131
40,689
2017
$m
-
-
-
-
-
2016
$m
-
-
-
-
-
2017
$m
-
-
-
-
-
2016
$m
-
-
-
-
-
Total
2017
$m
41,842
289
-
-
2016
$m
40,353
336
-
-
42,131
40,689
Loans and advances and loan commitments for which the loss allowance is measured at: (1)
Stage 1
12-months expected
credit loss
Not credit impaired
Stage 2
Lifetime expected credit
losses
Not credit impaired
Stage 3
Lifetime expected credit
losses
Credit impaired
Total
2017
$m
124,148
281,401
142,730
-
2016
$m
157,981
234,402
130,377
-
548,279
522,760
2017
$m
-
2,972
65,836
1,971
70,779
2016
$m
-
1,975
59,754
1,614
63,343
2017
$m
-
-
-
4,834
4,834
2016
$m
-
-
-
4,832
4,832
2017
$m
124,148
284,373
208,566
6,805
623,892
2016
$m
157,981
236,377
190,131
6,446
590,935
Group
Senior investment grade
Investment grade
Sub-investment grade
Default
Total
Group
Senior investment grade
Investment grade
Sub-investment grade
Default
Total
Company
Senior investment grade
Investment grade
Sub-investment grade
Default
Total
(1)
For the year ended 30 September 2017, mortgages previously classified as Senior investment grade, have been reclassified as Investment grade and Sub-investment grade reflecting the impact of a model
change for the Australian mortgage portfolio implemented during the September 2017 full year. Prior year comparatives have not been restated to reflect these changes.
Acceptances for which the loss allowance is measured at:
Stage 1
12-months expected
credit loss
Not credit impaired
Stage 2
Lifetime expected credit
losses
Not credit impaired
Stage 3
Lifetime expected credit
losses
Credit impaired
Total
2017
$m
48
1,661
2,413
-
4,122
2016
$m
52
2,916
5,154
-
8,122
2017
$m
-
89
2,980
-
3,069
2016
$m
-
264
5,022
-
5,286
2017
$m
-
-
-
30
30
2016
$m
-
-
-
33
33
2017
$m
48
1,750
5,393
30
7,221
2016
$m
52
3,180
10,176
33
13,441
Company
Senior investment grade
Investment grade
Sub-investment grade
Default
Total
118 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Risk disclosures (continued)
Debt instruments at fair value through other comprehensive income for which the loss allowance is
measured at:
Stage 1
12-months expected
credit loss
Not credit impaired
Stage 2
Lifetime expected credit
losses
Not credit impaired
Stage 3
Lifetime expected credit
losses
Credit impaired
2017
$m
41,754
275
-
-
2016
$m
40,262
318
-
-
42,029
40,580
2017
$m
-
-
-
-
-
2016
$m
-
-
-
-
-
2017
$m
-
-
-
-
-
2016
$m
-
-
-
-
-
Total
2017
$m
41,754
275
-
-
2016
$m
40,262
318
-
-
42,029
40,580
Company
Senior investment grade
Investment grade
Sub-investment grade
Default
Total
Risk concentrations
Concentration of risk is managed by client / counterparty, by industry sector and by geographical region.
Counterparty concentration
Concentration of risk to a counterparty or groups of related counterparties is monitored in accordance with APS 221 “Large Exposures”, including the
establishment of policies governing large exposures, implementation of appropriate limits and regular monitoring and reporting against those limits.
Concentration of exposure
Concentration of credit risk exists when a number of counterparties are engaged in similar activities, or operate in the same geographical areas or
industry sections and have similar economic characteristics so that their ability to meet contractual obligations is similarly affected by changes in
economic, political or other conditions.
The diversification and size of the Group are such that its lending is widely spread both geographically and in terms of the types of industries it serves.
Industry concentration of financial assets
The following tables show the level of industry concentrations of financial assets as at 30 September:
Group
Government and public authorities
Agriculture, forestry, fishing and mining
Financial, investment and insurance
Real estate - construction
Manufacturing
Instalment loans to individuals and other personal lending
(including credit cards)
Real estate - mortgage
Asset and lease financing
Commercial property services
Other commercial and industrial
Total
Group
Government and public authorities
Agriculture, forestry, fishing and mining
Financial, investment and insurance
Real estate - construction
Manufacturing
Instalment loans to individuals and other personal lending
(including credit cards)
Real estate - mortgage
Commercial property services
Other commercial and industrial
Total
Loans at fair value
2016
$m
374
2017
$m
236
Loans at amortised
cost
2016
$m
1,881
2017
$m
1,942
Provisions for
doubtful debts
2016
$m
1
2017
$m
1
Contingent
liabilities and
credit-related
commitments
2016
2017
$m
$m
1,567
1,257
3,964
472
143
827
13
-
-
5,359
3,582
14,596
5,835
599
207
1,007
26
-
-
6,650
5,166
31,471
22,648
2,604
9,720
10,865
329,534
11,674
58,018
65,288
29,530
21,809
2,595
9,381
11,062
314,557
10,949
51,583
60,344
586
115
43
214
319
422
111
481
932
726
112
42
242
309
253
96
363
970
11,107
24,431
2,150
7,361
15,522
53,484
119
14,730
40,788
11,381
22,040
2,061
8,183
15,683
52,367
168
13,549
38,709
19,864
543,764
513,691
3,224
3,114
170,949
165,708
Due from other banks
2016
$m
-
2017
$m
-
-
37,066
-
45,236
Debt instruments at fair
value through other
comprehensive income
2016
$m
23,488
2017
$m
23,124
-
9,476
-
10,148
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
9,480
-
51
-
-
-
6,986
-
67
37,066
45,236
42,131
40,689
Acceptances
2017
$m
-
763
49
3
130
-
-
4,365
1,476
6,786
2016
$m
-
1,064
113
10
278
1
-
8,258
2,481
12,205
2017 Annual Financial Report
119
Notes to the financial statements
Risk disclosures (continued)
Company
Government and public authorities
Agriculture, forestry, fishing and mining
Financial, investment and insurance
Real estate - construction
Manufacturing
Instalment loans to individuals and other personal lending
(including credit cards)
Real estate - mortgage
Asset and lease financing
Commercial property services
Other commercial and industrial
Total
Company
Government and public authorities
Agriculture, forestry, fishing and mining
Financial, investment and insurance
Real estate - construction
Manufacturing
Instalment loans to individuals and other personal lending
(including credit cards)
Real estate - mortgage
Commercial property services
Other commercial and industrial
Total
Loans at amortised
cost
2016
$m
1,745
2017
$m
1,765
19,085
20,688
1,669
7,170
18,258
20,221
1,777
6,788
9,489
9,700
293,212
278,659
11,214
50,257
56,902
10,478
44,186
52,834
Provisions for
doubtful debts
2016
$m
-
2017
$m
-
Contingent
liabilities and
credit-related
commitments
2016
2017
$m
$m
734
638
440
81
39
171
296
354
106
420
788
555
82
40
205
293
229
92
304
825
9,789
23,883
1,945
5,932
12,889
49,688
119
12,861
35,132
9,898
21,557
1,894
6,544
12,926
48,368
168
11,738
33,699
Loans at fair value
2016
$m
330
2017
$m
208
2,086
2,922
378
130
514
3
-
-
4,520
3,087
10,926
518
185
674
4
-
-
5,550
4,377
14,560
471,451
444,646
2,695
2,625
152,876
147,526
Due from other banks
2016
$m
-
2017
$m
-
-
35,030
-
43,359
Debt instruments at fair
value through other
comprehensive income
2016
$m
23,488
2017
$m
23,124
-
9,402
-
10,055
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
9,453
-
50
-
-
-
6,970
-
67
35,030
43,359
42,029
40,580
Acceptances
2017
$m
-
763
49
3
130
-
-
4,365
1,476
6,786
2016
$m
-
1,064
113
10
278
1
-
8,258
2,481
12,205
Geographical concentrations of financial assets
The following tables show the geographical concentrations of financial assets as at 30 September:
Group
Cash and liquid assets
Due from other banks
Trading derivatives (2)
Trading securities
Debt instruments at fair value through other comprehensive income
Other financial assets at fair value
Hedging derivatives (2)
Loans and advances (3)
Due from customers on acceptances
Other assets (2)
Total
Australia
New Zealand
Other International
2017
$m
8,682
9,798
13,698
45,452
31,436
11,125
3,840
456,147
6,786
2,369
589,333
2016(1)
$m
6,583
12,297
15,740
40,827
29,075
14,538
6,483
431,055
12,205
1,390
570,193
2017
$m
146
2,181
2,303
5,317
-
4,887
8
69,427
-
1,503
85,772
2016(1)
$m
541
1,975
5,131
4,416
-
6,650
190
65,619
-
1,156
85,678
2017
$m
33,836
25,087
13,136
185
10,695
46
44
2016(1)
$m
22,482
30,964
22,275
728
11,614
308
68
14,551
13,371
-
5,344
102,924
-
7,203
109,013
(1)
(2)
(3)
Comparative information has been restated to reflect a change in presentation of interest accrual on certain derivative assets and derivative liabilities, which is now presented within derivative assets and
derivative liabilities (previously included in other assets and other liabilities).
The Group has applied offsetting of financial assets and liabilities in respect of certain centrally cleared derivatives and their associated collateral amounts which were deemed to satisfy the AASB 132
"Financial instruments: Presentation" requirements for the Company. For the purposes of this disclosure, all netting is reflected in aggregate at the Company level and the full netting impact is therefore
allocated to the Australia region. Refer to the Offsetting of financial assets and liabilities disclosure for further details.
Loans and advances are disclosed on a total net basis.
120 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Risk disclosures (continued)
Company
Cash and liquid assets
Due from other banks
Trading derivatives (2)
Trading securities
Debt instruments at fair value through other comprehensive income
Other financial assets at fair value
Hedging derivatives (2)
Loans and advances (3)
Due from customers on acceptances
Other assets (2)
Total
Australia
Other International
2017
$m
7,342
9,948
17,033
45,452
31,436
10,926
3,772
454,173
6,786
1,532
588,400
2016(1)
$m
5,423
12,398
19,456
40,785
29,076
14,523
6,250
428,406
12,205
1,053
569,575
2017
$m
33,775
25,082
13,350
185
10,593
899
44
2016(1)
$m
22,399
30,961
23,011
728
11,504
308
69
14,104
12,915
-
5,061
103,093
-
6,928
108,823
(1)
(2)
(3)
Comparative information has been restated to reflect a change in presentation of interest accrual on certain derivative assets and derivative liabilities, which is now presented within derivative assets and
derivative liabilities (previously included in other assets and other liabilities).
The Group has applied offsetting of financial assets and liabilities in respect of certain centrally cleared derivatives and their associated collateral amounts which were deemed to satisfy the AASB 132
"Financial instruments: Presentation" requirements for the Company. For the purposes of this disclosure, all netting is reflected in aggregate at the Company level and the full netting impact is therefore
allocated to the Australia region. Refer to the Offsetting of financial assets and liabilities disclosure for further details.
Loans and advances are disclosed on a total net basis.
2017 Annual Financial Report
121
Notes to the financial statements
Risk disclosures (continued)
Market risk - trading
Traded Market Risk is the potential for gains or losses to arise from trading activities undertaken by the Group as a result of movements in market
prices. The trading activities of the Group are principally carried out by Corporate and Institutional Banking and Fixed Income, Currencies &
Commodities (FICC).
Trading activity represents dealings that encompass both active management of market risk and supporting client sales businesses. The types of
market risk arising from these activities include interest rate, foreign exchange, commodity, equity price, credit spread and volatility risk.
Traded Market Risk is primarily managed and controlled using Value at Risk (VaR) which is a standard measure used in the industry, and is subject to
the disciplines prescribed in the Group Traded Market Risk Policy.
Objectives and limitations of the Value at Risk methodology
VaR is a statistical estimate of the potential loss that could arise from shifts in interest rates, currency exchange rates, option volatility, equity prices,
credit spreads, commodity prices and inflation. The estimate is calculated on an entire trading portfolio basis, including both physical and derivative
positions. VaR is measured at a 99% confidence interval. This means that there is a 99% chance that the loss will not exceed the VaR estimate on any
given day.
VaR is predominantly calculated using historical simulation. This method involves multiple revaluations of the trading books using 550 days
(approximately two years) of historical pricing shifts. The pricing data is rolled daily so as to have the most recent 550 day history of prices. The results
are ranked and the loss at the 99th percentile confidence interval identified. The calculation and rate shifts used assume a one day holding period for all
positions.
The Group employs other risk measures to supplement VaR, with appropriate limits to manage and control risks, and communicate the specific nature of
market exposures to executive management, the Risk Committee of the Board and ultimately the Board. These supplementary measures include stress
testing, stop loss, position and sensitivity limits.
The use of a VaR methodology has limitations, which include:
• The historical data used to calculate VaR is not always an appropriate proxy for current market conditions. If market volatility or correlation conditions
change significantly, losses may occur more frequently and to a greater magnitude than the VaR measure suggests.
• VaR methodology assumes that positions are held for one day and may underestimate losses on positions that cannot be hedged or reversed inside
that timeframe.
• VaR is calculated on positions at the close of each trading day, and does not measure risk on intra-day positions.
• VaR does not describe the directional bias or size of the positions generating the risk.
VaR estimates are checked via backtesting for reasonableness and continued relevance of the model assumptions.
VaR is measured individually for foreign exchange risk, interest rate risk, volatility risk, commodities risk, credit risk and inflation risk. Risk limits are
applied in these categories separately, and against the total risk position.
Value at Risk for physical and derivative positions
The following table shows the Group and Company VaR for the trading portfolio, including both physical and derivative positions:
Group
Value at Risk at a 99% confidence level
Foreign exchange risk
Interest rate risk
Volatility risk
Commodities risk
Credit risk
Inflation risk
Diversification benefit
Total Diversified VaR at 99% confidence interval
Other market risks (2)
Total VaR for physical and derivative positions (3)
As at 30 September
2016
$m
2017
$m
Average value
during reporting
period
2016
$m
2017
$m
Minimum value
during reporting
Maximum value
during reporting
2017
$m
period(1)
2016
$m
2017
$m
period(1)
2016
$m
10.4
15.5
10.7
14.5
9.1
5.1
0.6
2.4
1.8
8.0
2.6
0.7
1.4
2.5
9.2
4.3
0.6
2.6
2.3
8.4
3.0
0.6
1.4
0.7
(15.7)
(14.6)
(15.3)
(13.7)
13.7
0.6
14.3
16.1
0.1
16.2
14.4
0.4
14.8
14.9
0.2
15.1
5.5
6.3
1.4
0.3
1.1
1.8
n/a
11.7
0.1
11.8
10.8
6.4
2.1
0.4
0.7
0.4
n/a
10.8
0.1
10.9
17.9
13.4
10.5
1.0
3.8
3.2
n/a
20.6
0.8
21.4
19.2
11.4
4.4
0.9
1.9
2.5
n/a
19.6
0.4
20.0
(1)
(2)
(3)
The maximum / minimum by risk types are likely to occur during different days in the period. As such, the sum of these figures will not equal the total maximum / minimum VaR, which is the maximum /
minimum aggregate VaR position during the period.
Other market risks includes exposures to various basis risks measured individually at a portfolio level.
VaR is measured individually for foreign exchange risk, interest rate risk, volatility risk, commodities risk, credit risk, and inflation risk. Risk limits are applied in these categories separately, and against the
total risk position.
122 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Risk disclosures (continued)
Company
Value at Risk at a 99% confidence level
Foreign exchange risk
Interest rate risk
Volatility risk
Commodities risk
Credit risk
Inflation risk
Diversification benefit
Total Diversified VaR at 99% confidence interval
Other market risks (2)
Total VaR for physical and derivative positions (3)
As at 30 September
2016
$m
2017
$m
Average value
during reporting
period
2016
$m
2017
$m
Minimum value
during reporting
Maximum value
during reporting
2017
$m
period(1)
2016
$m
2017
$m
period(1)
2016
$m
10.1
15.5
10.7
14.5
8.6
5.1
0.6
2.3
1.8
7.8
2.6
0.7
1.2
2.6
8.9
4.3
0.6
2.4
2.3
8.5
3.0
0.6
1.2
0.7
(15.6)
(14.0)
(15.1)
(13.6)
12.9
0.6
13.5
16.4
0.1
16.5
14.1
0.4
14.5
14.9
0.2
15.1
5.5
6.0
1.4
0.3
0.9
1.8
n/a
11.3
0.1
11.4
10.8
6.7
2.1
0.4
0.5
0.4
n/a
10.6
0.1
10.7
17.5
12.7
10.5
1.0
3.7
3.2
n/a
20.5
0.8
21.3
19.3
11.4
4.4
0.9
1.6
2.6
n/a
19.3
0.4
19.7
(1)
(2)
(3)
The maximum / minimum by risk types are likely to occur during different days in the period. As such, the sum of these figures will not equal the total maximum / minimum VaR, which is the maximum /
minimum aggregate VaR position during the period.
Other market risks includes exposures to various basis risks measured individually at a portfolio level.
VaR is measured individually for foreign exchange risk, interest rate risk, volatility risk, commodities risk, credit risk, and inflation risk. Risk limits are applied in these categories separately, and against the
total risk position.
Market risk - non-trading / banking positions
The Group has exposure to non-traded market risk, primarily Interest Rate Risk in the Banking Book (IRRBB).
Interest Rate Risk in the Banking Book
IRRBB is the risk that the Group's earnings or economic value will be affected or reduced due to changes in interest rates. The sources of IRRBB are as
follows:
• Repricing risk, arising from changes to the overall level of interest rates and inherent mismatches in the repricing term of banking book items.
• Yield curve risk, arising from a change in the relative level of interest rates for different tenors and changes in the slope or shape of the yield curve.
• Basis risk, arising from differences between the actual and expected interest margins on banking book items over the implied cost of funds of those
items.
• Optionality risk, arising from the existence of stand-alone or embedded options in banking book items, to the extent that the potential for those losses
is not included in the above risk types.
IRRBB is measured, monitored, and managed from both an internal management and regulatory perspective. The risk management framework
incorporates both market valuation and earnings based approaches in accordance with the IRRBB Policy and Guidance Notes. Risk measurement
techniques include VaR, Earnings at Risk (EaR), interest rate risk stress testing, repricing analysis, cash flow analysis and scenario analysis. The
IRRBB regulatory capital calculation incorporates repricing, yield curve, basis, and optionality risk, embedded gains / losses and any inter-risk and / or
inter-currency diversification. The IRRBB risk and control framework achieved APRA accreditation for the internal model approach under Basel II, and is
used to calculate the IRRBB regulatory capital requirement.
Key features of the internal interest rate risk management model include:
• Historical simulation approach utilising instantaneous interest rate shocks.
• Static balance sheet (i.e. any new business is assumed to be matched, hedged or subject to immediate repricing).
• VaR and EaR are measured on a consistent basis.
• 99% confidence level.
• Three month holding period.
• EaR utilises a 12 month forecast period.
• At least six years of business day historical data (updated daily).
•
•
Investment term for capital is modelled with an established benchmark term of between one and five years.
Investment term for core ‘Non-Bearing Interest’ (non-interest bearing assets and liabilities) is modelled on a behavioural basis with a term that is
consistent with sound statistical analysis.
Key model parameters and assumptions are reviewed and updated on at least an annual basis by Group Treasury in consultation with Group Risk.
Material changes require the approval of the Group Asset and Liability Committee (GALCO) and are advised to the local regulatory authorities.
2017 Annual Financial Report
123
Notes to the financial statements
Risk disclosures (continued)
Value at Risk and Earnings at Risk for the IRRBB
The following tables show the Group and Company aggregate VaR and EaR for the IRRBB:
2017
Group
Value at risk
Australia (1)
New Zealand
Other International
Earnings at risk (2)
Australia
New Zealand
Other International
As at
30 September
$m
232.9
8.7
18.5
25.4
6.9
-
Average value Minimum value Maximum value
$m
$m
$m
176.5
13.3
20.9
46.7
7.8
-
142.4
7.8
14.4
25.4
4.1
-
232.9
24.0
27.3
62.1
12.6
-
(1)
(2)
The Group implemented clarifications to APS 117 concerning the treatment of risk associated with government and near government debt securities in the estimation of VaR during the 2017 financial year.
This resulted in an increase in reported VaR in comparison to the 2016 financial year.
EaR amounts calculated under the IRRBB model include Australian Banking and other overseas banking subsidiary books, however excludes offshore branches. The Australia Region amount shows a
centralised Australian Banking EaR reported within NAB.
2016
Group
Value at risk
Australia
New Zealand
Other International
Earnings at risk (1)
Australia
New Zealand
Other International
As at
30 September
$m
64.1
4.1
18.6
40.3
4.1
-
Average value Minimum value Maximum value
$m
$m
$m
65.7
13.7
36.2
51.0
9.3
5.9
47.4
4.1
12.3
28.6
3.9
-
90.1
24.8
82.7
79.0
14.8
22.5
(1)
EaR amounts calculated under the IRRBB model include Australian Banking and other overseas banking subsidiary books, however excludes offshore branches. The Australia Region amount shows a
centralised Australian Banking EaR reported within NAB.
2017
Company
Value at Risk
Australia (1)
Other International
Earnings at risk (2)
Australia
As at
30 September
$m
Average value Minimum value Maximum value
$m
$m
$m
232.9
18.5
25.4
176.5
20.9
46.7
142.4
14.4
25.4
232.9
27.3
62.1
(1)
(2)
The Group implemented clarifications to APS 117 concerning the treatment of risk associated with government and near government debt securities in the estimation of VaR during the 2017 financial year.
This resulted in an increase in reported VaR in comparison to the 2016 financial year.
EaR amounts calculated under the IRRBB model for the Australia Region show a centralised Australian Banking EaR reported within NAB, excluding offshore branches.
2016
Company
Value at Risk
Australia
Other International
Earnings at risk (1)
Australia
As at
30 September
$m
Average value Minimum value Maximum value
$m
$m
$m
64.1
18.6
40.3
65.7
17.2
51.0
47.4
11.5
28.6
90.1
23.9
79.0
(1)
EaR amounts calculated under the IRRBB model for the Australia Region show a centralised Australian Banking EaR reported within NAB, excluding offshore branches.
124 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Risk disclosures (continued)
Liquidity Risk
Liquidity risk is the risk that the Group is unable to meet its financial obligations as they fall due. These obligations include the repayment of deposits on
demand or at their contractual maturity, the repayment of wholesale borrowings and loan capital as they mature and the payment of interest on
borrowings. The liquidity associated with financial markets can be reduced substantially as a result of external economic or market events, market size
or the actions of individual participants.
These risks are governed by the Group’s funding and liquidity risk appetite which is set by the Board. This is managed by Group Treasury and
measured and monitored by Group Balance Sheet and Liquidity Risk with oversight by the Group Asset and Liability Committee (GALCO). The Board
has the ultimate responsibility to monitor and review the adequacy of the Group’s funding and liquidity risk management framework and the Group’s
compliance with risk appetite.
Key principles adopted in the Group’s approach to managing liquidity risk include:
• Monitoring the Group’s liquidity position on a daily basis, using a combination of contractual and behavioural modelling of balance sheet and cash
flow information.
• Maintaining a high quality liquid asset portfolio which supports intra-day operations and may be sold in times of market stress.
• Operating a prudent funding strategy which ensures appropriate diversification and limits maturity concentrations. The Group undertakes a
conservative approach by imposing internal limits that are in addition to regulatory requirements.
• Maintaining a contingent funding plan designed to respond to the event of an accelerated outflow of funds from the Group.
• Requiring the Group to have the ability to meet a range of survival horizon scenarios, including name-specific and general liquidity stress scenarios.
The liquid asset portfolio held as part of these principles is well diversified by currency, tenor, counterparty and product type. The composition of the
portfolio includes cash, Government, State Government and highly rated investment grade paper. The total liquid assets held at 30 September 2017
was $123,733 million (2016: $118,268 million). In addition to these liquid assets, the Group holds Internal Securitisations in the form of Residential
Mortgage Backed Securities (RMBS) as a source of contingent liquidity to further support its liquidity requirements. RMBS must meet central bank
requirements to be eligible for repurchase agreements with a central bank. As at 30 September 2017 the amount of eligible Internal RMBS held was
$43,546 million (2016:$46,737 million).
Funding mix
The Group’s funding liabilities are comprised of a mix of deposits, term wholesale funding and short-term wholesale funding. The Group manages
funding mix and liquidity profile within risk appetite settings to ensure suitable funding of its asset base and to enable it to respond to changing market
conditions and regulatory requirements.
The Group maintains a strong focus on stable deposits both from a growth and quality perspective and continues to source deposits as a key funding
source for funded assets. The Group increased the proportion of stable customer deposits as a source of funding in the 2017 financial year to 51%
(2016: 49%) while reliance on other customer deposits remained stable at 7% (2016: 7%).
The Group supplements deposits raising via its term funding programmes, raising $36,818 million of term wholesale funding in the 2017 financial year
(2016: $36,403 million) at a weighted average maturity of approximately 4.8 years to first call (2016: 5.4 years). The Group's issuance was in excess of
term wholesale funding maturities in the 2017 financial year; this strategy supports the transition to NSFR compliance. In addition throughout 2017, the
Group continued to access international and domestic short-term wholesale markets.
2017 Annual Financial Report
125
Notes to the financial statements
Risk disclosures (continued)
The following table shows the Group’s funding position as at 30 September:
Core assets
Gross loans and advances
Loans at fair value
Other financial assets at fair value
Due from customers on acceptances
Other debt instruments at amortised cost
Total core assets
Funding and equity
Customer deposits
Term wholesale funding
Certificates of deposit
Securities sold under repurchase agreements
Due to other banks (1)
Other short term liabilities
Total equity excluding preference shares and other contributed equity
Total funding liabilities and equity
Other liabilities
Trading derivatives
Hedging derivatives
Other liabilities
Total liabilities and equity
(1)
Includes repurchase agreements due to other banks.
Funded Balance Sheet
Funding sources (1)
Stable customer deposits (2)
Term funding greater than 12 months
Equity
Total stable funding
Short term wholesale funding
Term funding less than 12 months
Other deposits (3)
Total funding
Funded assets
Liquid assets (4)
Other short term assets (5)
Total short term assets
Business and other lending (6)
Housing lending
Other assets (7)
Total long term assets
Total funded assets
2017
$m
543,764
14,596
46
6,786
584
565,776
407,585
156,846
52,255
23,493
36,683
24,035
48,398
2016
$m
513,691
19,864
271
12,205
778
546,809
390,500
157,204
46,018
16,064
43,903
20,663
47,998
749,295
722,350
27,187
1,674
10,169
788,325
2017
$m
360,234
133,857
48,398
542,489
97,041
22,989
47,351
709,870
107,904
31,060
138,964
231,203
329,534
10,169
570,906
709,870
41,559
3,402
9,399
776,710
2016
$m
341,883
120,044
47,998
509,925
96,217
37,160
48,617
691,919
107,162
28,926
136,088
227,219
314,557
14,055
555,831
691,919
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Excludes repurchase agreements, trading and hedging derivatives, insurance assets and liabilities and any accruals, receivables and payables that do not provide net funding.
Includes operational deposits, non-financial corporate deposits and retail / SME deposits.
Includes non-operational financial institution deposits and certain offshore deposits.
Regulatory liquid assets including high quality liquid assets and CLF eligible assets.
Includes non-repo eligible liquid assets and trade finance loans.
Excludes trade finance loans.
Includes net derivatives, goodwill, property, plant and equipment and net of accruals, receivables and payables.
126 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Risk disclosures (continued)
Contractual maturity of financial liabilities on an undiscounted basis
The following tables show cash flows associated with non-derivative financial liabilities and hedging derivatives, within relevant maturity groupings
based on the earliest date on which the Group and Company may be required to pay.
The balances in the tables below will not necessarily correspond to amounts presented on the balance sheet as the balances in the tables below
incorporate cash flows on an undiscounted basis and therefore include both principal and associated future interest payments.
Group
Due to other banks
Other financial liabilities at fair value
Deposits
Other borrowings
Bonds, notes and subordinated debt
Other debt issues
Other financial liabilities
Hedging derivatives
- contractual amounts payable
- contractual amounts receivable
Total cash flow payable
Contingent liabilities
Credit-related commitments
Total (1)
At call
$m
9,113
221
233,382
1,324
-
-
412
-
-
0 to 3
month(s)
$m
27,421
4,489
130,706
27,468
2,969
-
2,573
590
(338)
3 to 12
months
$m
191
5,954
87,418
14,544
14,501
-
-
2,073
(1,344)
2017
1 to 5
year(s)
$m
3
15,858
9,972
-
88,118
-
-
7,895
(5,484)
244,452
195,878
123,337
116,362
19,572
151,377
170,949
-
-
-
-
-
-
-
-
-
Over 5
years
$m
-
4,512
3
-
24,962
-
33
5,630
(4,720)
30,420
-
-
-
No specific
maturity
$m
-
108
-
-
-
6,187
-
-
-
6,295
-
-
-
Total
$m
36,728
31,142
461,481
43,336
130,550
6,187
3,018
16,188
(11,886)
716,744
19,572
151,377
170,949
(1)
The full notional amount of contingent liabilities and credit-related commitments have been disclosed as ‘at-call’ as they could be payable on demand. The Group expects that not all of the contingent
liabilities or commitments will be drawn before their contractual expiry.
Group
Due to other banks
Other financial liabilities at fair value
Deposits
Other borrowings
Bonds, notes and subordinated debt
Other debt issues
Other financial liabilities
Hedging derivatives
- contractual amounts payable
- contractual amounts receivable
Total cash flow payable
At call
$m
11,915
609
223,968
40
-
-
446
-
-
0 to 3
month(s)
$m
28,716
6,721
121,661
23,342
4,001
-
6,242
309
(89)
3 to 12
months
$m
3,322
8,200
80,334
8,010
28,217
-
-
962
(290)
2016
1 to 5
year(s)
$m
-
15,559
7,011
-
76,127
-
-
7,196
(4,234)
236,978
190,903
128,755
101,659
Contingent liabilities
Credit-related commitments and investment commitments
Total (1)
18,905
146,803
165,708
-
-
-
-
-
-
-
-
-
Over 5
years
$m
-
3,498
-
-
26,444
-
52
5,652
(4,543)
31,103
-
-
-
No specific
maturity
$m
-
22
-
-
-
6,248
-
-
-
6,270
-
-
-
Total
$m
43,953
34,609
432,974
31,392
134,789
6,248
6,740
14,119
(9,156)
695,668
18,905
146,803
165,708
(1)
The full notional amount of contingent liabilities, credit-related commitments and investment commitments have been disclosed as ‘at-call’ as they could be payable on demand. The Group expects that not all
of the contingent liabilities or commitments will be drawn before their contractual expiry.
2017 Annual Financial Report
127
Notes to the financial statements
Risk disclosures (continued)
Company
Due to other banks
Other financial liabilities at fair value
Deposits
Other borrowings
Bonds, notes and subordinated debt
Other debt issues
Other financial liabilities
Hedging derivatives
- contractual amounts payable
- contractual amounts receivable
Total cash flow payable
Contingent liabilities
Credit-related commitments
Total (1)
At call
$m
8,150
-
211,778
1,324
-
-
408
-
-
0 to 3
month(s)
$m
26,902
61
118,600
27,279
2,507
-
2,315
593
(402)
3 to 12
months
$m
191
1,007
72,766
14,544
14,499
-
-
4,518
(3,233)
221,660
177,855
104,292
18,607
134,269
152,876
-
-
-
-
-
-
2017
1 to 5
year(s)
$m
3
3,628
7,264
-
87,759
-
-
12,920
(10,224)
101,350
-
-
-
Over 5
years
$m
-
1,738
3
-
22,083
-
33
8,951
(7,608)
25,200
-
-
-
No specific
maturity
$m
-
108
-
-
-
6,187
-
-
-
6,295
-
-
-
Total
$m
35,246
6,542
410,411
43,147
126,848
6,187
2,756
26,982
(21,467)
636,652
18,607
134,269
152,876
(1)
The full notional amount of contingent liabilities and credit-related commitments have been disclosed as ‘at-call’ as they could be payable on demand. The Group expects that not all of the contingent
liabilities or commitments will be drawn before their contractual expiry.
Company
Due to other banks
Other financial liabilities at fair value
Deposits
Other borrowings
Bonds, notes and subordinated debt
Other debt issues
Other financial liabilities
Hedging derivatives
- contractual amounts payable
- contractual amounts receivable
Total cash flow payable
Contingent liabilities
Credit-related commitments and investment commitments
Total (1)
At call
$m
11,106
284
201,702
41
-
-
439
-
-
0 to 3
month(s)
$m
28,271
205
113,581
23,073
3,989
-
5,661
374
(185)
213,572
174,969
18,037
129,489
147,526
-
-
-
3 to 12
months
$m
3,322
1,319
69,454
7,977
28,203
-
-
4,867
(3,237)
111,905
-
-
-
2016
1 to 5
year(s)
$m
-
1,665
4,599
-
75,320
-
-
15,075
(10,856)
85,803
-
-
-
Over 5
years
$m
-
2,605
-
-
22,661
-
53
11,365
(9,680)
27,004
-
-
-
No specific
maturity
$m
-
22
-
-
-
6,248
-
-
-
6,270
-
-
-
Total
$m
42,699
6,100
389,336
31,091
130,173
6,248
6,153
31,681
(23,958)
619,523
18,037
129,489
147,526
(1)
The full notional amount of contingent liabilities, credit-related commitments and investment commitments have been disclosed as ‘at-call’ as they could be payable on demand. The Group expects that not all
of the contingent liabilities or commitments will be drawn before their contractual expiry.
Contractual maturity of assets and liabilities
The following tables show an analysis of contractual maturities of assets and liabilities at the reporting date. The Group expects that certain assets and
liabilities will be recovered or settled at maturities which are different to their contractual maturities, including deposits where the Group expects as part
of normal banking operations that a large proportion of these balances will roll over.
128 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Risk disclosures (continued)
Group
Assets
Cash and liquid assets
Due from other banks
Trading derivatives (1)
Trading securities
Debt instruments at fair value through other comprehensive income
Other financial assets at fair value
Loans and advances
Due from customers on acceptances
All other assets
Total assets
Liabilities
Due to other banks
Trading derivatives (1)
Other financial liabilities at fair value
Deposits
Other borrowings
Bonds, notes and subordinated debt
Other debt issues
All other liabilities
Total liabilities
Net (liabilities) / assets
2017
Less than 12
months
$m
Greater than
12 months
$m
No specific
maturity
$m
43,826
37,018
-
11,396
6,892
6,103
98,588
6,786
8,824
219,433
36,683
-
9,934
449,319
43,241
15,979
-
7,744
562,900
(343,467)
-
48
-
39,532
35,239
9,755
434,128
-
3,146
521,848
-
-
19,589
8,044
-
108,892
-
1,648
138,173
383,675
-
-
29,137
26
-
200
7,409
-
10,272
47,044
-
27,187
108
-
-
-
6,187
2,453
35,935
11,109
(1)
Trading derivatives have not been shown by contractual maturity because they are typically held for varying periods of time.
Group
Assets
Cash and liquid assets
Due from other banks
Trading derivatives (2)
Trading securities
Debt instruments at fair value through other comprehensive income
Other financial assets at fair value
Loans and advances
Due from customers on acceptances
All other assets
Total assets
Liabilities
Due to other banks
Trading derivatives (2)
Other financial liabilities at fair value
Deposits
Other borrowings
Bonds, notes and subordinated debt
Other debt issues
All other liabilities
Total liabilities
Net (liabilities) / assets
2016 (1)
Less than 12
months
$m
Greater than
12 months
$m
No specific
maturity
$m
30,630
42,926
-
11,867
6,971
6,724
93,188
12,205
10,667
215,178
43,903
-
14,714
421,982
31,354
29,703
-
8,035
549,691
(334,513)
-
2,310
-
33,612
33,718
14,757
409,339
-
6,622
500,358
-
-
18,488
6,378
-
98,239
-
3,151
126,256
374,102
-
-
43,146
492
-
15
7,518
-
10,003
61,174
-
41,559
22
-
-
-
6,248
1,619
49,448
11,726
Total
$m
43,826
37,066
29,137
50,954
42,131
16,058
540,125
6,786
22,242
788,325
36,683
27,187
29,631
457,363
43,241
124,871
6,187
11,845
737,008
51,317
Total
$m
30,630
45,236
43,146
45,971
40,689
21,496
510,045
12,205
27,292
776,710
43,903
41,559
33,224
428,360
31,354
127,942
6,248
12,805
725,395
51,315
(1)
(2)
Comparative information has been restated to reflect a change in presentation of interest accrual on certain derivative assets and derivative liabilities, which is now presented within derivative assets and
derivative liabilities (previously included in other assets and other liabilities).
Trading derivatives have not been shown by contractual maturity because they are typically held for varying periods of time.
2017 Annual Financial Report
129
Notes to the financial statements
Risk disclosures (continued)
Company
Assets
Cash and liquid assets
Due from other banks
Trading derivatives (1)
Trading securities
Debt instruments at fair value through other comprehensive income
Other financial assets at fair value
Loans and advances
Due from customers on acceptances
All other assets
Total assets
Liabilities
Due to other banks
Trading derivatives (1)
Other financial liabilities at fair value
Deposits
Other borrowings
Bonds, notes and subordinated debt
Other debt issues
All other liabilities
Total liabilities
Net (liabilities) / assets
2017
Less than 12
months
$m
Greater than
12 months
$m
No specific
maturity
$m
42,152
34,982
-
7,405
6,891
3,820
80,579
6,786
7,270
189,885
35,201
-
734
401,463
43,052
15,530
-
6,939
502,919
(313,034)
-
48
-
38,206
35,138
8,005
381,333
-
2,796
465,526
-
-
5,088
5,495
-
105,785
-
3,270
119,638
345,888
-
-
30,383
26
-
-
6,365
-
122,331
159,105
-
27,065
108
-
-
-
6,187
109,998
143,358
15,747
(1)
Trading derivatives have not been shown by contractual maturity because they are typically held for varying periods of time.
Company
Assets
Cash and liquid assets
Due from other banks
Trading derivatives (2)
Trading securities
Debt instruments at fair value through other comprehensive income
Other financial assets at fair value
Loans and advances
Due from customers on acceptances
All other assets
Total assets
Liabilities
Due to other banks
Trading derivatives (2)
Other financial liabilities at fair value
Deposits
Other borrowings
Bonds, notes and subordinated debt
Other debt issues
All other liabilities
Total liabilities
Net (liabilities) / assets
2016 (1)
Less than 12
months
$m
Greater than
12 months
$m
No specific
maturity
$m
28,717
41,049
-
9,680
6,970
4,315
76,074
12,205
9,692
188,702
42,649
-
1,480
381,074
31,054
29,703
-
7,731
493,691
(304,989)
-
2,310
-
31,383
33,610
10,516
358,808
-
5,467
442,094
-
-
3,906
4,113
-
93,523
-
5,759
107,301
334,793
-
-
42,467
450
-
-
6,439
-
133,247
182,603
-
38,901
22
-
-
-
6,248
118,684
163,855
18,748
Total
$m
42,152
35,030
30,383
45,637
42,029
11,825
468,277
6,786
132,397
814,516
35,201
27,065
5,930
406,958
43,052
121,315
6,187
120,207
765,915
48,601
Total
$m
28,717
43,359
42,467
41,513
40,580
14,831
441,321
12,205
148,406
813,399
42,649
38,901
5,408
385,187
31,054
123,226
6,248
132,174
764,847
48,552
(1)
(2)
Comparative information has been restated to reflect a change in presentation of interest accrual on certain derivative assets and derivative liabilities, which is now presented within derivative assets and
derivative liabilities (previously included in other assets and other liabilities).
Trading derivatives have not been shown by contractual maturity because they are typically held for varying periods of time.
130 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Risk disclosures (continued)
35 Fair value of financial instruments
(a) Fair value of financial instruments, carried at amortised cost
The table below shows a comparison of the carrying amounts, as reported on the balance sheet, and fair values of those financial assets and liabilities
measured at amortised cost where the carrying amounts of the financial assets and financial liabilities recorded at amortised cost in the balance sheet
are not approximately equal to their fair value.
The carrying amounts of cash and liquid assets, due from and to other banks, due from customers on acceptances, other assets, other liabilities and
amounts due from and to controlled entities, approximate their fair value as they are short-term in nature or are receivable or payable on demand.
Guarantees, letters of credit, performance related contingencies and credit related commitments are generally not sold or traded and estimated fair
values are not readily ascertainable. The fair value of these items was not calculated, as very few of the commitments extending beyond six months
would commit the Company or the Group to a predetermined rate of interest, and the fees attaching to these commitments are the same as those
currently charged for similar arrangements.
Analysis of the fair value disclosures uses a hierarchy that reflects the significance of inputs used in measuring the fair value. The level in the fair value
hierarchy within which a fair value measurement is categorised is determined on the basis of the lowest level input that is significant to the fair value
measurement in its entirety. The fair value hierarchy is as follows:
• Level 1 - Financial instruments that have been valued by reference to unadjusted quoted prices for identical financial assets or financial liabilities in
active markets. Financial instruments included in this category are Commonwealth of Australia and New Zealand government bonds, and spot and
exchange traded derivatives.
• Level 2 - Financial instruments that have been valued through valuation techniques incorporating inputs other than quoted prices within Level 1 that
are observable for the financial asset or financial liability, either directly (as prices) or indirectly (derived from prices). Financial instruments included
in this category are over-the-counter trading and hedging derivatives, semi-government bonds, financial institution and corporate bonds, mortgage-
backed securities, loans measured at fair value, and issued bonds, notes and subordinated debt measured at fair value.
• Level 3 - Financial instruments that have been valued through valuation techniques incorporating inputs that are not based on observable market
data. Unobservable inputs are those not readily available in an active market due to market illiquidity or complexity of the product. Financial
instruments included in this category are bespoke trading derivatives, trading derivatives where the credit valuation adjustment is considered
unobservable and significant to the valuation, and certain asset-backed securities valued using unobservable inputs.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. The estimated fair values are based on relevant information available at the reporting date and involves judgement.
The fair value estimates are based on the following methodologies and assumptions:
• The fair value of loans and advances that are priced based on a variable rate with no contractual repricing tenor are assumed to equate to the
carrying value. The fair value of all other loans and advances are generally calculated using discounted cash flow models based on the maturity of
the loans and advances. The discount rates applied are based on interest rates at reporting date for similar types of loans and advances, if the loans
and advances were performing at reporting date. The difference between estimated fair values of loans and advances and carrying value reflects
changes in interest rates since loan or advance origination and credit worthiness of the borrower.
• The fair value of deposits and other borrowings that are non-interest-bearing, at call or at a fixed rate that reprice within six months of reporting
date is assumed to equate to the carrying value. The fair value of other deposits and other borrowings is calculated using discounted cash flow
models based on the deposit type and maturity.
• The fair values of bonds, notes and subordinated debt and other debt issues are calculated based on a discounted cash flow model using a yield
curve appropriate to the remaining maturity of the instruments and appropriate credit spreads; or in some instances are calculated based on market
quoted prices when there is sufficient liquidity in the market.
Group
Financial assets
Carrying
value
$m
30 September 2017
Fair Value
Level 2
$m
Level 1
$m
Level 3
$m
Fair Value
$m
Carrying
value
$m
30 September 2016
Fair Value
Level 2
$m
Level 1
$m
Level 3
$m
Fair Value
$m
5,896
534,843
540,739
510,045
Loans and advances
540,125
Financial liabilities
Deposits and other borrowings
500,604
-
-
Bonds, notes and
subordinated debt (1)
Other debt issues
124,871
6,187
9,341
6,214
500,910
117,788
147
-
-
-
500,910
459,714
127,129
6,361
127,942
6,248
9,116
6,015
-
-
6,559
504,456
511,015
460,027
120,137
220
-
-
-
460,027
129,253
6,235
(1)
Fair value hedge accounting is applied to certain bonds, notes and subordinated debt, and as a result the carrying amount includes fair value hedge adjustments.
2017 Annual Financial Report
131
Notes to the financial statements
Risk disclosures (continued)
Company
Financial assets
Carrying
value
$m
30 September 2017
Fair Value
Level 2
$m
Level 1
$m
Level 3
$m
Fair Value
$m
Carrying
value
$m
30 September 2016
Fair Value
Level 2
$m
Level 1
$m
Level 3
$m
Fair Value
$m
3,690
465,155
468,845
441,321
Loans and advances
468,277
Financial liabilities
Deposits and other borrowings
450,010
-
-
Bonds, notes and
subordinated debt (1)
Other debt issues
121,315
6,187
8,829
6,214
450,127
114,690
147
-
-
-
450,127
416,241
123,519
6,361
123,226
6,248
8,578
6,015
-
-
4,283
438,418
442,701
416,435
116,149
220
-
-
-
416,435
124,727
6,235
(1)
Fair value hedge accounting is applied to certain bonds, notes and subordinated debt, and as a result the carrying amount includes fair value hedge adjustments.
(b) Fair value measurements recognised on the balance sheet
The following tables provide an analysis of financial instruments that are measured subsequent to initial recognition at fair value, using a fair value
hierarchy described in (a) above.
The fair values recognised on the balance sheet are based on quoted market prices to the extent possible. Where a quoted market price is not
available, a valuation technique will be applied to determine the fair value of the instrument. Inputs into such techniques include market interest rates,
liquidity and other factors. The counterparty credit risk associated with an instrument is incorporated into the fair value of the instrument using a credit
valuation adjustment (CVA). Funding value adjustments (FVA) are applied to uncollateralised over the counter derivatives to reflect funding costs and
benefits to the Group. The fair values of specific classes of instruments are determined as follows:
• The fair values of trading and hedging derivative assets and liabilities are obtained from quoted closing market prices at reporting date, discounted
cash flow models or option pricing models as appropriate.
• The fair values of trading securities and debt instruments at fair value through other comprehensive income are based on quoted closing
market prices at reporting date. Where securities are unlisted and quoted market prices are not available, the Group obtains the fair value by means
of discounted cash flows and other valuation techniques that are commonly used by market participants. These techniques address factors such as
interest rates, credit risk and liquidity.
• The fair values of other financial assets and liabilities at fair value are based on quoted closing market prices and data or valuation techniques,
appropriate to the nature and type of the underlying instrument.
• The fair value of equity instruments at fair value through other comprehensive income is estimated on the basis of the actual and forecasted
financial position and results of the underlying assets or net assets taking into consideration their risk profile.
Fair value measurement as at
30 September 2017
Level 3
$m
Level 2
$m
Level 1
$m
Fair value measurement as at
30 September 2016 (1)
Total
$m
Level 1
$m
Level 2
$m
Level 3
$m
Group
Financial assets
Trading derivatives
Trading securities
Debt instruments at fair value through other comprehensive income
Other financial assets at fair value
Hedging derivatives
Investments relating to life insurance business (2)
Equity instruments at fair value through other comprehensive income (3)
-
27,811
3,407
-
-
-
14
29,043
23,143
38,297
16,058
3,892
86
209
Total financial assets measured at fair value
31,232
110,728
Financial liabilities
Trading derivatives
Other financial liabilities at fair value
Hedging derivatives
Total financial liabilities measured at fair value
4
279
-
283
27,107
29,352
1,674
58,133
94
-
427
-
-
-
48
569
76
-
-
76
29,137
50,954
42,131
16,058
3,892
86
271
689
21,661
2,852
43
-
-
9
42,157
24,310
37,563
21,416
6,741
86
-
142,529
25,254
132,273
27,187
29,631
1,674
58,492
771
310
-
1,081
40,533
32,913
3,402
76,848
300
-
274
37
-
-
264
875
255
1
-
256
Total
$m
43,146
45,971
40,689
21,496
6,741
86
273
158,402
41,559
33,224
3,402
78,185
(1)
(2)
(3)
The 2016 comparative information has been restated to reflect a change in presentation of interest accrual on certain derivative assets and derivative liabilities, which is now presented within derivative
assets and derivative liabilities (previously included in other assets and other liabilities).
Investments relating to life insurance business are included in other assets on the balance sheet.
Equity instruments at fair value through other comprehensive income are included in other assets on the balance sheet.
132 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Risk disclosures (continued)
Fair value measurement as at
30 September 2017
Level 3
$m
Level 2
$m
Level 1
$m
Fair value measurement as at
30 September 2016 (1)
Total
$m
Level 1
$m
Level 2
$m
Level 3
$m
Company
Financial assets
Trading derivatives
Trading securities
Debt instruments at fair value through other comprehensive income
Other financial assets at fair value
Hedging derivatives
Equity instruments at fair value through other comprehensive income (2)
-
24,805
3,407
-
-
9
30,289
20,832
38,195
11,825
3,816
209
Total financial assets measured at fair value
28,221
105,166
Financial liabilities
Trading derivatives
Other financial liabilities at fair value
Hedging derivatives
Total financial liabilities measured at fair value
4
279
-
283
26,985
5,651
3,859
36,495
94
-
427
-
-
21
542
76
-
-
76
30,383
45,637
42,029
11,825
3,816
239
687
18,640
2,852
-
-
9
41,480
22,873
37,454
14,794
6,319
-
133,929
22,188
122,920
27,065
5,930
3,859
36,854
771
310
-
37,875
5,097
6,701
1,081
49,673
300
-
274
37
-
231
842
255
1
-
256
Total
$m
42,467
41,513
40,580
14,831
6,319
240
145,950
38,901
5,408
6,701
51,010
(1)
(2)
The 2016 comparative information has been restated to reflect a change in presentation of interest accrual on certain derivative assets and derivative liabilities, which is now presented within derivative
assets and derivative liabilities (previously included in other assets and other liabilities).
Equity instruments at fair value through other comprehensive income are included in other assets on the balance sheet.
There were no material transfers between Level 1 and Level 2 during the year for the Group and the Company.
Reconciliation of assets and liabilities measured at fair value based on valuation techniques for which any significant input is not based on observable
market data (Level 3):
2017
Assets
Group
Balance at the beginning of year
Gains / (losses) on assets and (gains) / losses on
liabilities recognised:
In profit or loss (2)
In other comprehensive income
Purchases and issues
Sales and settlements
Transfers into Level 3 (3)
Transfers out of Level 3 (3)
Foreign currency translation adjustments
Balance at the end of year
Gains / (losses) on assets and (gains) / losses on
liabilities for the reporting period related to financial
instruments held at the end of the reporting period
recognised:
In profit or loss
In other comprehensive income
Debt instruments
at fair value
through other
comprehensive
income
$m
274
Other
financial
assets at
fair value
$m
37
Trading
derivatives
$m
300
(191)
-
5
(3)
-
(13)
(4)
94
(191)
-
-
(51)
312
-
16
(124)
-
427
-
(51)
2
-
-
(24)
-
(15)
-
-
2
-
Equity instruments
at fair value through
other
comprehensive
income(1)
$m
264
-
-
17
(24)
-
(209)
-
48
-
-
Liabilities
Trading
derivatives
$m
255
Other
financial
liabilities at
fair value
$m
1
(180)
-
-
4
-
-
(3)
76
(180)
-
-
-
-
-
-
(1)
-
-
-
-
(1)
(2)
(3)
Equity instruments at fair value through other comprehensive income are included in other assets on the balance sheet.
Net gains or losses were recorded in other operating income.
Transfers into Level 3 were due to the lack of observable inputs for valuation of certain financial instruments. Transfers out of Level 3 were due to the valuation inputs becoming observable during the period.
Transfers between levels are deemed to have occurred at the beginning of the reporting period in which the instruments were transferred.
2017 Annual Financial Report
133
Notes to the financial statements
Risk disclosures (continued)
2016
Assets
Group
Balance at the beginning of year
Gains / (losses) on assets and (gains) / losses on
liabilities recognised:
In profit or loss (2)
In other comprehensive income
Purchases and issues
Sales and settlements
Transfers into Level 3 (3)
Transfers out of Level 3 (3)
Foreign currency translation adjustments
Derecognised in respect of the disposal group
Balance at the end of year
Gains / (losses) on assets and (gains) / losses on
liabilities for the reporting period related to financial
instruments held at the end of the reporting period
recognised:
In profit or loss
In other comprehensive income
Debt instruments
at fair value
through other
comprehensive
income
$m
5
Other
financial
assets at
fair value
$m
2,833
Trading
derivatives
$m
56
105
-
192
-
24
(38)
(38)
(1)
300
105
-
-
(6)
124
-
156
-
(1)
(4)
274
-
(6)
(26)
-
-
(593)
-
-
(203)
(1,974)
37
(12)
-
Equity instruments
at fair value through
other
comprehensive
income(1)
$m
405
-
(130)
4
-
-
-
(3)
(12)
264
-
(130)
Liabilities
Trading
derivatives
$m
-
Other
financial
liabilities at
fair value
$m
142
125
-
164
-
-
-
(34)
-
255
125
-
(1)
-
-
(17)
1
-
(8)
(116)
1
-
-
(1)
(2)
(3)
Equity instruments at fair value through other comprehensive income are included in other assets on the balance sheet.
Net gains or losses were recorded in other operating income, interest expense or impairment losses as appropriate.
Transfers into Level 3 were due to the lack of observable inputs for valuation of certain financial instruments. Transfers out of Level 3 were due to the valuation inputs becoming observable during the period.
Transfers between levels are deemed to have occurred at the beginning of the reporting period in which the instruments were transferred.
2017
Assets
Company
Balance at the beginning of year
Gains / (losses) on assets and (gains) / losses on
liabilities recognised:
In profit or loss (2)
In other comprehensive income
Purchases and issues
Sales and settlements
Transfers into Level 3 (3)
Transfers out of Level 3 (3)
Foreign currency translation adjustments
Balance at the end of year
Gains / (losses) on assets and (gains) / losses on
liabilities for the reporting period related to financial
instruments held at the end of the reporting period
recognised:
In profit or loss
In other comprehensive income
Debt instruments
at fair value
through other
comprehensive
income
$m
274
Other
financial
assets at
fair value
$m
37
Trading
derivatives
$m
300
(191)
-
5
(3)
-
(13)
(4)
94
(191)
-
-
(51)
312
-
16
(124)
-
427
-
(51)
2
-
-
(24)
-
(15)
-
-
2
-
Equity instruments
at fair value through
other
comprehensive
income(1)
$m
231
-
(6)
7
-
-
(209)
(2)
21
-
(6)
Liabilities
Trading
derivatives
$m
255
Other
financial
liabilities at
fair value
$m
1
(180)
-
-
4
-
-
(3)
76
(180)
-
-
-
-
-
-
(1)
-
-
-
-
(1)
(2)
(3)
Equity instruments at fair value through other comprehensive income are included in other assets on the balance sheet.
Net gains or losses were recorded in other operating income.
Transfers into Level 3 were due to the lack of observable inputs for valuation of certain financial instruments. Transfers out of Level 3 were due to the valuation inputs becoming observable during the period.
Transfers between levels are deemed to have occurred at the beginning of the reporting period in which the instruments were transferred.
134 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Risk disclosures (continued)
2016
Assets
Company
Balance at the beginning of year
Gains / (losses) on assets and (gains) / losses on
liabilities recognised:
In profit or loss (2)
In other comprehensive income
Purchases and issues
Sales and settlements
Transfers into Level 3 (3)
Transfers out of Level 3 (3)
Foreign currency translation adjustments
Balance at the end of year
Gains / (losses) on assets and (gains) / losses on
liabilities for the reporting period related to financial
instruments held at the end of the reporting period
recognised:
In profit or loss
In other comprehensive income
Debt instruments
at fair value
through other
comprehensive
income
$m
-
Other
financial
assets at
fair value
$m
471
Trading
derivatives
$m
56
105
-
192
-
24
(38)
(39)
300
105
-
-
(6)
124
-
156
-
-
274
-
(6)
(12)
-
-
(366)
-
-
(56)
37
(12)
-
Equity instruments
at fair value through
other
comprehensive
income(1)
$m
350
-
(126)
7
-
-
-
-
231
-
(126)
Liabilities
Trading
derivatives
$m
-
Other
financial
liabilities at
fair value
$m
-
125
-
164
-
-
-
(34)
255
125
-
-
-
-
-
1
-
-
1
-
-
(1)
(2)
(3)
Equity instruments at fair value through other comprehensive income are included in other assets on the balance sheet.
Net gains or losses were recorded in other operating income, interest expense or impairment losses as appropriate.
Transfers into Level 3 were due to the lack of observable inputs for valuation of certain financial instruments. Transfers out of Level 3 were due to the valuation inputs becoming observable during the period.
Transfers between levels are deemed to have occurred at the beginning of the reporting period in which the instruments were transferred.
The Group's exposure to fair value measurements based in full or in part on unobservable inputs is restricted to a small number of financial instruments,
which comprise an insignificant component of the portfolios in which they belong. As such, a change in the assumptions used to value the instruments
as at 30 September 2017 to reasonably possible alternatives would not have a material effect.
2017 Annual Financial Report
135
Notes to the financial statements
Risk disclosures (continued)
36 Financial asset transfers and securitisations
The Group and the Company enter into transactions by which they transfer financial assets to counterparties or to special purpose entities (SPEs).
Financial assets that do not qualify for derecognition are typically associated with repurchase agreements, covered bonds and securitisation program
agreements. The following table sets out the carrying amount of financial assets that did not qualify for derecognition and their associated liabilities.
Where relevant, the table also sets out the net position of the fair value of financial assets where the counterparty to the associated liabilities has
recourse only to the transferred assets.
Group
Carrying amount of transferred assets
Carrying amount of associated liabilities
For those liabilities that have recourse only to the transferred assets
Fair value of transferred assets
Fair value of associated liabilities
Net position
Company
Carrying amount of transferred assets
Carrying amount of associated liabilities
For those liabilities that have recourse only to the transferred assets
Fair value of transferred assets
Fair value of associated liabilities
Net position
Repurchase agreements
Repurchase
agreements
$m
10,838
2017
Covered
bonds Securitisation
$m
2,600
$m
36,357
Repurchase
agreements
$m
8,582
2016
Covered
bonds Securitisation
$m
3,536
$m
37,466
10,838
26,576
8,582
26,983
2,603
2,603
2,650
(47)
3,553
3,543
3,589
(46)
Repurchase
agreements
$m
10,634
2017
Covered
bonds Securitisation
$m
67,474
$m
30,794
Repurchase
agreements
$m
8,354
2016
Covered
bonds Securitisation
$m
72,946
$m
32,740
10,634
21,882
67,522
8,354
23,105
72,946
67,556
68,749
(1,193)
73,174
73,835
(661)
Securities sold subject to repurchase agreements are retained in their respective balance sheet categories when substantially all the risks and rewards
of ownership remain with the Company or the Group. The counterparty liability is included in amounts due to other banks and deposits and other
borrowings, as appropriate, based upon the counterparty to the transaction.
Covered bonds
The Group engages in covered bond program for funding and liquidity purposes. Housing loans have been assigned to bankruptcy remote SPEs
associated with covered bond programs to provide security for the obligations payable on the covered bonds issued by the Group. The Group is entitled
to any residual income after all payments due to covered bond investors have been met. The Group retains all of the risks and rewards associated with
the housing loans and where derivatives have not been externalised, interest rate and foreign currency risk are held in the Group. The covered bond
SPEs are consolidated by the Group, the housing loans are included in loans and advances and the covered bonds issued are included within Bonds,
notes and subordinated debt on the Group and Company’s balance sheet. The covered bond holders have dual recourse to the issuer or the cover pool
assets.
Securitisation
Through its loan securitisation programs, the Group packages and sells loans and advances (principally housing loans) as securities to investors
through a series of securitisation vehicles. This includes loans that are held for potential repurchase with central banks. The Group is entitled to any
residual income of the vehicles after all payments to investors and costs of the program have been met. The Group is considered to hold the majority of
the residual risks and benefits of the vehicles. The Company and the Group continue to be exposed primarily to liquidity risk, interest rate risk and credit
risk of the loans. The securitisation vehicles are consolidated by the Group and the loans are retained on the Group and the Company’s balance sheet.
The note holders have recourse only to the loan pool of assets.
136 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Other information
37 Related party disclosures
During the year, there have been dealings between NAB and its controlled entities and other related parties. NAB provides a range of services to related
parties including the provision of banking facilities and standby financing arrangements. Other dealings include granting loans and accepting deposits,
and the provision of finance. These transactions are normally entered into on terms equivalent to those that prevail on an arm’s length basis in the
ordinary course of business.
Other transactions with controlled entities may involve leases of properties, plant and equipment, provision of data processing services or access to
intellectual or other intangible property rights. Charges for these transactions are normally on an arm’s length basis and are otherwise on the basis of
equitable rates agreed between the parties. NAB also provides various administrative services to the Group, which may include accounting, secretarial
and legal. Fees may be charged for these services.
NAB currently issues employee share compensation to Group employees on behalf of Group subsidiaries. The equity-based payments expense relating
to this compensation is recharged from NAB to the employing subsidiaries in the Group. For further details, refer to Note 39 Shares and performance
rights.
The aggregate of material amounts receivable from or payable to controlled entities and NAB, at reporting date, is disclosed in the balance sheet of
NAB. Refer to Note 31 Interest in subsidiaries and other entities for details of NAB's investment in controlled entities. NAB has certain guarantees and
undertakings with entities in the Group. For further details, refer to Note 32 Contingent liabilities and credit commitments.
Loans made to subsidiaries are generally entered into on terms equivalent to those that prevail on an arm’s length basis, except that there are often no
fixed repayment terms for the settlement of loans between parties. Outstanding balances are unsecured and are repayable in cash.
The aggregate amounts receivable / (payable) from subsidiaries for the last two years to 30 September were:
Balance at beginning of year
Net cash flows in amounts due (to) / from controlled entities
Net foreign currency translation movements and other amounts receivables
Balance at end of year
Material transactions with subsidiaries for the last two years to 30 September included:
Net interest (expense)
Net operating lease (expense)
Net management fees (income)
Dividend revenue
Company
2017
$m
2,015
(311)
(142)
1,562
Company
2017
$m
(779)
(76)
42
2,005
2016
$m
3,538
(2,841)
1,318
2,015
2016
$m
(748)
(67)
41
2,199
During the 2017 financial year, there were transactions between NAB and MLC Limited, an entity over which the Group has significant influence. For
related party disclosures about this associate, refer to Note 31 Interest in subsidiaries and other entities.
Superannuation plans
The following payments were made to superannuation plans sponsored by the Group:
Payment to:
National Australia Bank Group Superannuation Fund A
National Wealth Management Superannuation Plan
Bank of New Zealand Officers Provident Association (Division 2)
National Australia Bank Pension and Workplace Savings Scheme
Group
Company
2017
$m
234
2
11
6
2016
$m
240
2
11
10
2017
$m
234
-
-
6
2016
$m
240
-
-
10
Transactions between the Group and superannuation plans sponsored by the Group during the last two years were made on commercial terms and
conditions.
Key Management Personnel (KMP)
KMP are those employees of the Group who have authority and responsibility for planning, directing and controlling the activities of both NAB and the
Group. More detailed remuneration disclosures for KMP’s are provided in the Remuneration report section of the Report of the Directors.
2017 Annual Financial Report
137
Notes to the financial statements
Other information (continued)
Remuneration of KMP
Total remuneration of KMP of NAB and the Group for the last two years to 30 September were:
Short-term benefits
Cash
salary
fixed
$
15,131,897
Cash STI
at risk
$
5,886,665
Non-
monetary
fixed
$
753,714
Post-
employment
benefits
Super-
annuation
fixed
$
566,112
NAB and the Group
2017
2016
15,228,940
7,627,064
590,404
532,520
Other long
term
benefits Equity-based benefits
Other
Payments
Total
Shares at
risk
$
2,166,797
Rights at
risk
$
10,664,807
$
2,796,294
$
38,124,301
1,778,216
9,831,928
3,062,383
38,834,852
$
158,015
183,397
Performance rights and shareholdings of KMP are set out in the Remuneration report section of the Report of the Directors.
Loans to KMP and their related parties
During the reporting period, loans made to KMP’s and other related parties of NAB and the Group were $14 million (2016: $15 million). Such loans are
made in the ordinary course of business on terms equivalent to those that prevail in arm’s length transactions. Loans may be secured or unsecured
depending on the nature of the lending product advanced. As at 30 September 2017, the total loan balances outstanding were $61 million (2016: $67
million).
No amounts were written off in respect of any loans made to directors or other KMP of NAB and the Group during the current or prior reporting period.
Further details regarding loans advanced to KMPs of NAB and the Group are included in the Remuneration report.
38 Remuneration of external auditor
Audit Services
Amounts paid or due and payable to Ernst & Young Australia
Amounts paid or due and payable to Ernst & Young Overseas
Total remuneration for audit services
Non-audit Services
Audit related Services
Amounts paid or due and payable to Ernst & Young Australia
Amounts paid or due and payable to Ernst & Young Overseas
Total remuneration for audit related services
All other Services
Amounts paid or due and payable to Ernst & Young Australia
Amounts paid or due and payable to Ernst & Young Overseas
Total remuneration for all other services
Total remuneration for non-audit services
Total remuneration for audit and non-audit services (1) (2)
(1)
(2)
Amounts exclude goods and services tax, value added tax or equivalent taxes.
Including any network firm.
Group
Company
2017
$'000
10,437
4,020
14,457
5,495
674
6,169
1,843
235
2,078
8,247
22,704
2016
$'000
11,557
4,787
16,344
5,783
1,065
6,848
1,335
466
1,801
8,649
24,993
2017
$'000
7,284
1,986
9,270
3,661
294
3,955
1,771
-
1,771
5,726
14,996
2016
$'000
7,332
2,270
9,602
3,593
156
3,749
722
20
742
4,491
14,093
Audit services consist of the audit or review of the consolidated financial statements of the Group and Company, including controlled entities that are
required to prepare financial statements.
Any services that are not audit services performed during the reporting period are non-audit services. These include audit related services and all other
services.
Audit related services consist of assurance and related services that are traditionally performed by the external auditor, including (i) provision of comfort
letters to underwriters in connection with securities offerings; (ii) regulatory services required by statute, regulation or regulatory compliance obligations;
and (iii) non-regulatory services including non-statutory audits, accounting consultations and audits in connection with acquisitions, internal control
reviews, attest services that are not required by statute or regulation and consultation concerning financial accounting and reporting standards.
All other services are those that are not audit or audit related services.
For a description of the Board Audit Committee’s pre-approval policies and procedures, refer to the NAB 2017 Corporate Governance Statement which
is available online at www.nab.com.au/about-us/corporate-governance. Further details of the non-audit services provided by Ernst & Young to the Group
during 2017 and the fees paid or due and payable for those services are set out in the Report of the Directors.
138 NATIONAL AUSTRALIA BANK
Notes to the financial statements
Other information (continued)
39 Shares and performance rights
The Group’s employee equity plans provide NAB shares and performance rights to employees of the Group. Each plan allows employees to be invited
to participate in the offers under the relevant plan. Employee equity plans may be specific to employees in a particular region (e.g. New Zealand (NZ)
staff share allocation plan, United Kingdom (UK) share incentive plan).
The Board determines the maximum number of shares or performance rights offered under each plan having regard to the rules of the relevant plan
and, where required, the formula used in calculating the fair value per instrument. Under ASX Listing Rules, shares and performance rights may not be
issued to NAB directors under an employee equity plan without specific shareholder approval.
Equity-based programs for employees
Equity-based programs offered to employees form part of the Group’s remuneration policy which is designed to:
• Attract, retain and reward employees.
• Align the interests of employees and shareholders through ownership of NAB securities.
• Comply with jurisdictional remuneration regulations and Group diversity, inclusion and pay equity commitments.
Under the terms of most offers, there is a period during which shares are held on trust and cannot be dealt with, or performance rights cannot be
exercised, by the employee to whom they are allocated. There may be forfeiture or lapse conditions particular to shares or performance rights allocated
to an employee (as described below) if the employee leaves during those periods or conduct standards are not met. Shares allocated to employees are
eligible for any cash dividends paid from the time they are allocated to the trustee on an employee’s behalf. Performance rights granted to employees
are not eligible for any cash dividends until the service and performance conditions have been met and the performance rights are exercised.
The value of the awards provided is measured by reference to the grant date fair value of the shares and performance rights provided to employees.
The expense for each tranche of shares or performance rights granted is recognised in the income statement on a straight-line basis, adjusted for
forfeitures, over the period that the awards provided are received (the vesting period), with a corresponding increase in the equity-based compensation
reserve.
The grant date fair value of each share is determined by the market value of NAB shares, and is generally a five day weighted average share price.
Employee share plans and performance rights are linked to internal performance, market performance and/or service conditions.
The fair value of the shares and performance rights with market performance hurdles is determined using a simulated version of the Black-Scholes
model. The key assumptions and inputs used in the valuation model vary depending on the award. They include the NAB share price at the time of the
grant, exercise price of the performance rights (which is nil), the expected volatility of NAB’s share price, the risk-free interest rate and the expected
dividend yield on NAB shares for the life of the performance rights. When estimating expected volatility, historic daily share prices are analysed to arrive
at annual and cumulative historic volatility estimates (which may be adjusted for any abnormal periods or non-recurring significant events). Trends in the
data are analysed to estimate volatility movements in the future for use in the numeric pricing model. The simulation takes into account both the
probability of achieving market performance conditions and the potential for early exercise of vested performance rights.
While market performance conditions are incorporated into the grant date fair values, non-market conditions are not taken into account when
determining the fair value and expected time to vesting of shares and performance rights. Instead, non-market conditions are taken into account by
adjusting the number of shares and performance rights included in the measurement of the expense so that the amount recognised in the income
statement reflects the number of shares or performance rights that actually vest.
The key equity-based programs offered to employees are:
Short-term incentives (STI) for certain employees may be deferred into shares or performance rights. Employees become eligible to receive those
shares or performance rights based on their individual performance, business performance or both, and service and other conditions.
The STI deferral model for employees based in Australia, Asia, NZ, the UK and the United States (US) provides for a proportion of an employee’s STI
reward to be deferred. The deferred amount is commensurate with the level of risk and responsibility within a role and the length of deferral, ranging
from 6 to 42 months for awards made in respect of the 2016 performance year or prior years, aligns with both the level of risk and impact of the role on
business performance and results. From the 2017 performance year, the length of deferral may range from 6 months to 90 months. A threshold is in
place whereby deferral only applies to STI deferred amounts of $1,000 or more for awards made in respect of the 2016 performance year or prior years.
From the 2017 performance year, the threshold will be $2,000 or more.
Generally, deferred STI shares (or performance rights which are granted to senior executives or for jurisdictional reasons) are forfeited (or lapsed)
during the deferral period if the employee resigns or breaches the NAB Code of Conduct during the following financial year(s) or, subject to certain
exclusions, if the employee is terminated from the Group. In determining the release of an employee’s deferred STI shares from restrictions during the
deferral period, the Board may in its absolute discretion, subject to compliance with the law, forfeit some or all of the deferred STI shares. For further
details on STI awards granted to senior executives of NAB, refer to the Remuneration report in the Report of the Directors.
Commencement shares (or performance rights granted for jurisdictional reasons) enable the buy-out of equity or other incentives from previous
employment, but are only provided with the recommendation of the Remuneration Committee or delegate and the approval of the Board or delegate.
The amount, timing and performance hurdles relevant to any such awards are based on satisfactory evidence of foregone awards from previous
employment. The shares may also be subject to restrictions and certain forfeiture conditions, including forfeiture (or lapsing) on resignation or if conduct
standards are not met.
2017 Annual Financial Report
139
Notes to the financial statements
Other information (continued)
Recognition / Retention shares (or performance rights granted for jurisdictional reasons) may be offered to key individuals in roles where retention is
critical over a medium term time frame (generally two to three years). The shares or performance rights may also be subject to restrictions and certain
forfeiture conditions, including forfeiture (or lapsing) on resignation.
Salary sacrifice shares were allocated on a monthly basis to UK employees when they nominated to contribute a portion of their gross salary to
receive NAB shares. Salary sacrifice shares ceased to be offered in December 2015.
General employee shares up to a target value of $1,000 are offered to eligible employees. These shares are held on trust, are subject to restrictions on
dealing for three years and, in Australia and Asia, are not subject to forfeiture. In NZ, the UK and the US, the shares are effectively forfeited if the
employee resigns or is dismissed from the Group before the end of the three year restriction period.
Long-term incentives (LTI) taking the form of performance rights, help to align management decisions with the long-term performance of the Group
through the use of challenging performance hurdles. The Executive LTI program is awarded to senior executives across the Group. An LTI maximum
opportunity is set with reference to external and internal relativities for each executive who must also meet minimum performance and conduct
thresholds. Performance hurdles (both internal and external) are measured at the end of a four to five year performance period. During the performance
period all of an executive’s performance rights will lapse on resignation and a pro rata portion will lapse on cessation of employment in other
circumstances having regard to the time elapsed in the performance period (unless the Board so determines). Performance rights will also lapse if
conduct requirements or performance hurdles are not met. The Board has absolute discretion to determine vesting or lapsing outcomes for the
performance rights.
Total Shareholder Return (TSR) compared against peer companies and Group Cash ROE growth compared against peer companies are the
performance measures used depending on the year the LTI was awarded.
Vesting of an LTI award generally occurs to the extent that the relevant performance hurdle is satisfied (as determined by the Board Remuneration
Committee). For historical awards, the performance rights generally have an expiry date between five and six years from the effective date, if they
remain unexercised. For LTI awards from 2015, if the applicable conditions are met, the performance rights will vest and each performance right will be
automatically exercised in return for one NAB fully paid ordinary share.
Each performance right is exchanged for one NAB fully paid ordinary share upon exercise, subject to standard adjustments for capital actions. No
exercise price is payable by the holder on exercise of performance rights.
Details of shares and performance rights are set out in the following tables:
Employee share plans
Employee share plans
Salary sacrifice shares (1)
Short-term incentive shares
Commencement and recognition shares
General employee shares
(1)
Salary sacrifice shares ceased to be offered in December 2015.
2017
2016
Fully paid
ordinary
shares granted
during the year
No.
-
Weighted
average grant
date fair value
$
-
Fully paid
ordinary shares
granted during
the year
No.
16,409
Weighted
average grant
date fair value
$
30.48
4,861,247
553,179
1,092,862
26.29
31.18
29.17
5,256,310
1,148,780
1,260,480
24.91
25.94
24.84
The closing market price of NAB’s shares at 30 September 2017 was $31.50 (2016: $27.87). The volume weighted average share price during the year
ended 30 September 2017 was $30.24 (2016: $27.38).
Performance rights movements
Equity instruments outstanding as at 30 September 2015
Granted
Forfeited
Exercised
Expired
Equity instruments outstanding as at 30 September 2016
Granted
Forfeited
Exercised
Expired
Equity instruments outstanding as at 30 September 2017
Equity instruments exercisable as at 30 September 2017
Equity instruments exercisable as at 30 September 2016
(1)
No exercise price is payable for performance rights.
140 NATIONAL AUSTRALIA BANK
Performance
rights(1)
No.
4,378,960
1,558,552
(483,269)
(387,127)
(143,635)
4,923,481
831,510
(606,334)
(259,315)
(1,674)
4,887,668
-
3,348
Notes to the financial statements
Other information (continued)
Performance rights outstanding
Terms and conditions
External hurdle (1)
Internal hurdle (2)
Individual hurdle (3)
2017
2016
Outstanding at
30 Sep
No.
4,464,645
53,769
369,254
Weighted
average
remaining life
months
24
Outstanding at
30 Sep
No.
4,442,277
Weighted
average
remaining life
months
34
12
9
89,600
391,604
16
10
(1)
(2)
(3)
Performance hurdles based on NAB’s relative TSR compared with peer companies.
Performance hurdles based on achievement of internal financial measures such as cash earnings, ROE compared to business plan, cash ROE growth compared with peer companies and Net Promoter
Score targets.
Vesting is determined by individual performance or time-based hurdles.
Information on fair value calculation
The table below shows the significant assumptions used as inputs into the grant date fair value calculation of performance rights granted during the last
two years. In the following table, values have been presented as weighted averages, but the specific values for each grant are used for the fair value
calculation. The following table shows a ‘no hurdle’ value where the grant includes performance rights which have non-market based performance
hurdles attached.
Weighted average values
Contractual life (years)
Risk-free interest rate (per annum)
Expected volatility of share price
Closing share price on grant date
Dividend yield (per annum)
Fair value of performance rights
‘No hurdle’ value of performance rights
Expected time to vesting (years)
40 Capital adequacy
2017
3.3
1.89%
20%
$31.16
7.40%
$15.06
$24.05
3.03
2016
3.7
2.23%
18%
$28.41
5.90%
$9.63
$24.59
3.42
As an ADI, NAB is subject to regulation by the Australian Prudential Regulation Authority (APRA) under the authority of the Banking Act 1959 (Cth).
APRA has set minimum regulatory capital requirements for banks that are consistent with the Basel capital adequacy framework.
The Group’s capital structure comprises various forms of capital. Common Equity Tier 1 (CET1) capital comprises paid-up ordinary share capital,
retained earnings plus certain other items recognised as capital. The ratio of such capital to risk-weighted assets is called the CET1 ratio. Additional Tier
1 capital comprises certain securities with required loss absorbing characteristics. Together these components of capital make up Tier 1 capital and the
ratio of such capital to risk-weighted assets is called the Tier 1 capital ratio.
Tier 2 capital mainly comprises of subordinated debt instruments, and contributes to the overall capital framework.
CET1 capital contains the highest quality and most effective loss absorbent component of capital, followed by Additional Tier 1 capital and then followed
by Tier 2 capital. The sum of Tier 1 capital and Tier 2 capital is called Total Capital. The ratio of Total Capital to risk-weighted assets is called the Total
Capital ratio. The minimum CET1 ratio, Tier 1 capital ratio and Total Capital ratio under APRA’s Basel capital adequacy Prudential Standards are 4.5%,
6.0% and 8.0% respectively.
In addition to the minimum capital ratios described above, APRA sets Prudential Capital Ratios for each tier of capital for each ADI, at a level
proportional to the ADI’s overall risk profile. A breach of the required ratios under APRA's Prudential Standards may trigger legally enforceable
directions by APRA, which can include a direction to raise additional capital or to cease business.
From 1 January 2016, APRA implemented a capital conservation buffer of 2.5% of an ADI’s total risk-weighted assets. In addition, for ADI’s considered
systemically important such as the Company, a further Domestic Systemically Important Bank (D-SIB) requirement of 1% has been added to the
required capital conservation buffer.
Under APRA’s Prudential Standards, entities involved in certain business activities (such as superannuation and funds management) are de-
consolidated for the purposes of calculating capital adequacy and excluded from the risk based capital adequacy framework. The investment in these
entities is deducted 100% from CET1 capital. Additionally, any profits from these activities included in the Group’s results are excluded from the
determination of CET1 capital to the extent they have not been remitted to the Company.
Capital ratios are monitored against internal capital targets that are set over and above minimum capital requirements set by the Board. The Group
remains well capitalised with a CET1 ratio of 10.06% as at September 2017. In July 2017, APRA announced a Common Equity Tier 1 (CET1) ratio
target of at least 10.5% by 1 January 2020 for major banks to be viewed as ‘unquestionably strong’. The Group expects that it can meet the new
'unquestionably strong' capital requirements in an orderly manner.
2017 Annual Financial Report
141
Notes to the financial statements
Other information (continued)
41 Discontinued operations
In the 2016 financial year, the Group executed two major divestments, the demerger and Initial Public Offering (IPO) of CYBG Group and the sale of
80% of Wealth's life insurance business to Nippon Life. Each of the transactions qualified as a discontinued operation.
Life insurance business discontinued operation
NAB has retained a 20% interest in MLC Limited following the sale of 80% of that company to Nippon Life. The retained interest gives NAB significant
influence over the business and is accounted for using the equity method in accordance with AASB 128 "Investments in Associates and Joint Ventures".
The investment is disclosed within other assets on the Group balance sheet. The full prior period results of the life insurance business are presented
within the life insurance business discontinued operation. The Group’s share of current period profit associated with the retained investment in the life
insurance business is presented within continuing operations. Refer to Note 31 Interest in subsidiaries and other entities for further detail.
Further to retaining a direct investment in the life insurance business, the Group has entered into a long term strategic partnership with Nippon Life
which includes a 20 year distribution agreement to provide life insurance products through NAB’s owned and aligned distribution networks. The
distribution agreement is a source of income for the Group in addition to the share of profits associated with the retained investment.
CYBG discontinued operation
The separation of CYBG Group was achieved by a demerger of 75% of CYBG shares to NAB shareholders, with the remaining 25% divested through
an IPO to institutional investors (with both transactions referred to as the CYBG demerger). As part of the CYBG demerger, NAB and CYBG entered into
the Conduct Indemnity Deed under which NAB agreed, subject to certain limitations, to provide CYBG with a Capped Indemnity in respect of certain
historic conduct liabilities (Refer to Note 32 Contingent liabilities and credit commitments for further information on the Capped Indemnity). All conduct
provisions recognised by NAB under the Conduct Indemnity Deed are presented within the CYBG discontinued operation and Provisions.
Analysis of loss for the year from discontinued operations
The results set out below represent the discontinued operations of Wealth's life insurance business and UK Banking operations as related to the CYBG
demerger. Adjustments to amounts previously presented in discontinued operations that are directly related to the disposal of a discontinued operation
in a prior period are classified separately in discontinued operations in the current period. During the financial year to 30 September 2017, a net loss of
$904 million before tax ($893 million after tax) was recognised in discontinued operations. This balance includes a loss of $853 million relating to the
Conduct Indemnity Deed entered into with CYBG. Refer to Note 32 Contingent liabilities and credit commitments for further information on the Conduct
Indemnity Deed.
Total discontinued operations
Net loss from life insurance business discontinued operation
Net loss from CYBG discontinued operation
Net loss from discontinued operations
42 Events subsequent to reporting date
Year to
Sep 17
$m
-
(893)
(893)
Sep 16
$m
(1,123)
(4,945)
(6,068)
On 27 October 2017, the Group announced it had agreed a settlement with the Australian Securities and Investments Commission (ASIC) of the Bank
Bill Swap Rate (BBSW) legal action. As part of the settlement the Group has agreed to a $10 million penalty, and to pay ASIC’s costs of $20 million. The
Group will also make a donation of $20 million to a financial consumer protection fund nominated by ASIC. The financial impact of this settlement has
been reflected in the Group’s results for the 2017 financial year.
On 2 November 2017, the Group announced an acceleration of its strategic agenda to enhance the customer experience and simplify the bank. A
restructuring provision of between $500 million and $800 million is expected to be raised in the Group’s interim financial report for the first half of the
2018 financial year.
Other than the matters noted above, there are no other items, transactions or events of a material or unusual nature that have arisen in the interval
between 30 September 2017 to the date of this report that, in the opinion of the directors, have significantly affected or may significantly affect the
operations of the Group, the results of those operations or the state of affairs of the Group in future years.
142 NATIONAL AUSTRALIA BANK
Directors' declaration
The directors of National Australia Bank Limited declare that:
(a) in the opinion of the directors, the financial statements and the notes thereto as set out on pages 57 to 142 and the additional disclosures included in
the audited pages of the Remuneration report, comply with Australian Accounting Standards (including the Australian Accounting Interpretations),
International Financial Reporting Standards as stated in Note 1(b) Statement of compliance to the financial statements, and the Corporations Act 2001
(Cth);
(b) in the opinion of the directors, the financial statements and notes thereto give a true and fair view of the financial position of NAB and the Group as at
30 September 2017, and of the performance of NAB and the Group for the year ended 30 September 2017;
(c) in the opinion of the directors, at the date of this declaration, there are reasonable grounds to believe that NAB will be able to pay its debts as and
when they become due and payable; and
(d) the directors have been given the declarations required by section 295A of the Corporations Act 2001 (Cth).
Dated this 14th day of November 2017 and signed in accordance with a resolution of the directors.
Dr Kenneth R Henry
Chairman
Mr Andrew G Thorburn
Group Chief Executive Officer
2017 Annual Financial Report
143
144 NATIONAL AUSTRALIA BANK
2017 Annual Financial Report
145
146 NATIONAL AUSTRALIA BANK
2017 Annual Financial Report
147
148 NATIONAL AUSTRALIA BANK
2017 Annual Financial Report
149
Shareholder information
Twenty largest registered fully paid ordinary shareholders of the company as at 31 October 2017
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED
J P MORGAN NOMINEES AUSTRALIA LIMITED
CITICORP NOMINEES PTY LIMITED
NATIONAL NOMINEES LIMITED
BNP PARIBAS NOMINEES PTY LTD
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