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Royal Bank of CanadaANNUAL FINANCIAL REPORT 2019Our vision is to be Australia’s leading bank, trusted by customers for exceptional service.National Australia Bank Limited ABN 12 004 044 937 National Australia Bank Limited ABN 12 004 044 937This 2019 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), Accounting Standards and interpretations issued by the Australian Accounting Standards Board and International Financial Reporting Standards and interpretations issued by the International Accounting Standards Board. NAB also produces a non-statutory Annual Review which can be viewed online at www.nab.com.au/annualreports.To view the Report online, visit www.nab.com.au/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. ANNUAL FINANCIAL REPORT 2019
REPORT OF THE DIRECTORS
2019 at a glance
Chairman's message
Operating and financial review
Directors’ information
Other Information
Other matters
Auditor’s independence declaration
Remuneration report
CORPORATE GOVERNANCE
Governance
FINANCIAL STATEMENTS
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
2
2
3
5
29
34
35
41
43
72
72
73
74
75
76
77
79
81
165
166
174
179
2019 Annual Financial Report
1
REPORT OF THE DIRECTORS
2
National Australia Bank
71,817Australians assisted with microfinance products and services — 1% increase from 2018$1.66Dividend per share (for the full year) — 32 cents lower than 20189.9%cash return on equity — 180 basis points decrease from 201819,673Number of customers assisted experiencing financial hardship — 7% increase from 2018$4.80bnStatutory net profit$5.10bnCash earnings — 10.6% decrease from 2018 $6.55bn cash earningsex large notables of $1,448m 0.8% increase from 2018-14Priority segments net promoter score — 2 point increase from 2018, ranked equal #1 amongst major banksEmployee engagement score — Compared to top quartile global benchmark of 69%54%2019 AT A GLANCE REPORT OF THE DIRECTORS
The release of National Australia Bank’s annual reports
coincides with my first day as Chairman. I have taken this
position after eight months as interim Group CEO, more
than three years as a Director and more than 37 years
working in financial services.
This has been an extraordinarily challenging year for the
organisation, in which it was clear that significant changes
were necessary. We required a different approach.
The Board understands what has gone wrong within the
bank and that we can only move forward if we deal with the
past. We are determined to make things right, earn trust
and build confidence in the future of our business.
We are pleased with the calibre of the incoming Group CEO,
Ross McEwan, who is commencing on 2 December 2019.
Ross is an experienced and proven CEO with a strong
reputation for customer fairness, cost management,
reputation recovery and leading industry reform. The Board
stands ready to help Ross take the organisation forward to
become the bank you want us to be.
At no stage will we seek to brush past the events and
findings of the Royal Commission. We were rightly called
out for failing to meet customer expectations and, in some
cases, breaching their trust. We faced challenges and
revelations that ultimately led to our outgoing Chairman
and former Group CEO resigning.
The shareholders’ first strike against our 2018
Remuneration Report at our Annual General Meeting (AGM)
last year also sent a clear message. We needed to reshape
our remuneration framework, including how we applied
outcomes for executives.
Along the way, we lost trust with customers and the
broader community. As interim Group CEO, I have
responded to these disappointments by being clear on
accountability and driving rigour and discipline in the way
NAB operates.
Lifting performance
We are addressing the issues of the past and preparing the
bank for the future. We have taken clear actions designed
to ensure we meet customer and community expectations.
The Board has increased rigour in assessing performance,
with a clear focus to reward longer-term, sustainable
customer and shareholder outcomes.
While 2019 underlying business performance was solid,
NAB did not achieve some financial and non-financial
targets. The Remuneration Report reflects the Board’s
decision that the Executive Leadership Team will receive no
short-term variable reward and no fixed remuneration
increase for the financial year.
We have strengthened our financial settings. We have
increased customer-related remediation provisions. We
have lowered our dividend payout, by 16% from financial
year 2018, and we have raised a significant amount of
capital to ensure we are on track to meet APRA’s
‘Unquestionably Strong’ requirements for 1 January next
year.
Our transformation, which has been underway for over two
years, is delivering real benefits in terms of productivity and
supporting business growth in a challenging, low-rate
environment. It is also improving the resilience of our
technology and enabling us to adapt to a new digital future.
Our focus on becoming simpler, faster and less complex for
customers and employees has resulted in 30% fewer
products, 30% fewer over the counter transactions and a
17% decrease in calls to our call centres.
We are making things right where we have made mistakes.
We have improved processes to remediate customers fairly,
consistently and more quickly, with a dedicated remediation
team of more than 950 people driving this work.
2019 Annual Financial Report
3
CHAIRMAN’S MESSAGE REPORT OF THE DIRECTORS
A comprehensive program of work is well underway to
improve non-financial risk management at NAB. We are
focused on driving effective change to improve outcomes
for customers and achieve sustainable, long-term
performance.
We have begun an extensive and considered reform
program to achieve cultural and risk transformation, arising
out of the Self-Assessment and sitting alongside our Royal
Commission response.
We take full accountability for our failings and have been
transparent on our progress to address them. Intensive
effort is underway to continue to overhaul processes and
practices, but it is early days and there is more work to be
done to achieve sustainable change.
We are determined to ensure NAB meets the highest
standards and to build a culture that puts customers at the
centre of everything we do.
Supporting customers and the broader community
NAB exists to serve customers, to keep their money safe and
to facilitate borrowing and enable investment. In doing so,
our core banking activities play an important role in the
economy and the broader community – including $5 billion
paid in dividends to our mostly Australian-based
shareholders and $3.1 billion paid in taxes this year.
We are absolutely committed to doing our part to support
growth for business and households. We know that
increased prosperity in Australia relies heavily on business
investment and the current caution in the private sector
reflects broader global uncertainty.
The RBA cash rate is sitting at historic lows, which presents
new challenges for our industry. We are determined to
address the needs of depositors, borrowers and our
shareholders in this dynamic environment – and remain
very much open for business. This year we provided $61
billion in new lending for our Australian and New Zealand
customers to buy or renovate their homes.
This year we enhanced our standing as Australia’s largest
business bank, growing market share in the small to
medium sector. With NAB financing one in three dollars lent
to Australian farmers, we are also the leading agribusiness
bank.
We also want to make a positive impact on the lives of our
customers, people, shareholders, communities and the
environment in which we operate. Our employees took
13,464 volunteer days to support the community this year
and in our 16th year of partnership with Good Shepherd, we
have now funded $293.6 million in loans to more than half
a million Australians unable to access mainstream finance.
In a unique collaboration with the CSIRO, we launched the
Australian National Outlook report in June, outlining a
broad and compelling view about Australia’s roadmap to
2060. We are committed to the communities in which we
operate and understand we have an important role to play
in Australia’s economy.
4
National Australia Bank
We have more than 34,000 people and are equally focused
on caring for them; the bankers and teams across the bank
who strive to deliver the best possible financial services to
our customers every day. I am proud that our customers
often call out their local branch employees as the highlight
of their banking relationship with us.
We are working to foster a culture of inclusion and
accessibility, enabled by leaders and employee-led
volunteer groups. In our survey of NAB employees this year,
74% told us they experienced an inclusive workplace in
2019. Our aim is to reach the top quartile of organisations
in Australia and New Zealand, which would require a result
around 77% for inclusion.
The future of your business
As Chairman, I am acutely aware of what is expected of me
and the Board in coming years. We will continue to actively
pursue Board renewal, following the resignation of former
Chairman Ken Henry, effective November 2019 and the
planned retirement of Anthony Yuen after our AGM in
December 2019.
I take this opportunity to formally thank Ken and Anthony
for their contributions and service since they joined the
Board in 2011 and 2010 respectively, and wish them well for
the future. I also thank our former Group CEO, Andrew
Thorburn, who led the organisation for more than four
years and whose passion for customers is well known.
I would also like to welcome Kathryn Fagg as a new director
on our Board, effective 16 December 2019. Kathryn is a
highly respected director with extensive leadership
experience across several industries, including banking, and
will stand for election at our AGM in December 2019.
The Board understands we are at the service of
shareholders, as well as customers and the community. As
customers and shareholders ourselves, we have a shared
experience and perspective on NAB’s performance.
After a year in which we were found to have fallen short in
several areas, we look forward to demonstrating to all
stakeholders that we are a company worthy of your
support.
Philip Chronican, Chairman
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 2019.
Certain definitions
The Group’s financial year ends on 30 September. The
financial year ended 30 September 2019 is referred to as
2019 and other financial years are referred to in a
corresponding manner. Reference in this document to the
September 2019 full year are references to the twelve
months ended 30 September 2019. The abbreviations $m
and $bn represent millions and thousands of millions (i.e.
billions) of Australian dollars respectively.
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. Users of
this report 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.
The Operating and Financial Review 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:
• 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.
• 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).
• 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).
REPORT OF THE DIRECTORS
• The Group’s ability to meet its internal net FTE reduction
targets.
• The Group’s ability to recruit and retain FTE and
contractors with the requisite skills and experience to
deliver Program initiatives.
• 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.
• 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.
• 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.
• NAB's proposed divestment of its wealth management
businesses (excluding JBWere and nabtrade) may have an
impact on the timing, scope and cost of the Program,
however the impact cannot be quantified at this time.
Further information on important factors that could cause
actual results to differ materially from those projected in
such statements is contained on page 18 under
“Disclosure on Risk Factors”.
Financial performance summary
The following financial discussion and analysis is based on
statutory information unless otherwise stated. The statutory
information 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 Report of the
Directors are not accounting measures within the scope of
International Financial Reporting Standards (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
• cash earnings (excluding large notable items)
• statutory ROE
• cash ROE
• net interest margin
• average equity (adjusted)
2019 Annual Financial Report
5
Refer to page 7 for a five-year summary of the Group’s
average equity (adjusted), total average assets and average
interest earning assets.
Information about large notable items
Large notable items included in the net profit attributable
to owners of NAB are described below:
Customer-related remediation
Charges associated with customer-related remediation
matters. These include:
• refunds and compensation to customers impacted by
issues in the Wealth business, including adviser service
fees charged by NAB Financial Planning and NAB Advice
Partnerships, combined with the Wealth advice review
and consumer credit insurance sales (within discontinued
operations)
• banking-related matters, including matters where
customers were incorrectly charged fees on certain fee-
exempt transactions
• costs for implementing remediation processes.
Capitalised software policy change
Charge associated with a change in the application of the
software capitalisation policy by increasing the
capitalisation threshold from $0.5 million to $2 million.
Restructuring-related costs
Costs associated with the acceleration of the Group's
strategic agenda announced on 2 November 2017 to
enhance the customer experience and simplify its business.
Rounding of amounts
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. Any discrepancies between total
and sums of components in tables contained in this report
are due to rounding.
REPORT OF THE DIRECTORS
OPERATING AND FINANCIAL REVIEW (CONTINUED)
• average interest earning assets
• average assets.
The Group regularly reviews the non-IFRS measures
included in its Report of the Directors to ensure that only
relevant financial measures are incorporated. Certain other
financial performance measures detailed in the Report of
the Directors 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 statements.
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 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, fair value and hedge ineffectiveness and other
non-cash earnings 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. A reconciliation
between statutory net profit and cash earnings is included
in Note 2 Segment information of the financial statements.
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, which in this
financial report is not materially different from statutory net
interest income) expressed as a percentage of average
interest earning assets.
Information about average balances
Average balances, including average equity (adjusted), total
average assets and average interest earning assets are
based on daily statutory average balances derived from
internally generated trial balances from the Group's general
ledger.
This methodology produces numbers that more accurately
reflect seasonality, timing of accruals (such as dividends)
and restructures (including discontinued operations), which
would otherwise not be reflected in a simple average.
6
National Australia Bank
OPERATING AND FINANCIAL REVIEW (CONTINUED)
5 Year Financial Performance Summary
Net interest income
Other income
Operating expenses
Credit impairment charge
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
REPORT OF THE DIRECTORS
2019
$m
13,558
4,373
(9,827)
(927)
7,177
(2,087)
5,090
(289)
4,801
3
4,798
Group(1)
2017
$m
13,182
4,842
(8,539)
(824)
8,661
(2,480)
6,181
(893)
5,288
3
5,285
2018
$m
13,505
5,596
(9,910)
(791)
8,400
(2,455)
5,945
(388)
5,557
3
5,554
2016
$m
12,930
5,192
(8,331)
(813)
8,978
(2,553)
6,425
(6,068)
357
5
352
2015
$m
12,462
5,975
(8,189)
(733)
9,515
(2,709)
6,806
(414)
6,392
54
6,338
(1)
Information is presented on a continuing operations basis. September 2015 was restated for the demerger of CYBG and the sale of 80% of Wealth's life
insurance business to Nippon Life in September 2016. The Group's financial statements for the year ended 30 September 2015 can be found in the
corresponding report published by the Group for the period.
5 Year Key Performance Indicators
Key Indicators
Statutory earnings per share (cents) - basic
Statutory earnings per share (cents) - diluted
Statutory return on equity
Cash return on equity
Profitability, performance and efficiency measures
Dividend per share (cents)
Net interest margin(1)
Capital
Common Equity Tier 1 ratio
Tier 1 ratio
Total capital ratio
Risk-weighted assets ($bn) (spot)
Volumes ($bn)(1)
Gross loans and acceptances (spot)(2)
Average interest earning assets
Total average assets
Customer deposits (spot)
Average equity (adjusted) - Statutory
Average equity (adjusted) - Cash
Asset quality
Group
2019
2018
2017
2016
2015
168.6
164.4
9.1%
9.9%
166
1.78%
10.38%
12.36%
14.68%
415.8
601.4
758.8
835.9
424.6
51.6
51.6
201.3
194.0
11.2%
11.7%
198
1.85%
10.20%
12.38%
14.12%
389.7
585.6
726.7
807.0
409.0
48.7
48.7
194.7
189.1
10.9%
14.0%
198
1.85%
10.06%
12.41%
14.58%
382.1
565.1
711.3
798.8
407.6
47.5
47.5
8.8
15.5
0.5%
14.3%
198
1.88%
9.77%
12.19%
14.14%
388.4
545.8
689.5
855.8
390.5
44.3
45.5
252.7
245.4
15.2%
14.8%
198
1.90%
10.24%
12.44%
14.15%
399.8
521.9
658.1
864.6
362.0
40.5
42.2
90+ days past due and gross impaired assets to gross loans and acceptances(1)
0.93%
0.71%
0.70%
0.85%
0.63%
Other
Funds under management and administration (FUM/A) (spot) ($bn)(3)
Assets under management (AUM) (spot) ($bn)(3)
Full Time Equivalent Employees (FTE) (spot)(1)
Full Time Equivalent Employees (FTE) (average)(1)
150.2
201.5
34,370
33,950
144.7
206.7
33,283
33,747
133.8
195.3
33,422
33,746
125.0
184.9
34,263
34,567
n/a
n/a
33,894
34,148
(1)
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. The Group's financial statements for the year ended 30 September 2015 can be found in the
corresponding report published by the Group for the period.
Including loans and advances at fair value.
(2)
(3) For the year ended 30 September 2017, there was 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 was restated for September 2016. 2015 period was not restated.
2019 Annual Financial Report
7
REPORT OF THE DIRECTORS
OPERATING AND FINANCIAL REVIEW (CONTINUED)
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
• A number of changes to the composition of the NAB
Board and Executive Leadership Team have occurred or
were announced during 2019, namely:
– Mr Andrew Thorburn resigned as Managing Director
and Group Chief Executive Officer (CEO) and ceased
employment with the Group effective 28 February
2019.
– Mr Philip Chronican, Director, commenced as interim
Group CEO on 1 March 2019 and served in this
capacity until 14 November 2019. He commenced as
Chairman of the Board effective 15 November 2019.
– Dr Ken Henry, resigned as non-executive director and
Chairman of the Board effective 14 November 2019.
– The Board announced the appointment of Mr Ross
McEwan as incoming Group CEO on 19 July 2019 and
he will commence in this role and as Managing
Director on 2 December 2019.
– Mr Gary Lennon, Group Chief Financial Officer (CFO),
acted as Group CEO from 21 December 2018 to
28 February 2019 and will be acting Group CEO from
15 November 2019 to 1 December 2019 while
continuing as Group CFO.
– Mr Greg Braddy, Deputy Group CFO, acted as Group
CFO from 21 December 2018 to 28 February 2019.
– Ms Lorraine Murphy, Chief People Officer, ceased
employment with the Group on 29 March 2019.
– Ms Julie Rynski, Customer Executive Regional and
Agribusiness, acted as Chief People Officer from
30 March 2019 to 30 September 2019.
– Ms Susan Ferrier joined NAB as Chief People Officer on
1 October 2019.
– Ms Kathryn Fagg has been appointed as a non-
executive director of NAB, effective 16 December
2019.
– Mr Anthony Yuen will retire as a non-executive
director of NAB following the Company's Annual
General Meeting on 18 December 2019.
• In March 2019, the Group established a Board Customer
Committee to better oversee NAB's processes to ensure
fair products and service outcomes and to evaluate
customer feedback and complaints.
• On 17 December 2018, the Group redeemed the GBP400
million Trust Preferred Securities (TPS) issued by National
Capital Trust 1 and guaranteed (on a limited basis) by
NAB on 29 September 2003. The Trust Preferred
Securities were redeemed for cash at their par value plus
accrued distribution.
• On 20 March 2019, the Group issued $1,874 million of
NAB Capital Notes 3, which will mandatorily convert into
8
National Australia Bank
NAB Ordinary Shares on 19 June 2028, provided certain
conditions are met. With written prior approval from
APRA, the Group may elect to convert, redeem or resell
NAB Capital Notes 3 on 17 June 2026, or on the
occurrence of particular events, provided certain
conditions are met.
• On 20 March 2019, the Group completed the resale of all
convertible preference shares (CPS) issued on 20 March
2013 to a nominated purchaser, in accordance with the
resale notice issued on 11 February 2019. Following the
resale, $750 million of CPS were converted into ordinary
shares, and the remaining balance of approximately $764
million of CPS was redeemed.
There were no other significant changes in the state of
affairs of the Group that occurred during the financial year
under review that are not otherwise disclosed in this report.
The Group’s Business
The Group is a financial services organisation with more
than 34,000 people, operating through a network of almost
900 locations, with over 573,000 shareholders and serving
approximately nine million customers. The Group's purpose
is to back the bold who move Australia forward.
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).
In 2019, the Group operated the following divisions:
• Business and Private Banking focuses on serving the
needs of three of NAB's priority customer segments –
small businesses, medium businesses and investors.
Customers are served through an integrated banking
model locally led by managing partners through business
banking centres and through the small business
customer hubs. This includes specialists in Health,
Agribusiness, Government, Education, Community and
Franchising (GECF), Professional Services and Commercial
Real Estate. The division also serves high net worth
customers through Private Bank and JBWere.
• Consumer Banking and Wealth provides customers with
products and services through proprietary networks in
NAB and UBank, as well as third party and mortgage
brokers. Customers are served through the Consumer
Banking network to secure home loans or manage
personal finances through deposit, credit or personal
loan facilities. The network also provides servicing
support to individuals and business customers. Wealth,
including Wealth Advice, Asset Management and
Superannuation, provides customers with access to
advisers and a financial planning network of self-
employed and employed advisers in Australia.
• 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, including
OPERATING AND FINANCIAL REVIEW (CONTINUED)
branches in the US, UK and Asia, with specialised
industry relationships and product teams. It includes
Bank of New Zealand's Markets Trading operations.
• New Zealand Banking comprises the Consumer Banking,
Wealth, 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.
• Corporate Functions and Other includes functions that
support all businesses including Treasury, Technology
and Operations, Support Units and Eliminations.
Strategic Highlights
Focus, Vision and Objectives
The Group’s strategic focus supports its vision to be
Australia’s leading bank, trusted by customers for
exceptional service. Achieving this vision is underpinned
currently by four key long term objectives:
1. Net Promoter Score(1)(2) (NPS) positive and number 1 of
major Australian banks in priority segments.
2. Cost to income ratio towards 35%.
3. Number 1 ROE of major Australian banks.
4. Top quartile employee engagement.
Critical to the Group’s ability to achieve its vision and
objectives is the maintenance of strong foundations –
Balance Sheet (including capital, funding and liquidity), Risk
(including credit and operational risk) and Technology.
Implementation of APRA Self-Assessment Actions and
Royal Commission Recommendations
At the request of the Australian Prudential Regulation
Authority (APRA), the Group undertook a Self-Assessment
into governance, accountability and culture in June 2018.
The Self-Assessment identified shortcomings in aspects of
the Group's approach to non-financial risk management,
with particular focus on operational, compliance and
conduct risk. On 30 November 2018, the Group voluntarily
published the Self-Assessment report which identified 26
actions to deliver structural, procedural and cultural change.
This work is organised around five overarching goals arising
out of the Self-Assessment and sits alongside NAB’s Royal
Commission response.
On 1 February 2019, the Royal Commission Final Report was
handed to the Governor-General by Commissioner, the Hon.
Kenneth Hayne AC QC. The Final Report includes 76
recommendations. The Group supports 72 of the 76
recommendations. The Royal Commission has established
new standards and expectations across the industry. The
Group welcomes change that will drive better outcomes for
customers and will implement the recommendations in
accordance with their intent.
REPORT OF THE DIRECTORS
A report detailing NAB's progress against the Self-
Assessment and the recommendations of the Royal
Commission was released on 7 November 2019 and is
available at www.nab.com.au/about-us/shareholder-centre/
asx-announcement.
Accelerating our Strategy
In November 2017, the Group announced an acceleration of
its strategy over the three years to September 2020 to
achieve its vision and objectives, reflecting the environment
of rapid and constant change.
This transformation involves a targeted $1.5 billion increase
in investment spend over the three years to September
2020, taking total investment spend to approximately $4.5
billion over that period. In the September 2019 financial
year, investment spend was $1.7 billion, bringing the
cumulative total since September 2017 to $3.2 billion. The
focus of this increased investment spend over three years is
on the four key areas outlined below.
Best Business Bank
The Group continues to invest in transforming its leading
Australian Small and Medium Enterprise (SME) franchise,
making it simpler and easier for customers. Good progress
has been made since September 2017 including:
• Improved banker capacity to understand and support
business and personal needs of the Group’s more
complex customers, with revenue per banker increasing
20%.
• New Customer Relationship Management platform has
been rolled-out providing mobile capability, real time
data and automated reports and dashboards.
• Small business customers have been migrated to a new
customer service hub, open 7 days a week with extended
operating hours.
• The proportion of new small business lending accounts
generated via the Quickbiz digital platform, increased to
47% from 20%.
• Revenue from bankers with industry specialisations or
focus up from 20% to 30%.
Simpler and Faster
The Group is focused on delivering exceptional customer
service with increased productivity and reduced complexity.
Key progress since September 2017 includes:
• Number of products reduced by 30% from approximately
600 to 423.
• Over-the-counter transactions in branches declined by
30% and call centre volumes reduced by 17%.
• 95 branches and business centres closed and 835 smart
ATM's rolled out.
• Mobile cheque capture launched.
• Simplifying, reducing and improving transparency of
fees, with 185 fees removed or reduced across Australian
(1) Net Promoter® and NPS® are registered trademarks and Net Promoter Score and Net Promoter Systems 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: NAB defined Home Owners (HL@bank) 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 DBM Atlas & BFSM Research for the September 2019 financial year.
2019 Annual Financial Report
9
REPORT OF THE DIRECTORS
OPERATING AND FINANCIAL REVIEW (CONTINUED)
Banking and Wealth in the September 2019 financial
year.
New and Emerging Growth Opportunities
Capturing new and emerging growth opportunities by
leveraging the Group’s capabilities and positions of strength
is a key focus. Progress includes:
• 75 global infrastructure deals completed over the year to
September 2019 worth approximately $53 billion of total
project debt.
• UBank, the Group’s digital bank, increased customer
numbers by 40% over the two years to September 2019,
and grew home lending at 7 times system rate over the
September 2019 financial year.
Great People, Talent and Culture
To deliver on its strategy and to meet the expectations of its
customers and the community, the Group is focused on
having the right culture and plan in place to build the
capability of our people and attract the best talent. Key
initiatives include:
• Commencement of a new Group Chief People Officer, Ms
Susan Ferrier from 1 October 2019, who has led large
transformation and culture change programs.
• A face-to-face program for all People Leaders to build
awareness and create alignment around the Group's
three culture priorities - customer first, disciplined and
simpler for our people.
As part of the transformation, the Group expects to deliver
cumulative cost savings, currently targeted at greater than
$1 billion by 30 September 2020, as it significantly simplifies
and automates processes, reduces procurement and third
party costs, and gets closer to its customers with a flatter
organisational structure. In the September 2019 financial
year, cost savings of $480 million were achieved, bringing
cumulative cost savings since September 2017 to $800
million.
The Group is reshaping its workforce to enable it to deliver
for customers. Over the three years to 30 September 2020,
the Group is targeting the creation of up to 2,000 new roles
and a reduction of 6,000 existing roles as it further
automates and simplifies its business. This is expected to
result in a net reduction in roles of approximately 4,000 by
30 September 2020. During the September 2019 financial
year, a reduction of 1,816 roles occurred and an additional
1,045 new roles were added. On a cumulative basis since
September 2017, there has been a reduction of 3,713 roles
and an addition of 1,240 new roles.
The Group outlined a target for expense growth over the
September 2019 financial year and the September 2020
financial year to be broadly flat excluding large notable
items. In the September 2019 financial year, expense growth
excluding large notable items was broadly flat.
Reshaping of Wealth Management
In May 2018, the Group announced an intention to reshape
its wealth offering, consistent with its plan to become
simpler and faster. A detailed review determined the Group
could best serve the needs of its customers and deliver long
term value for shareholders by retaining and investing in a
more focused wealth offering. This involves retaining
JBWere, part of the Group’s leading Business and Private
Banking franchise, to help high net worth customers
manage their personal wealth alongside their business
interests, combined with nabtrade, the Group’s fast growing
online investing platform, supporting self-directed
customers.
The Group intends to exit its Advice, Platform &
Superannuation and Asset Management businesses,
currently operating under MLC and other brands (‘MLC
Wealth’). Separate ownership will allow this business to
determine its own strategy and investment priorities to
better deliver for customers and enhance its competitive
position. It is expected there will be ongoing arrangements
between the Group and MLC Wealth, to offer the Group’s
customers continued access to advice and products to meet
wealth management needs.
Since announcing this intention, the reshaping of MLC
Wealth continues to gain momentum. A new executive
team is now largely in place with a new operating model
structured around four business pillars of - Advice,
Platforms, Asset Management and Retirement and
Investment Solutions. Significant work is underway to
ensure the strength of each pillar. This includes a simpler,
more customised advice business, a rebranding and
leadership restructure in Asset Management, and more
competitive pricing across the business.
The Group continues to make progress towards a separation
of MLC Wealth, targeting a public markets exit in the 2020
financial year, together with exploration of alternative
transaction structures and options. The Group will take a
disciplined approach to the exit of MLC Wealth and will
execute a transaction at the appropriate time having regard
for the interests of all stakeholders. Any transaction remains
subject to market conditions, regulatory and other
approvals.
Performance against Key Long-term Objectives
The Group uses the NPS(1) system to access real-time,
targeted feedback so it can understand and improve the
customer experience. Over the September 2019 financial
year, priority segment NPS(1)(2) improved from -16 to -14, and
is equal first amongst major banks.
The Group’s long term objective remains for NPS to be
positive and number one of major Australian banks, which
it expects to achieve by becoming simpler and faster to
(1) Net Promoter® and NPS® are registered trademarks and Net Promoter Score and Net Promoter Systems 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: NAB defined Home Owners (HL@bank) 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 DBM Atlas & BFSM Research for the September 2019 financial year.
10
National Australia Bank
REPORT OF THE DIRECTORS
On a cash earnings basis, credit impairment charges for the
September 2019 financial year increased 18% over the year
and represents 0.15% of gross loans and acceptances. The
ratio of loans which are more than 90 days in arrears and
impaired as a percentage of gross loans and acceptances
increased over the year to September 2019 by 22 basis
points to 0.93%, largely due to rising Australian mortgage
delinquencies.
Provisions for credit impairment remain prudent. On a cash
earnings basis, total provisions increased 11% over the year
to $4,142 million, and the ratio of collective provisions to
credit risk-weighted assets increased from 0.92% to 0.96%.
The Group continues to strengthen its technology
environment to be fast, agile, efficient, resilient and
relevant, supported by deep technical expertise. Technology
investment spend has increased as part of the acceleration
of the Group’s strategy to deliver these objectives in a
timely manner. Progress since September 2017 includes:
• A new technology leadership team has been established,
with new executives hired from major global financial
services and technology firms bringing strong
technology experience.
• IT legacy applications have reduced by 278 or 11%, and
422 or 19% of current IT applications have been migrated
to the cloud. The Group is targeting a 15-20% reduction
in IT legacy applications and 35% migration of current IT
applications to the cloud.
• A cloud-based data lake has been built with >100 key
data feeds in production and sophisticated tools
developed to support advanced data analytics and
machine learning.
• Customers are now beginning to see improvements as a
result of the Group's investment and strategic approach
to technology changes, with a 42% drop in critical and
high incidents over the year to September 2019.
OPERATING AND FINANCIAL REVIEW (CONTINUED)
deliver better outcomes for its customers, backing its
customers to grow and helping them when they need it
most. Key initiatives supporting this focus over the
September 2019 financial year include:
• Simplification and reduction of fees, with 185 fees
removed or reduced across Australia Banking and
Wealth.
• A pledge to keep the Group’s 316 branches in regional
and rural Australia open until at least January 2021 and
the Group has ceased charging default interest to
agricultural customers impacted by drought.
Over the September 2019 financial year, the Group’s Cost to
Income (CTI) ratio on a cash earnings basis increased by 230
basis points to 52.3%. Excluding large notable items, the CTI
decreased 30 basis points to 44.3%, benefitting from
productivity savings from the Group’s transformation
program.
Over the September 2019 financial year, the Group’s cash
return on equity (ROE) declined 180 basis points to 9.9%.
Excluding large notable items, Cash ROE declined 60 basis
points to 12.7%, mainly reflecting higher credit impairment
charges and higher levels of equity.
The Group is targeting top quartile employee engagement.
The Group’s annual staff engagement result for September
2019 remained stable at 54%. This is below the top quartile
benchmark of 69%(1) reflecting the year’s challenging
events.
Maintaining Strong Foundations
The Group remained well capitalised during the year to
September 2019 with a Group Common Equity Tier 1 (CET1)
ratio of 10.38% as at 30 September 2019. The Group expects
to achieve APRA's ‘Unquestionably Strong’ capital
benchmark from 1 January 2020.
The Board determined it prudent to reduce the 2019 interim
and full year dividend to 83 cents per share, representing a
16% reduction compared to the 2018 financial year. In
addition, the Board made the decision to partially
underwrite and apply discounts to the Dividend
Reinvestment Plan for both the interim and final 2019
dividend.
These actions are in response to a more challenging
operating environment, regulatory change and customer-
related remediation. The actions have also resulted in the
Group being well placed to meet APRA’s ‘Unquestionably
Strong' capital benchmark by 1 January 2020.
The Group has maintained strong liquidity through the
September 2019 financial year. The Net Stable Funding Ratio
(NSFR) was 113% and the quarterly average Liquidity
Coverage Ratio (LCR) was 126%, both above the APRA
regulatory requirement of 100%.
Portfolio concentrations continue to be managed with
reference to established Group risk appetite settings, and
overall credit risk in the Group’s portfolio remains sound.
(1) Based on the top quartile of Australian and New Zealand companies, source Aon (now known as Kincentric) 2019.
2019 Annual Financial Report
11
REPORT OF THE DIRECTORS
OPERATING AND FINANCIAL REVIEW (CONTINUED)
Financial Performance
Net interest income
Other income
Net operating income
Operating expenses
Credit impairment charge
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
September 2019 v September 2018
Net profit attributable to owners of NAB (statutory net
profit) decreased by $756 million or 13.6%.
Net interest income increased by $53 million or 0.4%,
including a decrease of $133 million which was offset by
movements in economic hedges in other operating income
and customer-related remediation of $72 million in the
2019 financial year. Excluding these movements, the
underlying increase of $258 million or 1.9% was driven by
growth in both housing and business lending volumes,
combined with the impact of repricing in the lending
portfolios. These movements were partially offset by
competitive pressures and changing customer preferences
(switching from interest only to principal and interest home
loans) affecting housing lending margins, and higher
funding and liquidity costs.
Other income decreased by $1,223 million or 21.9%,
including an increase of $133 million which was offset by
movements in economic hedges in net interest income, and
an increase of $886 million in customer-related
remediation. Excluding these movements, the underlying
decrease of $470 million or 8.4% was mainly driven by
unfavourable movements in fair value and hedge
ineffectiveness, lower Wealth income as a result of fee
reductions and repricing, removal of grandfathered
commissions, and a change in customer preferences to
lower margin products, and lower Markets income. This was
partially offset by higher NAB risk management income in
Treasury.
12
National Australia Bank
Group
2019
Large
2019
2018
Large
Notable
ex Large
Items
Notable
Notable
Items
2018
ex Large
Notable
$m
13,558
4,373
17,931
(9,827)
(927)
7,177
(2,087)
5,090
(289)
4,801
3
$m
(72)
(1,135)
(1,207)
(858)
-
(2,065)
617
(1,448)
(257)
(1,705)
-
Items
$m
13,630
5,508
19,138
(8,969)
(927)
9,242
(2,704)
6,538
(32)
6,506
3
$m
13,505
5,596
19,101
(9,910)
(791)
8,400
(2,455)
5,945
(388)
5,557
3
$m
-
(249)
(249)
(866)
-
(1,115)
324
(791)
(53)
(844)
-
4,798
(1,705)
6,503
5,554
(844)
Items
$m
13,505
5,845
19,350
(9,044)
(791)
9,515
(2,779)
6,736
(335)
6,401
3
6,398
Operating expenses decreased by $83 million or 0.8%.
Excluding a decrease of $8 million in large notable items,
total operating expenses decreased by $75 million or 0.8%.
This was driven by productivity benefits achieved through
continued simplification of the Group’s operations and
reduction in third party spend, combined with lower
performance-based compensation and lower legal costs
associated with the Royal Commission. This was largely
offset by foreign exchange movements, continued
investment in technology and associated amortisation
charges, increased spend to uplift customer experience and
strengthen the compliance and control environment, and
the impact of annual salary increases.
Credit impairment charge increased by $136 million or
17.2% mainly driven by new and increased specific credit
impairment charges raised for the business lending
portfolios in Australia and New Zealand, partially offset by
write-backs resulting from business turnarounds for a small
number of larger exposures, combined with lower collective
credit impairment charges.
Income tax expense decreased by $368 million or 15.0%
largely due to a lower profit before tax.
Discontinued operations reflect losses relating to customer-
related remediation of $257 million after tax and additional
costs associated with the life insurance business sale.
OPERATING AND FINANCIAL REVIEW (CONTINUED)
Large Notable Items
Review of Group and Divisional Results
REPORT OF THE DIRECTORS
Group
2019
$m
2,840
1,366
1,508
997
2018
$m
2,911
1,539
1,541
922
5,097
6,545
(10)
(289)
5,702
6,493
240
(388)
Net interest income
Business and Private Banking
Customer-related remediation
(72)
-
Consumer Banking and Wealth
Group
2019
$m
2018
$m
Other income
Customer-related remediation
Net operating income
Operating expenses
Customer-related remediation
Capitalised software policy change
Restructuring-related costs
(Loss) before income tax
Income tax benefit
Net (loss) for the year from continuing
(1,135)
(1,207)
(364)
(494)
(249)
(249)
(111)
-
Corporate and Institutional Banking
New Zealand Banking
Corporate Functions and Other(1)
(1,614)
(1,211)
Cash earnings
Cash earnings (excluding large notable items)
Non-cash earnings items
-
(755)
Net (loss) from discontinued operations
(2,065)
(1,115)
Net profit attributable to owners of NAB
4,798
5,554
617
324
(1)
Includes large notable items.
operations
(1,448)
(791)
September 2019 v September 2018
Net (loss) after tax for the year from
discontinued operations
Net (loss) attributable to owners of NAB
(257)
(1,705)
(53)
(844)
Large notable items recognised in net profit attributable to
owners of NAB consists of:
• Charges associated with customer-related remediation
matters of $1,100 million ($1,571 million before tax) in
continuing operations in the September 2019 financial
year (2018: $261 million ($360 million before tax)). The
charges of $1,571 million were recognised as follows:
– $72 million in net interest income
– $1,135 million in other operating income
– $364 million in operating expenses.
• Charges associated with customer-related remediation
matters of $257 million ($367 million before tax) in
discontinued operations in the September 2019 financial
year (2018: $53 million ($75 million before tax)).
• Accelerated amortisation charge of $348 million ($494
million before tax) in continuing operations in the 2019
financial year following a change to the application of
the software capitalisation policy.
• Restructuring-related costs of $530 million ($755 million
before tax) in continuing operations in the September
2018 financial year.
Group
Cash earnings decreased by $605 million or 10.6%. Cash
earnings excluding large notable items increased by $52
million or 0.8%.
Business and Private Banking
Cash earnings decreased by $71 million or 2.4% driven by
higher credit impairment charges and higher operating
expenses due to the continued investment in technology
and associated amortisation charges, partially offset by
higher revenue from balance sheet growth.
Consumer Banking and Wealth
Cash earnings decreased by $173 million or 11.2% driven by
lower revenue as a result of competitive pressures on
housing margins, and lower margins in the wealth
portfolios, combined with increased credit impairment
charges.
Corporate and Institutional Banking
Cash earnings decreased by $33 million or 2.1% driven by
increased credit impairment charges relating to the
impairment of a small number of larger exposures. Revenue
increased reflecting growth in gross loans and acceptances
and customer deposits, partially offset by lower margins (ex
Markets) and lower Markets income.
New Zealand Banking
Cash earnings increased by $75 million or 8.1% driven by
higher revenue benefitting from growth in lending, partially
offset by higher expenses and credit impairment charges.
Corporate Functions and Other
The cash deficit increased by $403 million mainly due to
increase of $657 million in large notable items.
2019 Annual Financial Report
13
REPORT OF THE DIRECTORS
OPERATING AND FINANCIAL REVIEW (CONTINUED)
Group Balance Sheet Review
Capital Management and Funding Review
Assets
Cash and liquid assets
Due from other banks
Trading instruments
Debt instruments
Other financial assets
Loans and advances
Due from customers on acceptances
All other assets
Total assets
Liabilities
Due to other banks
Trading instruments
Other financial liabilities
Deposits and other borrowings
Bonds, notes and subordinated debt
Other debt issues
All other liabilities
Total liabilities
Total equity
Total liabilities and equity
September 2019 v September 2018
Group
2019
$m
2018
$m
55,457
32,130
96,828
40,205
7,110
50,188
30,568
78,228
42,056
10,041
587,749
567,981
2,490
3,816
25,155
23,632
847,124
806,510
34,273
34,318
33,283
38,192
22,422
30,437
522,085
503,145
143,258
140,222
6,482
6,158
17,821
13,222
791,520
753,798
55,604
52,712
847,124
806,510
Total assets increased by $40,614 million or 5.0%. The
increase was mainly due to a net increase in cash and liquid
assets, due from other banks and trading instruments of
$25,431 million or 16.0%. The increase is mainly in trading
instruments due to foreign exchange rate and interest rate
movements during the period. Furthermore, an increase in
loans and advances (net of other financial assets at fair
value and due from customers on acceptances) of $15,511
million or 2.7% reflects growth in non-housing lending
driven by the Group's focus on priority business segments,
combined with continued momentum in housing lending.
Total liabilities increased by $37,722 million or 5.0%. The
increase was mainly due to growth in bonds, notes and
subordinated debt, other financial liabilities and trading
instruments of $17,778 million or 9.2% due to an increase
in long-term funding to support the Group's asset growth,
as well as foreign exchange and interest rate movements
during the period. Furthermore, an increase in deposits and
other borrowings and due to other banks totaling $15,021
million or 2.8% reflects growth to support increased lending
and the liquidity portfolio. Total equity increased by $2,892
million or 5.5% mainly due to an increase in contributed
equity attributable to shares issued through the Dividend
Reinvestment Plan (DRP), DRP underwritten allotments and
conversion of preference shares during the period.
14
National Australia Bank
Balance Sheet Management Overview
The Group aims to maintain strong capital, funding and
liquidity, in line with its ongoing commitment to balance
sheet strength. This includes:
• Seeking to maintain a well-diversified wholesale funding
portfolio which accesses funding across a variety of
markets, currencies and product types.
• Continuing to monitor and assess these positions so that
changes in market conditions and regulation can be
accommodated.
Regulatory Reform
The Group remains focused on areas of regulatory change.
Key reforms that may affect its capital and funding include:
'Unquestionably Strong' and Basel III Revisions
• In December 2017, the Basel Committee on Banking
Supervision (BCBS) finalised the Basel III capital
framework. APRA subsequently commenced consultation
on revisions to the domestic capital framework in
February 2018 and reaffirmed its intention to strengthen
capital requirements for major Australian banks by 150
basis points, such that they are considered
‘Unquestionably Strong’.
• APRA’s consultation on revisions to the capital framework
includes consideration of 'benchmarks for capital
strength', 'risk sensitivity of the capital framework' and
'transparency, comparability and flexibility of the capital
framework'.
• Final revised prudential standards in relation to the risk-
weighting framework and other capital requirements are
expected to be released in 2020, for proposed
implementation by 1 January 2022.
• In October 2019, APRA proposed changes to the
treatment of equity investments in subsidiaries (including
Bank of New Zealand) for the purpose of calculating
Level 1 regulatory capital. APRA intends to finalise these
changes in early 2020, for implementation by 1 January
2021.
• APRA has also proposed a minimum leverage ratio
requirement of 3.5% for internal ratings-based (IRB) ADIs
and a revised leverage ratio exposure measurement
methodology from 1 January 2022. The Group's leverage
ratio as at 30 September 2019 of 5.5% (under current
methodology) is disclosed in further detail in the
September 2019 Pillar 3 Report.
Increased Loss-absorbing Capacity for ADIs
• In July 2019, APRA released its framework for the
implementation of an Australian loss-absorbing capacity
regime, requiring an increase in Total capital of 3% of
risk-weighted assets for Domestic Systemically Important
Banks (D-SIBs) by 1 January 2024. APRA has maintained
its overall target calibration of 4% to 5% of risk-weighted
assets, and will consult on alternative methods for raising
the additional loss-absorbing capacity equal to 1% to 2%
of risk-weighted assets over the next four years.
OPERATING AND FINANCIAL REVIEW (CONTINUED)
Reserve Bank of New Zealand (RBNZ) Capital Review
• In New Zealand, the RBNZ is undertaking a review of the
capital adequacy framework applied to registered banks
incorporated in New Zealand. In December 2018, the
RBNZ proposed amendments to the amount of
regulatory capital required of locally incorporated banks,
including:
– increases in risk-weighted assets for banks that use the
IRB approach, increased scalars and the introduction
of standardised output floors.
– an increase in the Tier 1 capital requirement to 16% of
risk-weighted assets.
• The RBNZ is proposing various dates for implementation
of the proposed changes, including increases in the Tier
1 capital requirement over a five year period to 2024.
RBNZ expects to publish final rules in December 2019.
Further detail on the regulatory changes impacting the
Group are outlined in the September 2019 Pillar 3 Report.
National Income Securities
The distributions on the National Income Securities are
currently not able to be franked due to a provision in the
tax law which applies specifically to instruments that qualify
as Tier 1 capital for prudential purposes. When the National
Income Securities no longer qualify as Tier 1 capital from
31 December 2021, it is expected that any subsequent
distributions will be franked to the same extent as dividends
on NAB’s ordinary shares are franked.
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 to achieve
APRA's ‘Unquestionably Strong’ capital benchmark from
1 January 2020.
Funding and Liquidity
The Group monitors the composition and stability of
funding and liquidity through the Board approved risk
appetite which includes compliance with the regulatory
requirements of APRA's Liquidity Coverage Ratio (LCR) and
Net Stable Funding Ratio (NSFR).
Funding
The Group employs a range of metrics to set its risk
appetite and measure balance sheet strength. The NSFR is a
metric that measures the extent to which assets are funded
with stable sources of funding in order to mitigate the risk
REPORT OF THE DIRECTORS
of future funding stress. At 30 September 2019 the Group’s
NSFR was 113%, above the regulatory minimum of 100%.
Another 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. Over the
September 2019 financial year the SFI remained stable at
93% as an increase in the CFI was offset by a reduction in
the TFI.
Customer Funding
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 6 months ended 30 September 2019(1), NAB's
growth has been as follows:
• Australian domestic household deposits have grown by
1.3%.
• Business deposits (excluding deposits from financial
corporations and households) have reduced by 0.1%.
• Deposits from financial institutions have reduced by
0.4%.
Term Wholesale Funding
After a period of deterioration and volatility towards the
end of calendar year 2018, conditions in global debt capital
markets rebounded in 2019, with the Australian market
performing particularly strongly. Offshore debt issuance
spreads are largely unchanged when compared to the
beginning of the September 2019 financial year, while the
Australian market has outperformed, with credit spreads
reaching tighter levels. NAB’s average term wholesale
funding issuance cost was higher in the September 2019
half year, this was driven by the issuance of subordinated
Tier 2 debt. Term funding markets will continue to be
influenced by investor sentiment, macroeconomic
conditions, monetary and fiscal policy settings as well as
hedging costs in various derivative markets.
The Group maintains a well-diversified funding profile
across issuance type, currency, investor location and tenor,
and raised $26.2 billion during the September 2019
financial year.
NAB raised $22.2 billion of term funding, comprising $13.8
billion of senior unsecured funding, $5.2 billion of secured
funding (comprised of covered bonds and residential
mortgage backed securities (RMBS)) and $3.2 billion of
subordinated Tier 2 funding. BNZ raised $4.0 billion during
the September 2019 financial year.
(1) Source: APRA Monthly Authorised Deposit-taking Institution Statistics. The collection data is aligned to the new regulatory definitions set by APRA. APRA have
published comparatives restating March 2019 only.
2019 Annual Financial Report
15
REPORT OF THE DIRECTORS
OPERATING AND FINANCIAL REVIEW (CONTINUED)
The weighted average maturity of term wholesale funding
raised by the Group over the September 2019 financial year
was approximately 5.7 years to the first call date, inclusive
of subordinated debt. The weighted average remaining
maturity of the Group’s term wholesale funding portfolio is
3.2 years.
Short-term Wholesale Funding
The Group maintained consistent access to international
and domestic short-term wholesale funding markets during
the September 2019 financial year, noting certain periods of
increased volatility.
In addition, repurchase agreements have been 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.
Liquidity Coverage Ratio
The liquidity coverage ratio (LCR) metric measures the
adequacy of high quality liquid assets (HQLA) available to
meet net cash outflows over a 30 day period during a
severe liquidity stress scenario. HQLAs consist of cash and
central bank reserves along with highly rated government
and central bank issuance. In addition to HQLA, other
regulatory liquid assets included in the Committed Liquidity
Facility (CLF) also contribute to the LCR calculation. The
approved CLF size for 2019 was $55.9 billion ($59.3 billion
for calendar year 2018).
The Group maintains a well-diversified liquid asset portfolio
to support regulatory and internal requirements in the
various regions in which it operates. The value of regulatory
liquid assets held through the September 2019 quarter was
$143 billion which consisted of $88 billion of HQLA. The
Group also holds alternative liquid assets (ALA) which are
pools of internally securitised mortgages and other non-
HQLA securities. ALAs are a source of contingent liquidity
used to collateralise the CLF or are repo-eligible securities
with the Reserve Bank of New Zealand. The average value of
ALAs held over the September 2019 quarter was $55 billion.
A detailed breakdown of quarterly average net cash
outflows is provided in the Pillar 3 Report.
Credit Ratings
Entities in the Group are rated by S&P Global Ratings,
Moody’s Investors Service and Fitch Ratings.
Dividends
The directors have determined a final dividend of 83 cents
per fully paid ordinary share, 100% franked, payable on
12 December 2019. The proposed payment amounts to
approximately $2,393 million. The Group periodically
adjusts the Dividend Reinvestment Plan (DRP) to reflect the
capital position and outlook. The Group will apply a 1.5%
discount on the DRP, with no participation limit.
Dividends paid since the end of the previous financial year:
16
National Australia Bank
• The final dividend for the year ended 30 September 2018
of 99 cents per fully paid ordinary share, 100% franked,
paid on 14 December 2018. The payment amount was
$2,707 million.
• The interim dividend for the year ended 30 September
2019 of 83 cents per fully paid ordinary share, 100%
franked, paid on 3 July 2019. The payment amount was
$2,333 million.
Information on the dividends paid and determined to date
is contained in Note 28 Dividends and distributions of the
financial statements. 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$0.15 per share. Franking is not
guaranteed. The extent to which future dividends on
ordinary shares and distributions on frankable hybrids will
be franked will depend on a number of factors, including
capital management activities and the level of profits
generated by the Group that will be subject to tax in
Australia.
Review of, and Outlook for, the Group
Operating Environment
Global Business Environment
Global economic growth has slowed in calendar year 2019,
likely to its slowest pace since calendar year 2009 - below
the average rate of growth recorded since calendar year
1980. The easing in growth has been broad based,
including:
• An easing in US economic growth.
• A slowdown in the Euro-zone, particularly in Germany.
• A sharp downturn in Indian economic growth.
• A US-China trade dispute related decline in growth across
much of the East Asian region.
• A continuation of the decline in China’s growth rate even
as policy moves to offset the impact of the US-China
dispute.
• A steep drop in economic growth in Latin America.
In response to the slowdown in global growth, many central
banks have loosened monetary policy:
• The US Federal Reserve cut the federal funds rate target
range by 75bps between July and October 2019.
• The European Central Bank cut its deposit rate in
September, and announced a restart of its quantitative
easing (QE) program in November.
• A range of Emerging Market central banks have also
reduced their policy rate.
The action being taken by central banks would be expected
to help stabilise growth. However, there are a range of risks
around the global outlook. How the US-China trade dispute
and other trade issues will evolve is unclear. Other geo-
political risks include the uncertainty around Brexit,
ongoing protests in Hong Kong, and oil supply disruptions
in the middle-east.
OPERATING AND FINANCIAL REVIEW (CONTINUED)
Australian Economy
The Australian economy grew by 1.4% over the year to June
2019, its weakest growth since 2009. The annual growth
rate reflects:
• Household weakness, with consumption growth subdued
and residential dwelling investment falling.
• Strong growth in public consumption and continuing,
but more moderate, growth in public investment
(excluding asset transfers with the private sector).
• A decline in business investment (excluding asset
transfers with the public sector), with modest growth in
non-mining investment offset by a further decline in
mining investment. However, mining investment
stabilised in the last quarter.
• A more moderate pace of export volume growth.
Overall, domestic demand is being supported by
government spending while private sector demand is weak.
• Private sector demand declined by 0.3% over the year to
June 2019, the weakest it has been since 2009.
• Business conditions have trended down since mid 2018
and in September 2019 were below average.
While there is a disparity in conditions across industries and
geographies, the slowdown in business conditions has been
broad based. Retail sector conditions are particularly weak.
In US dollar terms, the RBA commodity price index in
October 2019 was 5.6% lower than the same month a year
ago. In Australian dollar terms, the index fell by 1.3% over
the year to October 2019, but still remains relatively high
compared with the last several years.
Agricultural prices are at generally reasonable levels,
although the NAB Rural Commodities Index declined 3.5%
(Australian dollar terms) over the year to September 2019.
Seasonal conditions are a major challenge in many areas.
Most of New South Wales and parts of Queensland
continue to experience severe drought. The Bureau of
Meteorology's outlook for a dry spring-early summer period
is a serious concern.
Year-average GDP growth is expected to be only around
1.7% in calendar year 2019, but some improvement is
expected in 2020 and 2021 with growth projected to rise
above 2.0% but remain below trend. The key dynamics are a
weak household sector (due in part to sluggish household
income growth and high debt levels), with only modest
growth in consumption and declining dwelling investment.
Public spending, business investment and, in the near term,
exports are expected to support growth.
With growth expected to be below trend, the
unemployment rate is expected to rise slightly. However, for
now, the labour market remains reasonably healthy:
• Employment growth is above the rate of working-age
population growth.
• While the unemployment rate has drifted up from 4.9%
in February 2019 to 5.2% in September 2019 it is still
below its average over the last twenty years. However,
underemployment remains elevated.
REPORT OF THE DIRECTORS
• Annual wage growth has strengthened a little since
mid-2017, but remains low by historical standards.
Dwelling prices in Australian capital cities have stabilised:
• The CoreLogic hedonic dwelling price index for the eight
capital cities declined between September 2017 and June
2019, but has since increased through to October 2019.
• The turnaround is evident in Sydney, Melbourne and
Brisbane; while in October dwelling prices were still
lower than a year ago they have increased in recent
months.
• Prices have continued to fall in Perth, and there has also
been a modest fall in Adelaide dwelling prices since
December 2018.
Total system credit growth has eased since September 2018:
• Annual housing credit growth was 3.1% in September
2019, down from 5.2% last September. Growth in both
owner occupier and investor credit slowed over this
period.
• Annual business credit growth was 3.3% in September
2019, down from 4.4% in September 2018 and other
personal credit continues to decline.
The RBA reduced the Cash Rate by a total of 75 basis points
between June and October 2019. It expects an extended
period of low interest rates will be required and has stated
that it is ready to ease monetary policy further if needed.
With inflation below target and the prospect of a
deterioration in the labour market, a further reduction in
the Cash Rate is expected and there is a possibility of
'unconventional' monetary policy action. How far the RBA
may have to ease monetary policy will be influenced by
Federal government fiscal policy as well as global
developments.
New Zealand Economy
Over the year to the June quarter 2019, GDP grew by a
modest 2.1%, down from the 3.2% pace of growth seen a
year earlier. Factors behind the easing in growth include:
• Capacity constraints faced by business, highlighted by a
low unemployment rate.
• Weak business confidence, and pressure on profits,
constraining business investment.
• A slowing in population growth as net inward migration
has eased.
New Zealand is also facing a challenging international
environment, reflected in slowing global growth. However,
while it may be a factor in the decline in business
confidence, at this stage the fall-out remains contained as
the terms-of-trade remains at a high level and export
volumes have been increasing.
Reflecting concerns over the growth outlook for the
economy, as well as low inflation, the Reserve Bank of New
Zealand (RBNZ) reduced the Official Cash Rate (OCR) at its
May 2019 (by 25 basis points) and August 2019 (by 50 basis
points) meetings. The easing in monetary policy will provide
support to the economy, as should fiscal policy.
2019 Annual Financial Report
17
REPORT OF THE DIRECTORS
OPERATING AND FINANCIAL REVIEW (CONTINUED)
Annual average GDP growth is expected to be 2.2% in
calendar year 2019, and at a similar or slightly lower level
over the following two years.
Over the year to the June quarter 2019, consumption
growth was solid, as was growth in government spending,
but business investment was weak, only growing by 0.3%,
and export volume growth was modest. Over this period,
residential building investment was also solid with above-
average growth of 5.2%. The number of building consents
continues to trend upwards and in September 2019 was at a
high level, indicating further increases in residential
investment is likely.
Commodity export prices increased by 7.2% in world price
terms over the twelve months to October 2019, and by 9.7%
in NZ dollar terms.
• International dairy export prices have increased by 12.8%
over the year to October 2019 and are close to their 10
year average. Fonterra's 2018/19 farmgate milk price was
NZ$6.35 per kg milk solids, and it expects an improved
result (NZ$6.55-7.55) for the 2019/20 season.
• Export prices for other commodities are generally at solid
levels, although, horticultural, aluminium and forestry
product prices have declined from their calendar year
2018 peaks.
Housing market conditions have been subdued but have
recently shown some signs of strengthening:
• The REINZ's House Price Index grew by 3.6% over the
year to September 2019, but has grown by 3.1% over the
last three months alone. Similarly prices in Auckland are
lower than a year ago but have risen in recent months.
House price growth has been much stronger in some
other localities, at 10% or more over the year to
September.
• Sales volumes rose by 3.3% over the year to September
2019.
• According to the RBNZ, factors that may have weighed on
house prices include tighter restrictions on non-resident
purchases, affordability constraints, lower net
immigration and elevated dwelling construction. Lower
interest rates should provide support to prices.
The labour market is healthy:
• While the unemployment rate increased in the
September quarter 2019 to 4.2%, from the eleven year
low reached in the June quarter, it remains relatively low.
• However, employment growth has slowed in recent
years. In the September quarter 2019, employment was
0.9% higher than the same time a year ago.
• Wage growth has been increasing.
Overall system credit growth was 5.6% over the year to
September 2019, up from 5.2% the same month a year ago.
• This reflects stronger business credit growth (excluding
agriculture), although there is a high degree of volatility
month-to-month, and an acceleration in housing credit
growth.
• In contrast, personal consumer credit growth has slowed
considerably.
18
National Australia Bank
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
Set out below are the principal risks and uncertainties
associated with the Company and the Group. It is not
possible to determine the likelihood of these risks occurring
with any certainty. However, the risk in each category that
the Company considers most material is listed first, based
on the information available at the date of this Report and
the Company’s best assessment of the likelihood of each
risk occurring and potential magnitude of the negative
impact to the Group should such risk materialise. In the
event that one or more of these risks materialise, the
Group’s reputation, strategy, business, operations, financial
condition and future performance could be materially and
adversely impacted.
The Group’s risk management framework and internal
controls may not be adequate or effective in accurately
identifying, evaluating or addressing risks faced by the
Group. There may be other risks that are currently unknown
or are deemed immaterial, but which may subsequently
become known or 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.
Strategic Risk
Strategic risk is the risk associated with the pursuit of the
Group’s strategic objectives including the risk that the
Group fails to execute its chosen strategy effectively or in a
timely manner.
Strategic initiatives may fail to be executed, may not
deliver all anticipated benefits and may change the
Group’s risk profile.
The Group’s corporate strategy sets its purpose, vision and
objectives, and focuses on:
• Becoming the best business bank.
• Simplifying the Group’s business to improve efficiency
and better service its customers.
• Pursuing new and emerging growth opportunities.
• Attracting and developing people to create a high
performing culture.
The Group prioritises, and invests significant resources in,
the execution of initiatives that are aligned to its strategy,
including transformation and change programs. These
programs focus on technology, infrastructure, business
improvement and cultural transformation. There is a risk
that these programs may not realise some or all of their
anticipated benefits. These programs may also increase
operational, compliance and other risks. Any failure by the
Group to deliver in accordance with its strategy or to deliver
OPERATING AND FINANCIAL REVIEW (CONTINUED)
these strategic programs effectively, may result in material
losses to the Group, or a failure to achieve anticipated
benefits, and ultimately, may adversely impact the Group’s
operations and financial performance and position.
Divestment, and the execution of its separation may create
risks and uncertainty for the Group and its customers,
aligned advisers, employees, suppliers and other
counterparties.
REPORT OF THE DIRECTORS
The Group faces intense competition.
There is substantial competition across the markets in which
the Group operates. 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 and
business models. In addition, evolving industry trends and
rapid technology changes may impact customer needs and
preferences and the Group may not predict these changes
accurately or quickly enough, or have the resources and
flexibility to adapt in sufficient time to meet customer
expectations and keep pace with competitors.
The Australian Commonwealth Government (the Australian
Government) passed legislation in August 2019 to establish
a ‘Consumer Data Right’ which seeks to improve consumers’
ability to compare and switch between products and
services. It is proposed to apply to the banking sector from
February 2020. These reforms (referred to as ‘Open
Banking’) are expected to reduce the barriers to new
entrants into, and increase competition in, the banking
industry in Australia. Progress is also being made towards
Open Banking in New Zealand (NZ).
Ongoing competition for customers can lead to
compression in profit margins and loss of market share,
which may ultimately impact on the Group’s financial
performance and position, profitability and returns to
investors.
The Group’s intended divestment of its Advice, Platform &
Superannuation and Asset Management businesses may
not proceed and there are risks in executing the
divestment.
The Group intends to divest its Advice, Platform &
Superannuation and Asset Management businesses (the
MLC Wealth Divestment). The Group’s decision to proceed
with, and its ability to execute, the MLC Wealth Divestment
is subject to a number of factors, including market
conditions, the impact of regulatory change and
investigations (including any implications of the findings of
the Final Report of the Royal Commission), the cost and
complexity of separation, and obtaining Board and
regulatory approvals.
If the Group does proceed with the MLC Wealth Divestment,
it will incur costs associated with the transaction. In
addition, the MLC Wealth Divestment will result in the
Group exiting a financial services market and accordingly
will decrease the size of the Group’s operations. This will
have a consequential impact on the Group’s revenues and
potentially its profitability and returns to investors.
If the Group decides not to, or is unable to, proceed with
the MLC Wealth Divestment, it will still incur costs that it is
unable to recover. In addition, the terms of the MLC Wealth
Risks may arise from pursuing acquisitions and
divestments.
The Group regularly considers a range of corporate
opportunities, including acquisitions, divestments, joint
ventures and investments.
Pursuit of corporate opportunities inherently involves
transaction risks, including over-valuation of an acquisition
or investment or under-valuation of a divestment, and
exposure to reputational damage. The Group may
encounter difficulties in integrating or separating
businesses, including failure to realise expected synergies,
disruption to operations, diversion of management
resources or higher than expected costs. These risks and
difficulties may ultimately have an adverse impact on the
Group’s financial performance and position.
The Group may incur unexpected financial losses following
an acquisition, joint venture or investment if the business it
invests in does not perform as planned or causes
unanticipated changes to the Group’s risk profile.
Additionally, there can be no assurance that employees,
counterparties, suppliers, customers and other relevant
stakeholders will remain with an acquired business
following the transaction and any failure to retain such
stakeholders may have an adverse impact on the Group’s
overall financial performance and position.
The Group may also have ongoing exposures to divested
businesses, including through the provision of continued
services and infrastructure or an agreement to retain certain
liabilities of the divested businesses through warranties and
indemnities, which may have an adverse impact on the
Group’s business and financial performance and position.
In particular, specific risks exist in connection with the sale
of 80% of MLC Limited to Nippon Life Insurance Company
(Nippon Life) in 2016. The Company gave certain covenants,
warranties and indemnities in favour of Nippon Life and
MLC Limited, a breach or triggering of which may result in
the Company being liable to Nippon Life or MLC Limited.
The parties also entered into long-term agreements for 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 impact the commercial attractiveness of these
agreements. These agreements also 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 the provision
of transitional services, as well as support for data migration
activities and the development of technology systems. As
this work is yet to be completed, there is a risk that
2019 Annual Financial Report
19
REPORT OF THE DIRECTORS
OPERATING AND FINANCIAL REVIEW (CONTINUED)
implementation costs may ultimately prove higher than
anticipated. The Company may also be liable to MLC Limited
or Nippon Life if it fails to perform its obligations in
accordance with the agreements relating to these matters. If
implementation costs are higher than expected, or if the
Company fails to perform its obligations in accordance with
the relevant agreements, there may be an adverse impact
on the Group’s financial performance and position.
Credit Risk
Credit risk is the risk that a customer will fail to meet its
obligations to the Group in accordance with agreed terms.
Credit risk arises from both the Group’s lending activities
and markets and trading activities.
A decline in the residential property market may give rise
to higher losses on defaulting loans.
Lending activities account for most of the Group’s credit
risk. The Group’s lending portfolio is largely based in
Australia and NZ. Residential housing loans and commercial
real estate loans constitute a material component of the
Group’s total gross loans and acceptances. A decline in the
value of residential property has been observed in some
areas in Australia. A range of factors could contribute to
further declines in residential property prices. This includes
regulatory changes which may impact the availability of
credit, shifts in government policies that are less favourable
to immigration and overseas investment, changes to
taxation policy and rising unemployment. If this occurs, the
declining value of the residential property used as collateral
(including in business lending) may give rise to greater
losses to the Group resulting from customer defaults,
which, in turn, may impact the Group’s financial
performance and position, profitability and returns to
investors. The most significant impact is likely to be
experienced by residential mortgage customers in high
loan-to-value-ratio brackets.
Adverse business conditions in Australia and NZ,
particularly in the agriculture sector, the consumer facing
sector, or both, may give rise to increasing customer
defaults.
The Group has a large share of the business lending market
in Australia and NZ. Should adverse business conditions
lead to defaults by business customers in these markets, the
Group may experience an adverse impact on its financial
performance and position.
Specifically, the Group has a large market share in the
Australian and NZ agricultural sectors, particularly the dairy
sector in NZ. Volatility in commodity prices, milk prices,
foreign exchange rate movements, disease and introduction
of pathogens and pests, export and quarantine restrictions,
and extreme weather events may negatively impact these
sectors. This may result in increased losses to the Group
from customer defaults, and ultimately may have an adverse
impact on the Group’s financial performance and position.
Customers of the Group whose businesses are in consumer
facing industries are also confronting challenges including
20
National Australia Bank
high levels of household debt, low wage growth and the
recent decline in house prices weighing on consumer
confidence and impacting their business’ performance.
These factors may give rise to an increase in customer
defaults, ultimately affecting the Group’s financial
performance and position, profitability and returns to
investors.
Climate change and extreme climate patterns may lead to
increasing customer defaults and may decrease the value
of collateral.
Credit risk may arise as a result of climate change, including
extreme weather events affecting property values or
business operations, the effect of new laws and government
policies designed to mitigate climate change, and the
impact on certain customer segments as the economy
transitions to renewable and low-emission technology.
There is a risk of increased levels of customer default in
affected business sectors. The impact of this on the Group
may be exacerbated by a decline in the value and liquidity
of assets held by the Group as collateral in these sectors,
which may impact the Group’s ability to recover under
defaulting loans.
For example, parts of eastern Australia are experiencing
severe drought conditions. The impact of these conditions
is expected to extend beyond primary producers, to
customers who are suppliers to the agricultural sector, and
to those who reside in and operate businesses within
regional communities. Extreme weather events and other
climate patterns in other parts of Australia may have similar
impacts on other business sectors. These impacts may
increase current levels of customer defaults, thereby
increasing the credit risk facing the Group and adversely
impacting the Group’s financial performance and position,
profitability and returns to investors.
The Group’s losses may differ materially from its
provisions which may impact its financial performance
and position.
The Group provides for expected losses from 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
assumptions upon which these 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 be adversely impacted by macro-economic
and geopolitical risks and financial market conditions
which pose a credit risk.
The majority of the Group's businesses operate in Australia
and NZ, with branches in Asia, the United Kingdom (UK) and
the United States (US). Levels of borrowing are heavily
dependent on customer confidence, employment trends,
market interest rates, and other economic and financial
OPERATING AND FINANCIAL REVIEW (CONTINUED)
market conditions and forecasts most relevantly for the
Group in Australia and NZ, but also in the global locations
in which the Group operates.
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; level of interest rates; yield curves;
market volatility; and uncertainty. Deterioration in any of
these factors may lead to the following negative impacts on
the Group:
• Increased cost of funding or lack of available funding.
• Deterioration in the value and liquidity of assets
(including collateral).
• Inability to price certain assets.
• An increase in customer or counterparty default and
credit losses.
• Higher provisions for credit impairment.
• Mark-to-market losses in equity and trading positions.
• Lack of available or suitable derivative instruments for
hedging purposes.
• Lower growth in business revenues and earnings.
• 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 macro-economic and financial market
conditions are currently of most relevance to the credit risk
facing the Group and may give rise to slower revenue
growth and/or increasing customer defaults:
• Global economic growth is trending downwards which
may create credit risk for the Group. The Group’s key
markets of Australia and NZ are small, open economies
where national income (and with it, the capacity for
businesses and households to service debt) is impacted
by global trends. The current global economic cycle
peaked in early 2018 and growth has slowed since this
time, due to fading fiscal stimulus, the impact of US-
China trade tensions, and tighter monetary policy in the
US, Canada and the UK, among other jurisdictions.
• In response to weakening growth, some central banks,
including the Reserve Bank of Australia and the US
Federal Reserve, have eased monetary policy and
indicated further rate cuts could occur. Given extremely
low policy rates in some countries, policy easing may
also involve additional quantitative easing. Policy easing
would be expected to reduce short-term downside risks
to growth, but risks building on existing imbalances in
various asset classes and regions. Policy easing may also
reduce the impetus for highly geared borrowers to
deleverage thereby increasing the credit risk posed to
the Group by these highly geared customers.
• As a key trading partner, China’s economic growth is
important to Australia and NZ, with export income and
business investment exposed to any sharp slowdown in
REPORT OF THE DIRECTORS
the rapid pace of Chinese economic growth. China’s high
and growing debt burden presents a risk to its medium-
term growth prospects. Due to its export mix, Australia’s
economy is exposed to any sudden downturn in China’s
domestic investment in business, infrastructure or
housing. Any such downturn could therefore have a
negative impact on the Group’s customers who are
exposed to these sectors, and may give rise to increasing
levels of customer defaults.
• The ongoing trade tensions between the US and China
present additional uncertainty that poses risks to global
economic growth. There remains the possibility of
further trade measures that will negatively impact global
economic growth. Although China is the primary target
of US trade measures, value chain linkages mean that
other emerging markets, primarily in Asia, may also be
impacted. A number of emerging markets in East Asia are
major trading partners with Australia and NZ and
accordingly a negative impact on their economies may
increase the credit risk facing the Group.
• Geopolitical risks continue to present uncertainty to the
global economic outlook, with negative impacts on
consumption and business investment. An increasing
fragmentation of, and a rise in populism in, many major
democratic economies have led to difficulties in policy
implementation. Protests in Hong Kong are creating
political tensions between the Hong Kong Special
Administrative Region and mainland China. The
uncertainty surrounding the UK’s departure from the
European Union continues, with a general election
scheduled prior to the recently extended deadline, with
the major parties offering differing ways forward for
Brexit. In addition, there are a range of other geopolitical
risks, particularly given the ongoing uncertainty around
the Korean Peninsula, South China Sea and US sanctions
on Iran.
• Australia’s economic growth has slowed in 2019, which is
largely a reflection of weakness in household demand.
Wages growth has been weak, and if the slowdown in
growth persists, unemployment is expected to rise. NZ’s
economic growth has also slowed. A slowdown in
economic growth in Australia and NZ and any resulting
increase in unemployment may negatively impact debt
servicing levels, increase customer defaults and
negatively impact the Group’s financial performance and
position and its profitability.
• As commodity exporting economies, Australia and NZ are
exposed to shifts in global commodity prices that can be
sudden, sizeable and difficult to predict. Fluctuations 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 given the Group’s sizeable exposures to
commodity producing and trading businesses, this
2019 Annual Financial Report
21
REPORT OF THE DIRECTORS
OPERATING AND FINANCIAL REVIEW (CONTINUED)
volatility poses a significant source of credit risk to the
Group.
Market Risk
Market risk is the risk of loss from the Group’s trading
activities. The Group may suffer losses as a result of a
change in the value of the Group’s positions in financial
instruments or their hedges due to adverse movements in
market prices. Adverse price movements impacting the
Group may occur in credit spreads, interest rates, foreign
exchange rates, and commodity and equity prices, in
particular during periods of heightened market volatility or
reduced liquidity.
Credit spread risk is the risk of the Group’s trading book
being exposed to movements in the value of securities and
derivatives as the result of changes in the perceived credit
quality of the underlying company. Credit spread risk
accumulates in the Group’s trading book when it provides
risk transfer services to customers seeking to buy or sell
fixed income securities (such as corporate bonds). The
Group may also be exposed to credit spread risk when
holding an inventory of fixed income securities in
anticipation of customer demand or undertaking market-
making activity (i.e. quoting buy and sell prices to clients) in
fixed income securities.
Interest rate risk is the risk of the Group’s trading book
being exposed to changes in the value of securities and
derivatives as the result of changes in interest rates. The
Group’s trading book accumulates interest rate risk when
the Group provides interest rate hedging solutions for
clients, holds interest rate risk in anticipation of customer
requirements or undertakes market-making activity in fixed
income securities or interest rate derivatives.
The occurrence of any event giving rise to a material
trading loss may have a negative impact on the Group’s
financial performance and financial position.
Balance Sheet and Liquidity Risk
Balance sheet and liquidity risk comprises key banking book
structural risks of the Group, such as liquidity risk, funding
risk, interest rate risk, capital risk and foreign exchange risk.
The Group is exposed to funding and liquidity risk.
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 to help fund
its business, in addition to using customer deposits.
Dislocation in any of these capital markets, reduced investor
interest in the Group’s securities and/or reduced customer
deposits, may adversely affect the Group’s funding and
liquidity position, increase the cost of obtaining funds or
impose unfavourable terms on the Group’s access to funds,
constrain the volume of new lending, or adversely affect the
Group’s capital position.
Liquidity risk is the risk that the Group is unable to meet its
financial obligations as they fall due. These obligations
22
National Australia Bank
include the repayment of deposits on demand or at their
contractual maturity, the repayment of wholesale
borrowings and loan capital as it matures, the payment of
interest on borrowings and the payment of operational
expenses and taxes. The Group must also comply with
prudential and regulatory liquidity obligations across the
jurisdictions in which it operates. 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, result in the Group drawing upon
its committed liquidity facility with the Reserve Bank of
Australia or cause the Group to breach its prudential or
regulatory liquidity obligations. This may adversely impact
the Group’s reputation and financial performance and
position.
The Group’s capital position may be constrained by
prudential requirements.
Capital risk is the risk that the Group does not hold
sufficient capital and reserves to cover exposures and to
protect against unexpected losses. Capital is the
cornerstone of the Group’s financial strength. It supports an
authorised deposit-taking institution’s (ADI’s) operations by
providing a buffer to absorb unanticipated losses from its
activities.
Compliance with prudential capital requirements in the
jurisdictions in which the Group operates and any further
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 more capital (in an absolute
sense) or raise more capital of higher quality.
• Restrict balance sheet growth.
Additionally, if the information or the assumptions upon
which the Group’s capital requirements are assessed prove
to be inaccurate, this may adversely impact the Group’s
operations, and financial performance and position.
A significant downgrade in the Group’s credit ratings may
adversely impact its cost of funds and capital market
access.
Credit ratings are an assessment of a borrower’s
creditworthiness and may be used by 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 sovereign
jurisdictions where the Group conducts business. Credit
ratings may be affected by operational and market factors,
or changes in the credit rating agency’s rating
methodologies.
A downgrade in the credit ratings or outlook of the Group,
the Group’s securities, or the sovereign rating of one or
more of the countries in which the Group operates, may
increase the Group’s cost of funds or limit access to capital
OPERATING AND FINANCIAL REVIEW (CONTINUED)
markets. This may also cause a deterioration of the Group’s
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 may also adversely impact the
Group’s competitive position and financial performance and
position.
The Group’s financial performance and capital position
may be adversely impacted by interest rate fluctuations.
Interest rate risk is the risk to the Group’s financial
performance and capital position caused by changes in
interest rates. Factors which may affect the level of interest
rate risk include all on-balance sheet and off-balance sheet
items that create an interest rate risk exposure within the
Group. As interest rates and yield curves change over time,
including negative interest rates in certain 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. Such exposure may arise from a
mismatch between the maturity profile of the Group’s
lending portfolio compared to its deposit portfolio (and
other funding sources), as well as the extent to which
lending and deposit products can be repriced as interest
rates approach zero or become negative, thereby impacting
net interest margin.
The Group may fail to or be unable to sell down its
underwriting risk.
As financial intermediaries, members of the Group
underwrite or guarantee 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 be exposed to potential losses, which may be
significant, if it fails to sell down some or all of this risk to
other market participants.
The value of the Group’s banking book may be adversely
impacted by foreign exchange rates.
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 which gives rise to
foreign currency exposures, such as repatriation of capital
and dividends. 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, or a change in the reserve
status of any of these currencies.
The Group’s financial statements are prepared and
presented in Australian dollars, and any adverse
fluctuations in the Australian dollar against other currencies
REPORT OF THE DIRECTORS
in which the Group invests or transacts and generates
profits (or incurs losses) may adversely impact its financial
performance and position.
Operational Risk
Operational risk is the risk of loss resulting from inadequate
or failed internal processes, people and systems or external
events. This includes legal risk, but excludes strategic and
reputation risk.
Disruption to technology may adversely impact the
Group’s reputation and operations.
Most of the Group’s operations depend on technology, and
therefore the reliability and security of the Group’s
information technology systems and infrastructure are
essential to the effective operation of its business and
consequently to its financial performance and position. The
reliability of technology may be impacted by the complex
technology environment, failure to keep technology
systems up-to-date, an inability to restore or recover
systems in acceptable timeframes, or a physical or cyber-
attack.
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 operational challenges.
Any disruption to the Group’s technology (including
disruption to the technology systems of the Group’s
external providers) may be wholly or partially beyond the
Group’s control and may result in: operational disruption;
regulatory enforcement actions; customer redress;
litigation; financial losses; theft or loss of customer data;
loss of market share; loss of property or information; or
may adversely impact the speed and agility in the delivery
of change and innovation.
In addition, any such disruption may adversely affect the
Group’s reputation, including the view of regulators or
ratings agencies, which may result in loss of customers, a
reduction in share price, ratings downgrades and regulatory
censure or penalties. Social media commentary may further
exacerbate such adverse outcomes for the Group and
negatively impact the Group’s reputation.
Privacy, security and data breaches may adversely impact
the Group’s reputation and operations.
The Group processes, stores and transmits large amounts of
personal and confidential information through its
technology systems and networks. 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. As with other business
activities, the Group uses select external providers (in
Australia and overseas) to store confidential data and to
develop and provide its technology services, including the
increasing use of cloud infrastructure.
2019 Annual Financial Report
23
REPORT OF THE DIRECTORS
OPERATING AND FINANCIAL REVIEW (CONTINUED)
A breach of the security at any of these external providers
or within the Group may be wholly or partially beyond the
control of the Group and may result in theft or loss of
customer data, a breach of privacy laws and subsequent
regulatory enforcement actions, customer redress,
litigation, or financial losses. This may adversely impact the
financial performance and position of the Group.
In addition, any such breach may adversely affect the
Group’s reputation, including the view of regulators or
ratings agencies, which may result in loss of customers, a
reduction in share price, ratings downgrades and regulatory
censure or penalties. Social media commentary may further
exacerbate such adverse outcomes for the Group and
negatively impact the Group’s reputation.
Deficient policies, processes, infrastructure and models
give rise to a significant risk to the Group’s operations.
The Group’s business involves the execution of a large
number of complex transactions. The Group is reliant on its
policies, processes and supporting infrastructure
functioning as designed, along with third parties
appropriately managing their own operational risk and
delivering services to the Group as required. A failure in the
design or operation of these policies, processes and
infrastructure, failure of the Group to manage external
service providers, or the disablement of a supporting
system all pose a significant risk to the Group’s operations
and consequently its financial performance and reputation.
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. Reputational damage may also result in a
higher risk premium being applied to the Group, and
impact the cost of funding the Group’s operations or its
financial condition. Further, reputational damage may result
in regulators requiring the Group to hold additional capital,
pay fines or incur additional costs, including costs to
undertake remedial action. These impacts may affect the
viability of some or all of the Group’s business activities.
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 is exposed to the risk of human error.
The Group’s business, including the internal processes and
systems that assist in business decisions, relies on inputs
from its employees, agents and third party vendors. The
Group is exposed to operational risk due to process or
human errors including incorrect or incomplete data
capture and records maintenance, incorrect or incomplete
documentation to support activities, or inadequate design
of processes or controls. The Group uses select external
providers (in Australia and overseas) to provide services to
the Group and is exposed to similar risks arising from such
failures in the operating environment of its external
24
National Australia Bank
providers. The materialisation of any of these risks could
lead to direct financial loss, loss of customer, employee or
commercially sensitive data, regulatory penalties and
reputational damage.
The Group may not be able to attract and retain suitable
personnel.
The Group is dependent on its ability to attract and retain
key executives, employees and Board members with a deep
understanding of banking and technology, who are
qualified to execute the Group’s strategy, as well as the
technology transformation the Group is undertaking to
meet the changing needs of its customers. Weaknesses in
employment practices, including diversity, discrimination
and workplace health and safety, are sources of operational
risk that can impact the Group’s ability to attract and retain
qualified personnel with the requisite knowledge, skills and
capability.
The Group’s capacity to attract and retain key personnel is
dependent on its ability to design and implement effective
remuneration structures. This process may be constrained
by regulatory requirements (particularly in the highly
regulated financial services sector), as well as investor
expectations, which may be somewhat disparate.
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 the Group’s strategic objectives.
External events may adversely impact the Group’s
operations.
Operational risk can arise from external events such as
natural disasters, biological hazards or acts of terrorism.
The Group has branches in regional areas in Australia
(including in Queensland, Western Australia and New South
Wales) that are prone to seasonal natural disasters,
including fires and floods.
In addition, the Group has branches and office buildings in
Christchurch and Wellington in NZ, which have experienced
significant earthquakes and aftershocks in recent years and
which may be exposed to the risk of future earthquakes.
Given the Group’s physical presence in the central business
districts of major cities in Australia and NZ, it may also be
exposed to the risk of a terrorist attack.
External events such as natural disasters, biological hazards
and acts of terrorism may cause property damage and
business disruption, which may adversely impact the
Group’s financial performance. In addition, if the Group is
unable to manage the impacts of such external events, it
may lead to reputational damage and compromise the
Group’s ability to provide a safe workplace for its personnel.
OPERATING AND FINANCIAL REVIEW (CONTINUED)
If there is a ‘second strike’ shareholder vote against the
2019 Remuneration Report and a spill resolution is passed
at the 2019 Annual General Meeting, there is a risk of
disruption to the governance and oversight of the Group.
At the Company’s 2018 Annual General Meeting, the
Company’s 2018 Remuneration Report received a ‘first
strike’ vote under the Corporations Act. If at least 25% of
the votes cast on the resolution to adopt the Company’s
2019 Remuneration Report are cast against that resolution,
the Company will receive a ‘second strike’ and be required
to put a ‘spill resolution’ to its shareholders at the
Company’s 2019 Annual General Meeting. If the ‘spill
resolution’ is passed by a simple majority, then at a
subsequent meeting to be held within 90 days of the
Company’s 2019 Annual General Meeting, all of the
Company’s directors who approved the Company’s 2019
Remuneration Report (other than the CEO) will be required
to stand for re-election at the meeting. In the event the
Company was to receive a ‘second strike’, and the spill
resolution was passed at its 2019 Annual General Meeting,
there is a risk that the composition of the Company’s Board
may change, causing disruption to the governance and
oversight of the Group.
The receipt of a ‘second strike’ and subsequent passing of a
‘spill resolution’ may also cause reputational damage to the
Group, which may adversely impact the Group’s ability to
attract and retain customers, employees, and investors in
the short and long-term and the ability to pursue new
business opportunities.
Compliance Risk
Compliance risk is the risk of failing to understand and
comply with relevant laws, regulations, licence conditions,
supervisory requirements, self-regulatory industry codes of
conduct and voluntary initiatives.
REPORT OF THE DIRECTORS
remediation of compliance issues, could result in a
significant number of breaches of AML/CTF obligations and
significant monetary penalties for the Group.
Refer to Note 29 Contingent liabilities and credit
commitments of the financial statements under the heading
Anti-Money Laundering (AML) and Counter-Terrorist Financing
(CTF) program uplift and compliance issues for more
information.
Matters arising during the Royal Commission may result
in legal proceedings against the Group.
The Royal Commission has referred two matters to the
Australian Prudential Regulation Authority (APRA) regarding
the conduct of the Group’s superannuation trustee, NULIS
Nominees (Australia) Ltd (NULIS). It is possible that APRA
may bring proceedings against NULIS in relation to these
matters. In addition, litigation funder IMF Bentham and
William Roberts Lawyers recently announced that they are
working to bring a class action against NULIS and are
seeking customers to register their interest in participating
in the class action.
The Royal Commission also referred other instances of
potential misconduct to the Australian Securities and
Investments Commission (ASIC) for consideration. ASIC
subsequently commenced civil proceedings against the
Company in relation to its ‘Introducer Payment Program’,
alleging contraventions of the National Consumer Credit
Protection Act 2009 in relation to 297 loan applications that
were made between 2013 and 2016. The potential outcome
and total costs associated with this matter remain
uncertain. ASIC may bring further proceedings against the
Group in relation to other matters referred to it by the Royal
Commission, which may result in the imposition of civil or
criminal penalties on the Group or the issuing of a class
action or other civil litigation against the Group.
The Group may be involved in a breach or alleged breach
of laws governing bribery, corruption and financial crime.
It is also possible that legal actions may be commenced
against relevant individuals within the Group.
Supervision, regulation and enforcement in relation to anti-
bribery and corruption, anti-money laundering (AML) and
counter-terrorism financing (CTF) laws and trade sanctions
has increased. In June 2018, Australia’s financial intelligence
agency, AUSTRAC, reached an agreement with another
major Australian bank for a $700 million penalty relating to
serious breaches of AML/CTF laws. The Company has
reported a number of AML/CTF compliance breaches to
relevant regulators and has responded to a number of
requests from regulators requiring the production of
documents and information. The Group is currently
investigating and remediating a number of AML/CTF
compliance issues. The potential outcome and total costs
associated with the investigation and remediation process
remain uncertain. A negative outcome to any investigation
or remediation process may adversely impact the Group’s
reputation and its business, financial position and results of
operations. Further, given the large volume of transactions
that the Group processes, the undetected failure of internal
AML/CTF controls, or the ineffective implementation or
Any damages awards or penalties may adversely impact the
Group’s reputation and financial performance and position.
Refer to Note 29 Contingent liabilities and credit
commitments of the financial statements for details in
relation to the Group’s material legal proceedings and
contingent liabilities.
Responsible lending obligations are evolving and may
create additional operational complexity for the Group.
The responsible lending obligations applicable to the Group
under the National Consumer Credit Protection Act 2009
have evolved in recent years. Changes to these obligations,
including their interpretation by the courts, or any
increased regulatory and public scrutiny, may require the
Group to change its consumer lending processes or
procedures. This may lead to additional operational
complexity for the Group, as well as increased costs, which
may adversely impact the Group’s financial performance
and position.
2019 Annual Financial Report
25
REPORT OF THE DIRECTORS
OPERATING AND FINANCIAL REVIEW (CONTINUED)
Ensuring compliance with laws and regulations that apply
to the Group is complex and costly.
The Group is highly regulated and subject to various
regulatory regimes which differ across the jurisdictions in
which it operates, trades or raises funds.
Ensuring compliance with all applicable laws is complex.
There is a risk the Group will be unable to implement the
processes and controls required by relevant laws and
regulations in a timely manner or that the Group’s internal
controls will prove to be inadequate or ineffective in
ensuring compliance. Any failure to comply with relevant
laws and regulations may have a negative impact on the
Group’s reputation and financial performance and position,
and may give rise to class actions, regulatory enforcement
or litigation.
In addition, there is significant cost associated with the
systems, processes and personnel required to ensure
compliance with applicable laws and regulations. Such costs
may negatively impact the Group’s financial performance
and position.
Failure to comply with laws or regulatory requirements
may expose the Group to class actions.
There have been a number of domestic and international
firms facing high profile enforcement actions for alleged
instances of non-compliance with laws or regulatory
requirements. In some cases, these enforcement actions
have also given rise to class actions. Plaintiff law firm Slater
& Gordon has filed a class action in the Federal Court of
Australia, alleging that the Company and MLC Limited
engaged in unconscionable conduct and misleading and
deceptive conduct in connection with the sale of a
particular type of consumer credit insurance (being ‘NAB
Credit Card Cover’) and unconscionable conduct in
connection with the sale of a second consumer credit
insurance product, NAB Personal Loan Cover. Refer to Note
29 Contingent liabilities and credit commitments of the
financial statements under the heading Consumer Credit
Insurance (CCI) for more information.
It is possible that class actions may arise against members
of the Group in relation to allegations of which the Group is
currently aware or other matters of which it is not yet
aware. Any class action may impact the Group’s reputation,
divert management time from operations and affect the
Group’s financial performance and position, profitability
and returns to investors.
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. A higher degree of
judgement is required for the estimates used in the
calculation of provisions (including for customer-related
26
National Australia Bank
remediation), the valuation of goodwill and intangible
assets, and the fair value of financial instruments. Changes
in the methodology or assumptions on which the
assessment of goodwill and intangible balances is based,
together with expected changes in future cash flows
(including changes flowing from current and potential
regulatory reforms), could result in the potential write-off of
a part or all of that goodwill or intangible balances.
If the judgements, estimates and assumptions used by the
Group in preparing 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 reputation, and financial
performance and position.
The Group may be exposed to litigation and contingent
liabilities.
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 estimated with any certainty.
Currently, there are a number of ongoing investigations and
court proceedings involving the Group. These include
matters relating to: the provision of financial advice; the
inappropriate charging of fees for services; engaging in
regulated credit activities with unlicensed persons; selling
practices and advice in relation to consumer credit
insurance products and compliance with licence conditions
and the National Credit Code. Where appropriate,
provisions are held for litigation matters 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. As with other accounting
judgements, risks and uncertainties remain in relation to
these assumptions and the ultimate costs of redress to the
Group. There is inherent uncertainty regarding the possible
outcome of any court proceedings involving the Group. It is
also possible that further class actions, regulatory
investigations or the imposition of new licence conditions
could arise in relation to these matters or other matters of
which the Group is not yet aware.
A negative outcome to investigations or litigation involving
the Group may divert management time from operations
and adversely impact the Group’s reputation, and financial
performance and position. Refer to Note 29 Contingent
liabilities and credit commitments of the financial statements
for details in relation to the Group’s material legal
proceedings and contingent liabilities.
Conduct Risk
Conduct risk is the risk that any action of the Group, or
those acting on behalf of the Group, will result in unfair
outcomes for any of the Group’s customers.
OPERATING AND FINANCIAL REVIEW (CONTINUED)
The Group is heavily reliant on its employees, contractors
and external suppliers acting in an appropriate and
ethical way.
Organisational culture can greatly influence individual and
group behaviours which can expose an organisation and
lead to unfair customer outcomes. The behaviours that
could expose the Group to conduct risk include:
• Selling, or unduly influencing customers to purchase,
products or services that do not meet their needs.
• Being a party to fraud.
• Non-adherence to applicable requirements or providing
financial advice which is not appropriate or in the
customers’ interests.
• Delays in appropriately escalating regulatory issues.
• Failure to resolve issues and remediate customers in a
timely manner.
If the Group’s conduct related controls were to fail
significantly, be set inappropriately, or not meet legal,
regulatory or community expectations, then the Group may
be exposed to:
• Increased costs of compliance, fines, additional capital
requirements, public censure, litigation, settlements and
restitution to customers.
• Increased supervision, oversight or enforcement by
regulators or other stakeholders.
• Unenforceability of contracts such as loans, guarantees
and other security documents.
• Enforced suspension of operations, amendments to
licence conditions or loss of licence to operate all or part
of the Group’s businesses.
• Other enforcement or administrative action or
agreements, including legal proceedings.
A failure of the Group’s conduct controls to accurately
reflect relevant legal, regulatory or community expectations
may adversely impact the Group’s reputation, financial
performance and position, profitability, operations and
returns to investors.
Regulatory Risk
Regulatory risk is the risk of failing to identify or
appropriately respond to changes to the regulatory
environment or of damaging the Group’s standing with its
regulators as a result of the Group not meeting regulatory
expectations.
Extensive regulatory change poses a significant risk to the
Group.
Globally, the financial services and banking industries are
subject to a significant and increasing number of regulatory
reviews and political scrutiny, including in Australia and NZ.
Changes to laws and regulations or their interpretation and
application 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 the Group’s corporate
structure and increasing demands on management,
REPORT OF THE DIRECTORS
employees and information technology systems. This may
also impact the viability of the Group’s participation in
certain markets, or give rise to the need to divest a part of
the Group’s business.
The Royal Commission made a considerable number of
recommendations, most of which have received political
support. The Royal Commission’s recommendations are
expected to result in significant legislative and regulatory
change that will impact the operations of the Group. The
Australian Government has committed to a compressed
timeframe for introducing the large number of legislative
changes required to effect the Royal Commission’s
recommendations. The compressed timeframe for
implementation poses a particular risk to the Group’s
operations as the necessary controls may not be able to be
implemented in a timely and considered manner. Following
the Royal Commission, further inquiries and regulatory
reviews impacting the financial services industry may be
commissioned by the Australian Government, which,
depending on their scope, findings and recommendations,
may adversely impact the Group.
Other reviews and regulatory reforms currently relevant to
the Group which present a potential regulatory risk include:
• APRA’s various reforms in relation to loss-absorbing
capacity. These include the requirement, due to be
implemented by 1 January 2024, that Domestic
Systemically Important Banks (D-SIBs) such as the
Company, increase total capital by 3% of risk-weighted
assets (RWA), which is expected to be satisfied primarily
by issuing additional Tier 2 capital. Based on the Group’s
RWA of $416 billion at 30 September 2019, this
requirement represents an incremental increase of $12.5
billion of total capital. In addition, APRA intends to
consult on a target of additional capital amounting to a
further 1-2% of RWA. The Group’s funding costs are
expected to increase due to the higher cost of Tier 2
capital issuance relative to senior debt.
• APRA’s proposed revisions to the credit risk management
framework for ADIs include broadening requirements for
credit risk management practices; revising credit
standards; and aligning asset classification and
provisioning with the Basel Committee on Banking
Supervision’s (BCBS) recent accounting standard changes
and guidance.
• The Reserve Bank of New Zealand (RBNZ) proposal that
banks deemed systemically important in NZ (including
the Company’s subsidiary, Bank of New Zealand (BNZ)) be
required to hold Tier 1 capital amounting to 16% of RWA,
consisting of a minimum Tier 1 requirement of 6% of
RWA and prudential capital buffer of Common Equity
Tier 1 equal to 10% of RWA over a proposed five-year
staged transition period. It remains unclear the extent to
which APRA will incorporate aspects of the RBNZ’s
proposals as part of its review of the Australian capital
framework.
• APRA’s ongoing consultation on revisions to the capital
framework, reaffirming its intention to strengthen
2019 Annual Financial Report
27
requirements, and ultimately its reputation, and financial
performance and position.
There is a risk of the Group failing to deliver on
commitments made to its regulators and to the public or
otherwise damaging its relationship with regulators.
In response to the Royal Commission, the Group has made
certain public commitments to change the way it operates.
In addition, in November 2018, the Group published its self-
assessment on governance, accountability and culture to
APRA and has undertaken to regularly report on the Group’s
progress in implementing the findings.
If the Group does not deliver on the matters identified in its
self-assessment, fails to deliver on its public commitments
following the Royal Commission, or otherwise fails to
comply with the representations it makes to the public or to
its regulators, this may negatively impact the Group’s
reputation. Such reputational damage may adversely impact
the Group’s ability to attract and retain customers or
employees in the short and long-term. It may also result in a
higher risk premium being applied to the Group, and
impact the cost of funding the Group’s operations, or its
financial performance and position.
The enforcement approach of the Group’s principal
regulators has changed, resulting in a greater risk of
enforcement actions.
A number of measures were recommended by the Royal
Commission to improve the effectiveness and oversight of
ASIC and APRA in deterring, and imposing appropriate
penalties for, misconduct. These included a
recommendation for ASIC to change its approach to
enforcement, with a focus on instigating court actions in
relation to conduct matters where a breach of law is more
likely than not, and the matter is in the public interest.
Accordingly, the Group may be exposed to a greater risk of
enforcement action initiated by its primary regulators, ASIC
and APRA, which may result in the imposition of civil or
criminal penalties on the Group. The issuing of any such
enforcement action, and any subsequent imposition of
penalties, may negatively impact on the Group’s reputation
and financial performance and position.
REPORT OF THE DIRECTORS
OPERATING AND FINANCIAL REVIEW (CONTINUED)
banking system resilience by establishing
‘Unquestionably Strong’ capital ratios. The major
Australian banks (including the Company) are expected
to meet APRA’s ‘Unquestionably Strong’ target
benchmark beginning January 2020. Final revised
prudential standards in relation to the risk-weighting
framework and other capital requirements are expected
to be released in 2020, and may require additional
capital to be held by the Group from January 2022.
• The NZ Financial Markets Authority and RBNZ have
undertaken a review of conduct and culture in the
financial services industry. Alongside industry-wide
recommendations released as a result of the review,
further specific findings were provided to individual NZ
banks (including BNZ) in November 2018. The review has
led to a NZ Government announcement in September
2019 that it will introduce legislation to create an
oversight regime for regulating conduct in the banking
and insurance sectors by the end of 2019.
• The Australian Banking Executive Accountability Regime
(BEAR) has been legislated and applies to the Group. The
Royal Commission made a number of recommendations
regarding BEAR, including to introduce a new
accountable person responsibility for end-to-end product
value chains within an ADI (including any necessary
remediation of customers in respect of an ADI’s
products). APRA is currently seeking submissions on this
proposal, with a target implementation date of 1 July
2020.
• The Australian Government has directed the Australian
Competition and Consumer Commission (ACCC) to
commence an inquiry into home loan pricing. The ACCC
will investigate a wide range of issues, including the rates
paid by new and existing customers, how the cost of
financing for banks has affected interest rate decisions
and the interaction between home loan pricing and rate-
setting by the Reserve Bank of Australia. A preliminary
report is expected by the end of March 2020, with a final
report due on 30 September 2020.
Other material regulatory changes include new
requirements for the design and distribution of financial
products, responsible lending reforms, and the
implementation of Open Banking reforms. In addition,
there are a number of other ongoing or proposed
regulatory changes and inquiries relevant to the Group such
as: changes to the Group entities eligible for inclusion in the
Level 1 group for prudential purposes; changes to financial
benchmarks; derivatives reform; payments; data protection
and privacy laws; data quality; competition inquiries;
accounting and reporting requirements; and tax reform.
The full scope, timeline and impact of current and potential
inquiries and regulatory reforms such as those mentioned
above, or how they will be implemented (if at all in some
cases), is not known. Depending on the specific nature of
the requirements and how they are implemented or
enforced, they may have an adverse impact on the Group’s
business, operations, structure, compliance costs or capital
28
National Australia Bank
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 provided
directors have the capacity to devote sufficient time and
effort to fulfil their NAB responsibilities. The Chairman, with
the assistance of the Nomination & Governance Committee,
has determined each director meets this requirement.
Mr Philip Chronican
BCom (Hons), MBA (Dist),
GAICD, SF Fin
Age: 63
Term of office: Non-executive director since May 2016.
Chairman of the Board and Chairman of the Board’s
Nomination & Governance Committee since 15 November
2019. Mr Chronican served as interim Group CEO from
1 March 2019 to 14 November 2019. Director of Bank of
New Zealand (a subsidiary of NAB) until 28 February 2019.
Independent: Yes
Skills & Experience: Mr Chronican has more than 37 years of
experience in banking and finance in Australia and New
Zealand. 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, Mr Chronican
had a long career at Westpac Banking Corporation
(Westpac), where Mr Chronican established his reputation
as one of Australia's leading banking executives, in
executive roles including Group Executive Westpac
Institutional Bank and Chief Financial Officer. Mr Chronican
has broad experience in M&A activity and post-merger
integration, and has taken an active and public role in
advocating for greater transparency and ethics in banking
and promoting workforce diversity.
Mr Chronican's other directorship is The Westmead Institute
for Medical Research (Chairman).
Mr David Armstrong
BBus, FCA, MAICD
Age: 61
Term of office: Non-executive director since August
2014. Chairman of the Board's Audit & Risk* Committees.
*Chairman since 1 March 2019.
Independent: Yes
Skills & Experience: Mr Armstrong has more than 30 years
of experience in professional services, including as a
REPORT OF THE DIRECTORS
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 (Chairman), Opera
Australia Capital Fund Limited, Australian Museum
(President) and Lizard Island Reef Research Foundation.
Mr Peeyush Gupta
AM, BA, MBA, FAICD,
AMP (Harvard)
Age: 60
Term of office: Non-executive director since November
2014. Member of the Board's Risk, Remuneration and
Nomination & Governance Committees. Director of certain
NAB Wealth and Bank of New Zealand subsidiaries
(subsidiaries of NAB).
Independent: Yes
Skills & Experience: Mr Gupta has more than 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.
Mr Gupta has extensive corporate governance experience,
having served as a director on many corporate, not-for-
profit, trustee and responsible entity boards since the
1990s, including experience on Audit, Risk, and
Remuneration committees.
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 Charter Hall Direct
Property Management Limited (Chairman), Insurance & Care
NSW (iCare) and Special Broadcasting Service Corporation.
Ms Anne Loveridge
BA (Hons), FCA, GAICD
Age: 58
Term of office: Non-executive director since December 2015.
Chairman of the Board's Remuneration Committee and a
member of the Board's Nomination & Governance
Committee.
Independent: Yes
Skills & Experience: Ms Loveridge has more than 30 years of
experience in professional services including as a senior
partner in the Financial Services practice at PwC, with
2019 Annual Financial Report
29
REPORT OF THE DIRECTORS
DIRECTORS’ INFORMATION (CONTINUED)
expertise in the banking, property, private equity and
wealth management sectors. Ms Loveridge has extensive
knowledge and understanding of people leadership and
development, financial and regulatory reporting and risk
management. Ms Loveridge has significant corporate
governance experience serving as a director and Chairman
on both corporate and not-for-profit entity boards and
committees.
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), member of
Chief Executive Women (CEW) and International Women's
Forum (Australia).
Ms Geraldine McBride
BSc
Age: 58
Term of office: Non-executive director since March
2014. Member of the Board's Audit and Customer
Committees.
Independent: Yes
Skills & Experience: Ms McBride has more than 30 years of
experience in the technology industry and international
business. Ms McBride is a former President of global
software company SAP for North America, as well as roles
with Dell and IBM. Ms McBride is CEO and Director of
MyWave.
Directorships of listed entities:
Sky Network Television Limited (since August 2013)
Fisher and Paykel Healthcare Corporation Limited (since July
2013)
Mr Douglas McKay
ONZM, BA, AMP (Harvard),
CMInstD (NZ)
Age: 64
Term of office: Non-executive director since February 2016.
Member of the Board's Nomination & Governance, Audit
and Customer Committees. Chairman of Bank of New
Zealand (a subsidiary of NAB).
Independent: Yes
Skills & Experience: Mr McKay has more than 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
30
National Australia Bank
including Auckland Council, Lion Nathan, Carter Holt
Harvey, Goodman Fielder, Sealord and Independent Liquor.
Directorships of listed entities:
Genesis Energy Limited (since June 2014)
Fletcher Building Limited (since September 2018) (Both
listed on the New Zealand Stock Exchange)
Mr McKay's other directorships include Eden Park Trust
(Chairman) and IAG (NZ) Holdings Limited.
Ms Ann Sherry
AO, BA, Grad Dip IR, FAICD,
FIPAA
Age: 65
Term of office: Non-executive director since November
2017. Chairman of the Board's Customer Committee and a
member of the Board's Remuneration Committee.
Independent: Yes
Skills & Experience: Ms Sherry has more than 20 years of
experience in executive roles within the banking, tourism
and transport industries in Australia and New Zealand,
together with significant experience in government and
public service. Ms Sherry was Chairman of Carnival
Australia, having previously served as CEO and as Executive
Chairman. Prior to joining Carnival Australia, Ms Sherry 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.
Directorships of listed entities:
Sydney Airport (since May 2014)
Ms Sherry’s other directorships and interests include,
UNICEF Australia (Chairman), Palladium Group, Cape York
Partnership, Museum of Contemporary Art, Infrastructure
Victoria, Carnival Australia (Adviser), and Trans-Tasman
Business Council’s ANZ Leadership Forum (Australian
Chairman).
Mr Anthony Yuen
B.Soc.Scs
Age: 69
Term of office: Non-executive director since March 2010.
Member of the Board's Audit and Risk Committees. Mr Yuen
will retire from the Board following the Company’s Annual
General Meeting on 18 December 2019.
Independent: Yes
Skills & Experience: Mr Yuen has more than 40 years of
experience in international banking and finance. Prior to
taking on a strategic investment management role on
behalf of Royal Bank of Scotland with Bank of China in 2006,
Mr Yuen held senior executive roles, having Asia wide
DIRECTORS’ INFORMATION (CONTINUED)
regional responsibility with Bank of America Corporation,
National Westminster Bank and The Royal Bank of Scotland.
Mr Yuen's other interests include Hong Kong Red Cross, ABF
Hong Kong Bond Index Fund and Membership Committee
of the Academy of Finance.
Former Directors
Dr Henry resigned from the Board effective 14 November
2019.
Dr Ken Henry AC, BCom (Hons), PhD, DB h.c, FASSA, FAIIA
Age: 61
Term of office: Non-executive director from November 2011
to November 2019. Chairman from December 2015 to
14 November 2019. Dr Henry was Chairman of the Board's
Nomination & Governance Committee.
Independent: Yes
Skills & Experience: Dr Henry has more than 30 years of
experience in economics, policy and regulation, governance
and leadership. Dr Henry served as the Secretary of the
Department of the Treasury and was special adviser to the
Prime Minister with responsibility for leading the
development of the White Paper on Australia in the Asian
Century. Dr Henry conducted the Review into Australia’s
Future Tax System (the ‘Henry Tax Review’) commissioned
by the Rudd Government.
Directorships of listed entities:
ASX Limited (since February 2013)
Dr Henry’s other directorships and interests include Sir
Roland Wilson Foundation (Chairman), Accounting for
Nature Limited, 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 Thorburn resigned as Group Chief Executive Officer and
Managing Director effective 28 February 2019.
Mr Andrew Thorburn BCom, MBA
Age: 54
Term of office: Director from August 2014 to 28 February
2019.
Independent: No
Skills & Experience: Mr Thorburn has more than 32 years of
experience in banking and finance. Mr Thorburn joined NAB
in January 2005 as Head of Retail Banking and was
appointed Managing Director and CEO of Bank of New
Zealand in 2008. Mr Thorburn joined the NAB Group
Executive Committee in January 2009 and was appointed
Group Chief Executive Officer and Managing Director in
August 2014.
REPORT OF THE DIRECTORS
Directors appointed subsequent to 30 September 2019
Mr Ross McEwan BBus
Age: 62
Term of office: Appointed as Group Chief Executive Officer
and Managing Director effective 2 December 2019.
Independent: No
Skills & Experience: Mr McEwan has more than 30 years of
experience in the finance, insurance and investment
industries. Mr McEwan is a senior global financial services
executive with deep experience in international markets
and long-standing knowledge of the Australian banking
environment. Mr McEwan also has extensive experience in
leading organisations through significant change and
recovery. Prior to joining NAB, Mr McEwan was Group CEO
of Royal Bank of Scotland from 2013-2019 and CEO UK Retail
from 2012-2013. Mr McEwan's experience includes
executive roles at Commonwealth Bank of Australia, First NZ
Capital Securities and National Mutual Life Association of
Australasia / AXA New Zealand.
Ms Kathryn Fagg, AO FTSE, BE(Hons), MCom(Hons),
Hon.DBus(UNSW), Hon.DChemEng(UQ)
Age: 58
Term of office: Appointed as a non-executive director
effective 16 December 2019.
Independent: Yes
Skills & Experience: Ms Fagg has more than 25 years of
senior commercial and operational experience and is a
respected and experienced director and Chairman, with
extensive leadership experience across a range of
industries, including banking. Ms Fagg has been a board
member of the Reserve Bank of Australia and held executive
roles with Linfox Logistics, Bluescope Steel and ANZ. Ms
Fagg has a deep understanding of strategy, leadership,
governance and risk, operations, investments, decision-
making and corporate development.
Directorships of listed entities:
Boral Limited (since September 2014, Chairman since July
2018)
Djerriwarrh Investments Limited (since May 2014)
Incitec Pivot Limited*(since April 2014)
*Ms Fagg will retire as a director on 20 December 2019.
Ms Fagg’s other directorships include Breast Cancer
Network Australia (Chairman), CSIRO, The Grattan Institute,
The Myer Foundation and Male Champions of Change.
2019 Annual Financial Report
31
– 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.
REPORT OF THE DIRECTORS
DIRECTORS’ INFORMATION (CONTINUED)
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 (Dist), 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 supports the Board to enable the Board to fulfil its
role.
Ms Penelope MacRae BA (Hons), LLB (Hons) joined the
Group in 2011 as a Senior Corporate Lawyer and was
appointed 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.
Ms Kelly Patterson BA, LLB (Hons) joined the Group in 2015,
having previously worked in the Group’s United Kingdom
(UK) operations, and was appointed Company Secretary in
April 2018. She is the Secretary of the Board Remuneration
Committee. She has experience in Australia and the UK in a
wide range of legal, governance and regulatory matters.
Ms Tricia Conte BCom, LLB (Hons) joined the Group in 2006
and was appointed Company Secretary in November 2018.
She is the Secretary to the Board Audit Committee and a
Senior Legal Counsel who advises the Group on a wide
range of legal, corporate, governance 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 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.
• Legal costs incurred in good faith in obtaining legal
advice on 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
32
National Australia Bank
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.
Board
Audit
Risk Committee Remuneration
Nomination
Customer
Committee
Committee
&
Committee(1)
Governance
Committee
Scheduled Other Scheduled Other Scheduled Other Scheduled Other Scheduled Scheduled Other
Number of meetings held (A,B,C)
Ken Henry
David Armstrong(2)
Philip Chronican – Non-executive director
(1 October 2018 to 28 February 2019)(3)
Philip Chronican – Interim Group CEO
(1 March 2019 to 30 September 2019)(3)
Peeyush Gupta(4)
Anne Loveridge
Geraldine McBride(5)
Doug McKay(6)
Ann Sherry(7)
Anthony Yuen
Andrew Thorburn – Group CEO(8)
15
15
15
7
8
15
15
15
15
14
15
6
9
9
9
3
6
8
9
8
7
8
8
1
12
-
12
-
-
-
-
11
12
-
12
-
7
-
7
-
1
-
-
5
6
-
7
-
11
-
11
4
7
11
-
-
-
-
11
2
5
-
5
2
2
5
-
-
-
-
5
-
11
11
-
-
5
6
11
11
-
-
11
-
4
-
-
3
8
11
11
-
-
11
-
-
5
5
-
-
1
5
5
5
-
-
-
4
-
-
-
3
-
-
4
4
4
-
-
1
-
-
-
1
-
-
1
1
1
-
-
Directors at times attended Committee meetings where they were not members. This is not reflected in these numbers, apart from Mr
Thorburn’s attendance in his capacity as Group CEO prior to his resignation and Mr Chronican’s attendance in his capacity as interim Group
CEO, which are reflected in these numbers.
A. For the purpose of this table, scheduled meetings refer to meetings scheduled within the calendar of meetings approved by the Board. The
number of scheduled meetings includes jointly convened meetings of the Board and Audit Committees (2 meetings), the Board and
Remuneration Committee (1 meeting), and the Audit and Risk Committees (2 meetings). These numbers are reflected in both the Board and
relevant Committees’ scheduled meeting columns. The number of scheduled Board meetings included 3 short special purpose meetings
related to financial reporting. The Board also establishes ad-hoc committees for special purpose business from time to time to support the
Board in carrying out its responsibilities. These are not included in the number of scheduled meetings.
B. Other meetings include workshops to consider items of special interest as well as meetings convened between scheduled meetings to
consider high priority matters. The number of other meetings includes jointly convened workshops of the Board and Risk Committee (1
workshop) and joint workshops of the Audit and Risk Committees (2 workshops). These numbers are reflected in both the Board and relevant
Committees’ other meeting columns.
C. Unless otherwise stated, each director has been a member, or the Chairman, of the relevant Committee for the whole of the period from
1 October 2018.
(1) Established in March 2019.
(2) Member of the Risk Committee from October 2018 to February 2019. Chairman of the Risk Committee from March 2019, upon Mr Chronican’s commencement
as interim Group CEO.
(3) Mr Chronican was Chairman of the Risk Committee and a member of the Remuneration Committee from October 2018 to February 2019 until he commenced as
interim Group CEO effective 1 March 2019. On 6 March 2019, Mr Chronican was announced as the next Chairman. Mr Chronican was unable to attend one
Board workshop while in his capacity as interim Group CEO. Mr Chronican's views were conveyed by the Chairman to the other directors present at the
workshop.
(4) Mr Gupta was unable to attend one Board workshop. Mr Gupta’s views were conveyed by the Chairman to the other Directors present at the workshop.
(5) Ms McBride was unable to attend one Board workshop, one scheduled Audit Committee meeting, one Audit Committee meeting convened for a high priority
matter and one joint Audit and Risk Committee workshop. Ms McBride’s views were conveyed by the Chairman to the other directors present at those
meetings.
(6) Mr McKay was unable to attend one Board meeting convened for a high priority matter, one Board workshop and one Audit Committee workshop. Mr McKay’s
views were conveyed by the Chairman to the other Directors present at those meetings.
(7) Ms Sherry was unable to attend one of the scheduled Board meetings (a short financial reporting meeting in November 2018) and one Board meeting
convened for a high priority matter. Ms Sherry’s views were conveyed by the Chairman to the other directors present at those meetings.
(8) Former Group CEO and Managing Director. Mr Thorburn resigned effective 28 February 2019. While not a member of any of the Board Committees, Mr
Thorburn regularly attended Risk and Remuneration Committee meetings.
2019 Annual Financial Report
33
REPORT OF THE DIRECTORS
OTHER INFORMATION
Directors' and executives' interests
Particulars of shares, performance rights and other relevant interests held directly and indirectly by directors and executives are
set out in the Remuneration report.
Performance rights
As at the date of this report, there are 2,791,200 performance rights outstanding in relation to NAB fully paid ordinary shares. No
exercise price is payable for performance rights. The latest dates for exercise of the performance rights range between
15 February 2020 and 15 February 2027. Persons holding performance rights are not entitled to participate in capital actions by
NAB (such as rights issues or bonus issues).
For the period from 1 October 2019 to the date of this report, no NAB fully paid ordinary shares were issued as a result of the
exercise of a performance right.
For further details on performance rights refer to Note 34 Equity-based plans of the financial statements and section 5.4 of the
Remuneration report.
34
National Australia Bank
OTHER MATTERS
Litigation and disputes
From time to time entities within the Group may be
involved in disputes or legal proceedings arising from the
conduct of their business. The outcomes and total costs
associated with such disputes and proceedings are typically
uncertain. Any material legal proceedings may adversely
impact the Group's reputation and financial performance
and position.
Refer to Note 29 Contingent liabilities and credit
commitments of the financial statements for details of 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 14 November 2019, Dr Ken Henry resigned as non-
executive director and Chairman of the Board. Mr Philip
Chronican commenced as Chairman of the Board, effective
15 November 2019 with his last day as interim Group CEO
on 14 November 2019. Mr Gary Lennon, Group CFO will be
acting Group CEO from 15 November 2019 to 1 December
2019 while continuing as Group CFO.
On 13 September 2019, NAB exercised its option to redeem
the EUR750 million medium-term notes. The notes were
repaid at par on 12 November 2019.
Other than the matters noted, there are no items,
transactions or events of a material or unusual nature that
have arisen in the period between 30 September 2019 and
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.
REPORT OF THE DIRECTORS
Further details on the role of the Board and its committees
can be found in NAB's 2019 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 2019 environmental reporting year was 576,376
gigajoules (GJ) (2018: 599,527 GJ), which is approximately
83% of the Group’s measured total net energy use. The
associated total greenhouse gas (GHG) emissions from fuel
combustion (Scope 1) and from electricity use (Scope 2)
were 101,626 tCO2-e (2018: 108,192 tCO2-e).
During the 2019 environmental reporting year, the Group’s
total net GHG emissions (Scope 1, 2 and 3(1)) were 168,175
tCO2-e (2018: 180,950 tCO2-e), after accounting for use of
certified renewable energy in the UK and generated
renewable energy in Australia. 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 2019, the Group identified 1,253 energy
efficiency and 26 renewable energy opportunities in
Australia alone. Initiatives implemented in 2019 are
estimated to deliver ongoing annual energy savings of
6,726 GJ and annual estimated cost savings of $397,278. A
further 14 efficiency energy opportunities are in progress or
approved to proceed.
The Group’s main Melbourne-based data centre is subject to
National Environment Protection Measure (National Pollutant
Inventory) (NPI) reporting requirements 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 participates in the
Carbon Reduction Commitment Energy Efficiency Scheme
(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.
2019 Annual Financial Report
35
REPORT OF THE DIRECTORS
OTHER MATTERS (CONTINUED)
(CRC EE Scheme). The Group’s UK-based GHG emissions
reportable under the CRC EE Scheme for the 2018/2019
compliance year (year ended 31 March 2019) were 0 tCO2-e
(2018: 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 2019 as required
by the CRC EE Scheme Order 2010. This year, the Group was
not required to purchase and surrender Carbon Reduction
Commitment Allowances. This is the Group's final return
required under the CRE EE Scheme, ended by the UK
Government after the 2019 reporting period. The Scheme
will be replaced by new Streamlined Energy & Carbon
Reporting (SECR) requirements introduced in April 2019 in
the UK. NAB is assessing whether it will be subject to the
SECR requirements.
In 2014 the Group’s UK-based operations became subject to
the Energy Savings Opportunities Scheme (ESOS),
introduced by the UK 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. The Group has
appointed an appropriately qualified lead assessor to
conduct the required ESOS assessment of its London Branch
and will submit its notification of compliance to the UK
Environment Agency to fulfil its ESOS obligation by
5 December 2019.
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 these risks are 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. Additionally, financial regulators have agreed that
climate-related risks are a source of financial risk that need
to be addressed to ensure the future stability and resilience
of the financial system. The Group supports the transition to
a low-carbon economy consistent with the Paris Agreement
to limit global warming to less than 2 degrees Celsius above
pre-industrial levels, striving for 1.5 degrees Celsius.
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 climate change considerations
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
is a high-level summary of the Group’s approach to climate
change governance, strategy, risk management, and metrics
and targets consistent with the Financial Stability Board's
Taskforce on Climate-Related Financial Disclosures'
recommendations.
Governance
The Board retains ultimate oversight for Environmental,
Social and Governance (ESG) risks and issues, including
climate change. This 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, climate-related credit risk policy settings,
commitments, targets and initiatives, environmental
operational performance, carbon neutral status, and
concerns raised by 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. The Board Risk Committee may
also receive reports related to climate change matters that
fall under its charter, particularly on matters such as
emerging risk, risk appetite, scenarios and stress testing.
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 Non-Financial Risk Committee has oversight of these
risks, including climate-related risks, and the Group’s
environmental performance and Environmental Agenda.
The Group Credit and Market Risk Committee oversees
financial risk and ESG risks, including climate-related risks,
in the context of the credit risk portfolio. This includes
credit policy settings for climate intensive, low-carbon and
climate-sensitive sectors. Matters are escalated to the
Executive Risk Committee, Board Risk Committee and Board
as required.
The Group's Climate Change Working Group (CCWG), which
consists of management representatives from across the
Group, reviews the key risks and opportunities facing the
Group and its customers arising from climate change and
the Paris Agreement, and monitors and supports the
implementation of the Group’s climate change strategy.
Updates on implementation of the Group's climate change
strategy are reported by the CCWG through to
management, executive and the Board.
In the 2019 financial year, the Group progressed a number
of climate-related risk activities and projects to continue to
increase the Group’s understanding of climate-related risks
and opportunities, including:
• Commencing work as part of the United Nations
Environment Program Finance Initiative (UNEP FI) Phase
2 pilot project, with other UNEP FI member banks, to
(1) Green growth describes a path of economic growth that uses natural resources in a sustainable manner.
36
National Australia Bank
OTHER MATTERS (CONTINUED)
further develop methodologies and processes to
implement the recommendations made by the Financial
Stability Board’s Taskforce on Climate-related Financial
Disclosures (TCFD). Phase 2 involves an expanded group
of 37 banks. Work is being undertaken through to June
2020. Phase 2 will examine a broader range of scenarios
to help increase understanding of the spectrum of
scenarios available and explore the availability of further
data sets to assist with climate-related scenario analysis
and risk assessment. In addition, participating banks will
also explore climate risk governance and disclosure best-
practices.
• Becoming a founding signatory to the Principles for
Responsible Banking (PRB). Signatories, including the
Group, have committed to align their business strategies
to the Sustainable Development Goals(1) (SDGs), the Paris
Agreement and relevant national and regional
frameworks. They also commit to setting and publishing
targets and metrics in line with society’s goals as
expressed in the SDGs and the Paris Agreement within
the four-year PRB implementation period. Early in the
2020 financial year, the Group will also join the PRB's
Collective Commitment to Climate Action.
• Working with the Energy Transitions Hub (the Hub) at the
University of Melbourne to develop a process to geocode
data from the Group’s lending portfolio and overlay it
with transition and physical climate risk information for
the purpose of scenario analysis. This new process is
being used to examine the potential impact of climate
scenarios with a focus on cyclones and the impact they
may have on the Group’s Australian retail mortgage
portfolio under different levels of warming. Further
information on the outcomes of this work are provided
on page 38.
• Undertaking further transition risk scenario analysis on
coal-related sectors. This work is in progress. Additional
to the REMIND(2) model used in Phase 1 of the UNEP FI
TCFD pilot, the Group is considering a number of
additional climate-related scenarios including the
International Energy Agency’s New Policies Scenario and
Sustainable Development Scenario and a 1.5oC scenario
available from Global Energy Monitor. This work is
helping to increase the Group's understanding of
transition pathways for coal-related sectors and will help
inform the approach taken to portfolio alignment with
the Paris Agreement goals. Changes arising from this
work include:
– Supporting current coal-fired power generation
customers implementing transition pathways aligned
with Paris Agreement goals of 45% reduction in
emissions by 2030 and net zero emissions by 2050.
REPORT OF THE DIRECTORS
– Capping thermal coal mining exposures at current
levels and reducing thermal coal mining financing by
50% by 2028, intended to be effectively zero by 2035,
apart from residual performance guarantees to
rehabilitate existing coal assets.
The Group will review targets each year against the latest
global climate scenarios and relevant technology
developments.
• Review of credit risk policy settings for carbon intensive,
climate sensitive and low-carbon sectors. This work
commenced in the 2017 financial reporting year and is
ongoing. These reviews consider a range of factors
including: (i) various climate change scenarios for both
transition(3) and physical(4) risk; (ii) customer strategies
and plans and their alignment to the Paris Agreement
2oC climate goal; (iii) industry trends; and (iv) trends in
Group exposures to these sectors. Outcomes of the
review process to date have led to implementation of the
following credit risk policy settings. Although the Group
continues to support existing customers across the
mining and energy sectors to facilitate an orderly
transition to a low-carbon economy, it will not finance:
– new thermal coal mining projects or new-to-bank
thermal coal mining customers
– oil / tar sands extraction projects
– oil and gas projects within or impacting the Arctic
National Wildlife Refuge area and any similar Antarctic
Refuge
– new, or material expansions of, coal-fired power
generation facilities, unless there is technology in
place to materially reduce emissions.
The Group also continues to work with a range of external
organisations on climate-related projects including:
• IAG – The Group has been working with IAG, and the
Commonwealth and NSW governments to develop an
investment vehicle that will direct capital to finance new
and/or adapt existing infrastructure that builds resilience
to natural hazards. This pilot will help prove the concept
with a view to implementing the approach across other
regions.
• Climate-KIC Australia – The Group has been working
with Climate-KIC Australia through a forum of national
state government partners, on climate change
adaptation and resilience. This collaboration is focused
on identifying adaptation projects and developing a
scalable approach to adaptation finance.
• Energetics(5)– The Group supported development of a tool
to help assess the potential impacts that future changes
in climatic conditions may have on the factors that affect
credit risk in the dairy industry.
(1) The sustainable development goals are a collection of 17 global goals set by the United Nations General Assembly in 2015 for the year 2030. The SDGs are part
of Resolution 70/1 of the United Nations General Assembly, the 2030 Agenda.
(2) REMIND is a global multi-regional model incorporating the economy, the climate system and a detailed representation of the energy sector available from the
Potsdam Institute for Climate Impact Research. REMIND allows for the analysis of technology options and policy proposals for climate mitigation.
(3) For the purpose of this work, transition risk was defined as the impact of low-carbon policy and transition to low-carbon technology on markets and industries.
(4) For the purpose of this work, physical risk was defined as the risk resulting from climate variability, extreme weather events and longer-term changes in climate
patterns.
(5) Energetics is a specialist management consultancy focused on helping client's to understand and transition to a low-carbon economy.
2019 Annual Financial Report
37
REPORT OF THE DIRECTORS
OTHER MATTERS (CONTINUED)
Physical risk scenario analysis
• supporting the Group's customers through the low-
During the 2019 financial year, the Group has been working
with the Hub at the University of Melbourne to develop a
process to geocode data from the Group's lending portfolio
so it could be overlaid with physical climate risk
information. Geocoding is a process that converts addresses
(like a street address) into coordinates that can pinpoint a
property location on a map. This process was developed
and piloted in the 2019 financial year using data from the
Group's Australian retail mortgage portfolio. The next step
is to test this process with other segments of the Group's
lending portfolio during the 2020 financial year to ensure
the process is repeatable and reliable.
After geocoding the Group's Australian retail mortgage
portfolio, the Hub helped to develop a process for
overlaying lending portfolio data with physical climate data.
Cyclone data (wind speeds >64 knots or cyclone category 1
and above) was used to test this overlay process and
develop the Group's understanding of how to assess the
potential impact of physical climate hazards on segments of
its lending portfolio under different climate scenarios. Wind
speeds from cyclone tracks under four different warming
levels (1.2oC, 1.5oC, 2oC and 3oC above pre-industrial levels)
were selected and analysed by the Climate and Energy
College in collaboration with the Potsdam Institute for
Climate Impact Research for use as an indicator of the
severity and location of future damage due to tropical
cyclones under a changing climate. A range of scenarios is
important to help understand the possible future physical
risks due to uncertainties in the climate models.
Initial analysis suggests that an increased geographic
proportion of the Group's Australian retail mortgage
portfolio is likely to experience cyclones under higher
warming scenarios. Further work is required to refine this
methodology. Future work will include growing the Group's
understanding of how to link forecast changes in physical
climate impacts such as cyclone frequency, location and
severity with possible future changes in probability of
default. Following further testing of this approach, the
Group will look to add other overlays of physical hazard
data such as flooding, drought, and extreme heat, as well as
applying the approach to other lending portfolio segments.
Climate Change Strategy
The Group identifies and prioritises current and future
business opportunities, including those related to climate
change (for example, financing clean technology). This
occurs through strategic planning processes both at a
Group and business line level.
The Group’s climate change strategy is focused on four key
areas:
• leadership commitments
• developing climate change knowledge and insights
carbon transition
• investing in organisational capability to identify and
respond to climate change risks and opportunities.
In the 2019 financial year, the Group reviewed its Climate
Change Strategy and increased its: (i) environmental finance
commitment to support green infrastructure, capital
markets and asset finance from $20 billion to $35 billion
(taking the Group’s total environmental finance
commitment from $55 billion to $70 billion by 2025)(1) and
(ii) commitment to purchase Australian renewable energy
from 50% to 100% by 2025. The Group has since signed up
to the RE100 initiative(2).
The Group is committed to playing an active role in
addressing climate change through seeking to provide
innovative products and services that help the Group’s
priority customer segments take advantage of low-carbon
opportunities. The Group’s assessment of climate change-
related opportunities has led to a series of commitments
covering the Group's operations, as well as how the Group
supports its customers through the low-carbon transition.
The Group’s progress on key commitments includes:
• Reaching a total of: (i) $17.5 billion against the Group's
commitment to provide $20 billion to support green
infrastructure, capital markets and asset finance by 2025;
and (ii) $16.1 billion against the Group's commitment to
provide $35 billion in new mortgage lending flow for 6
Star residential housing in Australia (new dwellings and
significant renovations) by 2025.
• Delivering on the Group's 50% renewable electricity by
2025 commitment, 10% of which will be delivered via a
large solar installation at the Group's primary data centre
and contracts with Pacific Hydro for renewable energy
certificates from a new Victorian wind farm which
commenced generation in January 2019. As at 30 June
2019, the Group had surrendered renewable energy
certificates equivalent to 3% of Australian electricity
consumption.
The Group’s climate change commitments have been
integrated into the Group’s business strategy. The Group is
using 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.
Highlights in the 2019 financial year have included:
• Financing a further $1.7 billion for renewable energy
projects (this year the Group financed its 130th renewable
energy project).
• UBank launching a Climate Bond certified consumer
Green Term Deposit (TD) (a world first). This green
product allocates customers’ savings to financing a
portfolio of low-carbon projects, such as wind and solar
power generation, electrified passenger rail and green
buildings. The Green TD has attracted around 2,900
customers and raised almost $357 million in deposits.
(1) Represented as a cumulative amount of new environmental finance since 1 October 2015. Refer to 2019 Sustainability Report and Data Pack for more
information.
(2) RE100 is a global corporate leadership initiative bringing together businesses committed to 100% renewable electricity.
38
National Australia Bank
OTHER MATTERS (CONTINUED)
• Participating in eight public green, social and
sustainability bond deals and three sustainability-linked
loans including:
– Arranging Australia’s largest ever green bond – the
$1,800 million TCorp Green Bond. Proceeds were
earmarked for low-carbon transport and sustainable
water projects.
– Arranging the world’s first Climate Bond certified
green bond for a retail property landlord – $300
million Queensland Investment Corporation Shopping
Centre Fund green bond.
– Acting as a Mandated Lead Arranger on the $1,400
million Sydney Airport Sustainability Linked Loan (see
case study in the Group's 2019 Sustainability Report for
more information).
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 the March 2019 half year and the
September 2019 financial year results presentations, as well
as in the Group's annual Sustainability Report. Currently,
exposure to renewable energy represents 69.4% of the
Group’s power generation portfolio (up slightly from 68.8%
at 30 September 2018) and exposure to coal-fired power
generation decreased from 5.4% at 30 September 2018 to
1.7% at 30 September 2019. Exposure to coal mining
increased from $0.7 billion at 30 September 2018 to $1.5
billion at 30 September 2019 (as exposure at default (EAD)).
Of the $0.8 billion increase, $0.4 billion relates to model
and regulatory prescribed methodology requirements
(including: thermal coal +$0.2 billion, metallurgical coal +
$0.2 billion). However, comparing September 2019 full year
to March 2019 half year, which were calculated with the
same model and regulatory prescribed methodology,
thermal coal exposure decreased by 14.8% from $0.9 billion
to $0.8 billion (as EAD) and metallurgical coal increased by
28.8% from $0.6 billion to $0.7 billion, with a small increase
in total coal mining exposure of 2% from $1.47 billion to
$1.5 billion (as EAD).
Further information about the Group’s Environmental
Agenda, climate change governance, strategy, risk
management and metrics, targets and commitments,
operational greenhouse reduction and resource efficiency
targets and management approach can be found in the
Group’s 2019 Annual Review and 2019 Sustainability Report
available online at www.nab.com.au/annualreports.
Modern Slavery
The Group is subject to modern slavery acts in Australia and
the United Kingdom. On 1 January 2019, the Australian
Modern Slavery Act came into effect. Disclosure pursuant to
this Act will be required in 2020.
The Group has prepared a Modern Slavery Act statement
which sets out actions taken by the Group during the 2019
financial year to ensure that its business operations, and its
supply chain, are free from slavery and human trafficking.
REPORT OF THE DIRECTORS
This statement is available online at www.nab.com.au/
modernslaverystatement in accordance with the UK Modern
Slavery Act.
2019 Annual Financial Report
39
REPORT OF THE DIRECTORS
OTHER MATTERS (CONTINUED)
Past employment with external auditor
EY has been the Group external auditor since 31 January 2005. There is no person who has acted as an officer of the Group
during the 2019 financial year who has previously been a partner at EY when that firm conducted NAB’s audit.
Audit-related, Taxation-related and Non-audit services
EY provided audit-related, taxation-related and non-audit services to the Group during 2019. The fees paid or due and payable to
EY for these services during the year to 30 September 2019 are as follows:
Comfort letters
Regulatory
Non-regulatory
Total audit-related services
Taxation-related services
Non-audit services
Total audit-related, taxation-related and non-audit services
Group
2019
$’000
604
7,276
419
8,299
225
99
8,623
As set out in Note 33 Remuneration of external auditor of the financial statements, total fees paid or due and payable for all
services provided by EY to the Group during 2019 amount to $24.4 million.
EY also provides 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 EY for these services during the year to
30 September 2019 total $3.3 million.
In accordance with advice received from the Board Audit Committee, the directors are satisfied that the provision of audit-
related, taxation-related and non-audit services during the year to 30 September 2019 by EY 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 that the provision of each service or type of service would not impair the
independence of EY.
A description of the Board Audit Committee’s pre-approval policies and procedures is set out in the NAB 2019 Corporate
Governance Statement which is available online at www.nab.com.au/about-us/corporate-governance. Details of the services
provided by EY to the Group during 2019 and the fees paid or due and payable for those services are set out in Note 33
Remuneration of external auditor of the financial statements. A copy of EY’s independence declaration is set out on the following
page.
40
National Australia Bank
AUDITOR’S INDEPENDENCE DECLARATION
REPORT OF THE DIRECTORS
2019 Annual Financial Report
41
A member firm of Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards LegislationErnst & Young8 Exhibition StreetMelbourne VIC 3000 AustraliaGPO Box 67 Melbourne VIC 3001Tel: +61 3 9288 8000Fax: +61 3 8650 7777ey.com/auAuditor’s Independence Declaration to the Directors of NationalAustralia Bank LimitedAs lead auditor for the audit of the financial report of National Australia Bank Limited for the financialyear ended 30 September 2019, I declare to the best of my knowledge and belief, there have been:a)no contraventions of the auditor independence requirements of theCorporations Act 2001inrelation to the audit;andb)no contraventions of any applicable code of professional conduct in relation to the audit.This declaration is in respect of National Australia Bank Limited and the entities it controlled during thefinancial year.Ernst & YoungSarah LowePartner15 November 2019 REPORT OF THE DIRECTORS
DIRECTORS’ SIGNATURES
This report of directors signed in accordance with a resolution of the directors:
Philip Chronican
Chairman
15 November 2019
42
National Australia Bank
REMUNERATION REPORT
Letter from Chairman Philip Chronican and Remuneration Committee Chairman Anne Loveridge
REPORT OF THE DIRECTORS
Dear Shareholder,
This year’s Remuneration report responds to where we fell
short of your expectations in 2018 and outlines the
fundamental changes we have made to reflect your
feedback. It is clear that we have let down customers,
shareholders and the community in various ways.
Having received clear rejection by shareholders culminating
in a record first strike vote, we acted on your concerns and
made the material changes many of you wanted to see
reflected in our remuneration framework and the way
performance is reflected in remuneration outcomes.
We have delivered a new remuneration framework for our
Executives designed to better meet shareholder
expectations for long-term performance outcomes and
more closely align the interests of Executives and
shareholders. We have made material enhancements to the
information provided to the Board to improve rigour in the
assessment of outcomes. We have determined for our
Executives that there will be no short-term variable rewards
and no fixed remuneration increases.
Recognising our shortcomings gives us cautious optimism
that this year’s actions are more appropriate, although that
is ultimately for shareholders to decide.
Our shortfalls have been taken well into account
The introduction for this Remuneration report is shared
between the incoming Chairman, Philip Chronican, and the
Remuneration Committee Chairman, Anne Loveridge,
because we want to demonstrate clear responsibility from
the top to make this right for shareholders.
We are under no illusion as to the task ahead and the
opportunities we have as a Board and broader organisation.
The resignations of our Chairman and Group CEO
announced in February highlighted and acknowledged the
need to respond to deeper issues which have been taken
well into account.
While underlying business performance was solid, we did
not achieve some financial and non-financial results which
is reflected in the 2019 remuneration outcomes for our
Executives. Specifically, your Company has needed to make
substantial provisions for customer-related remediation
which has impacted 2019 earnings.
We have also recognised the impact on our brand,
reputation and the trust which our customers place in us.
These are all considerations which we make on your behalf
when assessing performance and remuneration outcomes.
The accountability actions taken by the Board since the
first strike have been significant and include:
• accepting the resignation of Group CEO, Andrew
Thorburn (effective February 2019) which resulted in
forfeiture of all his deferred variable reward potentially
worth $21 million(1)
• forfeiting deferred variable reward previously awarded
between 2016 and 2018 for the majority of the 2018
Executive team (other than the former Group CEO),
potentially worth $5.5 million(1)
• accepting the resignation of Chairman, Dr Ken Henry
(effective November 2019) and determining that other
directors would receive a reduction in fees for 2019,
equivalent to 20% of 2018 base fees received
• substantially changing the remuneration framework
for Executives to ensure they continue to be focused on
the right outcomes for our customers and shareholders
today and over the long-term.
The Board has been decisive on 2019 performance
outcomes
The Board has increased rigour in assessing performance,
with a clear focus to reward longer-term, sustainable
customer and shareholder outcomes.
While 2019 underlying business performance was solid,
NAB did not achieve some financial and non-financial
targets. The key remuneration outcomes for Executives in
2019 are:
• based on performance, no short-term variable reward be
awarded to any Executive for 2019. The maximum short-
term variable reward opportunity for Executives was
$14.4 million, while at target opportunity was $9.6
million(2)
• no increases to fixed remuneration for Executives.
A 2019 long-term incentive, which will be subject to testing
in 2023, will be granted to align the interests of Executives
and shareholders over the long-term.
Our 2019 remuneration framework is substantially
improved in response to your feedback
After engaging with key stakeholders, we made material
changes to our remuneration framework and the way
performance and accountability is reflected in remuneration
outcomes in response to your main concerns:
• Variable reward outcomes last year were too high – as
disclosed earlier this year the Board forfeited deferred
variable reward previously awarded for the majority of
the 2018 Executive team (in addition to that of the
former Group CEO), potentially worth $5.5 million(1).
(1) Based on an indicative share price of $25 and assuming full vesting of all rights, shares and cash awards, and excluding the value of any dividends on unvested
shares.
(2) Maximum assumes all individual and Group performance scores set at the highest possible level, while at target assumes all individual and Group performance
scores set at target. See Section 1.4 for detail on the Group's actual performance for 2019.
2019 Annual Financial Report
43
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
• The plan design delivered too heavily through cash – we
have reduced the cash element and increased the
deferred equity component.
• Our plan lacked a clear long-term performance hurdled
element – we reintroduced a long-term variable reward
component with a hurdle based on total shareholder
return performance relative to a group of peers over a
four year performance period.
• Dividends being paid on unvested deferred variable
reward – this element has been removed.
A detailed explanation of the framework is provided in the
report and we encourage you to spend time reviewing the
new structure.
Attracting and retaining talent is critical
This report details a clearer remuneration framework that
better reflects shareholder and community expectations,
although there will always be debate around what is the
appropriate compensation to attract and retain the best
executive talent.
We have appointed a respected and experienced Group
CEO in Ross McEwan while keeping his fixed remuneration
levels comparable with major Australian peers and placing
almost 75% of his maximum reward at risk. The Board has
received positive feedback from institutional investors on
Ross’ appointment and looks forward to working with him,
particularly given his strong capabilities in driving cultural
reforms in financial services with a focus on customers and
creating an ethical and accountable ‘speak up’ culture.
Related actions to restore trust
Broader than these actions, the Board has overseen actions
responding to the findings of the Royal Commission. The
Board completed and published its self-assessment into the
effectiveness of our governance, accountability and culture
frameworks and practices, undertaken at the request of the
Australian Prudential Regulation Authority (APRA).
As a Board, we are working hard to encourage a strong
culture underpinned by ethics, integrity and an enduring
approach of doing the right thing by our customers,
employees, investors and the community.
The Remuneration Committee is overseeing a Group-wide
review of all variable reward plans and practices to ensure
they are driving the right customer outcomes.
We have carefully reviewed our framework structure and
operation to ensure sufficient focus and balance on non-
financial matters such as risk management, compliance and
customer outcomes. This drives the right behaviours
alongside appropriate and sustainable financial outcomes.
We are able to assess individual scorecards, Group
performance measures and the broader quality and
sustainability of the results. This means annual variable
reward is balanced between financial and non-financial
metrics, with customer and transformation measures
playing a significant role.
44
National Australia Bank
We have increased our governance and oversight of
employee conduct and support the enhanced Employee
Conduct Management framework introduced to ensure our
behavioural standards are upheld and that customers can
rely on our people to do the right thing.
The Board has listened and acted
The message you sent your directors and management last
year was justifiably confronting. The range of corrections
we have made are designed to meet your clear approval
and smooth the path for an appropriate framework and
rigorous application of outcomes in 2019 and beyond.
We are acutely aware of the continuing changes in the
community and regulatory landscape, including APRA’s
recently released consultation paper on remuneration, and
will continue to ensure our remuneration frameworks are
appropriate and comply with all requirements.
We will continue to align our remuneration structure and
outcomes with these elements as well as the core financial
performance measures that you expect. We look forward to
your continued feedback about progress on these critical
matters for your Company and its Executives.
Philip Chronican
Chairman
15 November 2019
Anne Loveridge
Remuneration Committee Chairman
15 November 2019
Contents
Board response to concerns raised in relation to the
2018 Remuneration report
Key remuneration outcomes for 2019
Section 1 - Executive remuneration framework
Section 2 - Remuneration governance and framework
Section 3 - Long Term Incentive outcomes
Section 4 - Key Management Personnel
Section 5 - Executive statutory remuneration
disclosures
Section 6 - Non-executive director remuneration
Section 7 - Loans and other transactions
45
47
49
56
58
59
60
67
70
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
Board response to concerns raised in relation to the 2018 remuneration report
As part of the Board’s recognition of failing to meet shareholder expectations last year on its Executive remuneration framework
and subsequent application of outcomes, we provide a summary of specific concerns raised through the engagement process
and the tangible, fundamental actions taken since. The new framework applies to the 2019 financial year onwards.
You said...
Variable reward
We changed...
The link between business performance, accountability and remuneration outcomes is stronger
The amount of variable reward
• After further consideration of accountability for outcomes, the Board has reviewed and adjusted the
(including cash) paid in 2018 was
variable reward decisions made in 2018 for the majority of the Executive team.
too high and did not reflect business
• This resulted in the forfeiture of deferred variable reward previously awarded between 2016 and 2018 to
performance or stakeholders’
the majority of 2018 Executive team (other than the former Group CEO), potentially worth $5.5 million(1).
reasonable expectations
• Based on 2019 performance, the Board determined no short-term variable reward (cash or deferred
rights) be awarded to Executives for 2019. (The maximum short-term variable reward opportunity for
Executives was $14.4 million, while the reward opportunity at target was $9.6 million(2).)
Long-term focus
Restoration of a specific long-term variable award
Our Executive remuneration
• The Executive remuneration framework includes a specific Long Term Variable Reward (LTVR) subject to
framework lacked an explicit long-
minimum individual performance requirements being met.
term performance hurdle
• The LTVR will only vest at the end of the four year performance period if a relative Total Shareholder
Return (TSR) hurdle is achieved.
• From 2019 we will deliver less variable reward as cash and more as deferred equity. A minimum of 50%
of total remuneration is now deferred (at maximum opportunity), and at least one third of deferred
variable reward is now subject to long-term shareholder return performance (see Section 1.8 for more
Dividends
Dividends will not be paid before deferred equity vests
information).
Dividends were to be paid on
• Dividends will not be paid during deferral periods on unvested equity awarded to Executives from 2019.
unvested deferred shares
• A dividend equivalent amount will be paid at the end of the deferral period if Annual Variable Reward
Governance
Enhanced governance processes
(VR) deferred rights are not forfeited.
• No dividend equivalent payment will be made for LTVR awards that vest.
There was insufficient rigour and
• We have made material enhancements to the information provided to the Board to improve the rigour
transparency in our remuneration
and discipline in determining Executive performance and its impact on remuneration outcomes,
practices
particularly around customer outcomes and non-financial risks.
• There is stronger governance and oversight of employee conduct and how it impacts remuneration.
• A Board Customer Committee has been established to oversee a significant improvement in the
importance given to the voice of the customer in NAB’s decision-making and a more intense focus on
customer outcomes and how they are reflected in remuneration.
• The Board has overseen remuneration related actions supporting the recommendations of the final
report of the Royal Commission and those identified in our self-assessment to APRA.
• An independent review of the effectiveness of the Group's Remuneration Policy was overseen by the
Board. Review findings have been considered in the development of the Executive remuneration
framework.
(1) Based on an indicative share price of $25 and assuming full vesting of all rights, shares and cash awards, and excluding the value of any dividends on unvested
shares.
(2) Maximum assumes all individual and Group performance scores set at the highest possible level, while at target assumes all individual and Group performance
scores set at target. See Section 1.4 for detail on the Group's actual performance for 2019.
Key definitions
Term
Executives
Control Roles
Key Management
Personnel (KMP)
Meaning
The Group CEO and other executive KMP, excluding the interim Group CEO (Philip Chronican) and
executives who have acted in a KMP role on an interim basis (Greg Braddy and Julie Rynski)
The Chief Risk Officer (CRO), Chief People Officer (CPO) and Chief Legal and Commercial Counsel
KMP are the non-executive directors of NAB, the Group CEO (an executive director 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
2019 Annual Financial Report
45
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
New Executive remuneration framework
The Board has returned to a traditional variable reward plan previously supported by shareholders, replacing the combined
incentive scheme that applied for 2018. Consistent with our remuneration principles, it rewards performance beyond the short-
term and encourages long-term decision making critical to creating value for customers and shareholders.
The key objective is to ensure focus on improving the performance and behaviours that drive exceptional customer service,
deliver long-term sustainable returns and progress NAB’s desired culture with an emphasis on integrity and accountability. We
believe the changes to the Executive remuneration framework accommodate these objectives and address key stakeholder
concerns which led to the vote against the 2018 Remuneration Report. This framework applies for the 2019 financial year
onwards.
46
National Australia Bank
RISKReflect risk, reputation, conduct and values outcomes!CUSTOMERSReinforce our commitment to customersEMPLOYEESAttract and retain the best peopleSHAREHOLDERSAlign reward with sustainable shareholder valueSTRATEGYDrive delivery of long-term performanceREMUNERATION PRINCIPLESFIXED REMUNERATIONSet to attract and retain• Fixed remuneration (FR) is comprised of base salary and superannuation• Paid regularly during financial year• Set at a market competitive level for role and experienceDelivering today for our customers and shareholdersHOW THE REMUNERATION FRAMEWORK SUPPORTS OUR STRATEGYANNUAL & DEFERRED VARIABLE REWARD Earned for delivery of annual goals that drive long-term sustainable performance• Quantum ranges (% of FR)1:0% - 150%for Group CEO0% - 150%for all other Executives0% - 105%for Control Roles2• Outcomes vary depending on Group and individual performance (balanced scorecard), and demonstrated values and behaviours• Delivered as 50% cash, 50% deferred rights (12.5% delivered at the end of year 1, year 2, year 3 and year 4)• Dividend equivalent payment for any vested deferred rights at the end of each deferral periodANNUAL VR (CASH)ANNUAL VR (DEFERRED RIGHTS)Board discretion applies for qualitative matters including risk, reputation, conduct and values to ensure sustainable performance (including for malus and clawback)AT RISKSustained delivery tomorrow for our customers and shareholdersLONG TERM VARIABLE REWARDEarned for long-term performance• Award value (% of FR)3:130%for Group CEO130%for all other Executives100%for Control Roles2• The award is granted subject to minimum individual performance requirements being met • Vesting is subject to NAB’s TSR result against financial services peer group, tested after 4 years• Provided as performance rights• No dividend equivalent payment for awards that vestLONG TERM VARIABLE REWARDYEAR 4YEARS 1-41 From 2019, the VR based on annual performance at target is 100% of FR (150% of FR at maximum) for the Group CEO, 70% of FR (105% of FR at maximum) for Control Roles and 100% of FR (150% of FR at maximum) for other Executives.2 Control Roles are the Chief Risk Officer, Chief People Officer and the Chief Legal and Commercial Counsel.3 The actual value delivered to an Executive is subject to the level of achievement against the performance hurdle and NAB’s share price at the time of vesting.PERFORMANCE YEAR (YEAR 0)FIXED REMUNERATION REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
Key remuneration outcomes for 2019
In 2019, our Executives progressed performance against our key customer, risk, people and transformation metrics and delivered solid underlying
business performance. But financial results have been impacted by substantial provisions made for customer-related remediation. The Board has
considered the overall collective accountability for our shortfalls in performance, and determined no Annual VR (cash or deferred) be awarded to
Executives for 2019. Outcomes for 2019(1) are set out below.
Fixed remuneration
No increases to fixed remuneration during 2019.
Annual Variable Reward (VR) outcomes
No Annual VR has been awarded to Executives for 2019. The maximum
short-term variable reward opportunity was $14.4 million ($9.6 million at
target opportunity)(2).
No variable reward has been awarded to the former Group CEO for 2019.
(The interim Group CEO did not participate in any variable reward plans.)
Former Group CEO*
Executives
% Maximum Annual VR
2019
0%
0%
2018
30%
12% - 70%
* The 2018 percentage includes deferred variable reward forfeited on resignation.
Progress has been made against key customer, risk, people and transformation metrics, however, this year's outcomes reflect accountability for
below target financial performance (impacted by substantial customer-related remediation provisions), and our shortfalls across customer, trust
and reputation.
See Section 1.3 to 1.6 for more information.
Long-term variable reward outcomes
• The 2013 Long Term Incentive (LTI) award did not achieve the required performance hurdles and so did not vest. The 2014 LTI award did not
achieve the required performance hurdles when tested in November 2018 and so did not vest. The 2014 award is subject to a final test in
November 2019. See Section 3 for more information.
• A 2019 long-term incentive, which will be subject to testing in 2023, will be granted to align the interests of Executives and shareholders over
the long-term. See Section 1.8 for more information.
Accountability consequences
In 2019, the Board has built on the action it commenced in 2018 where forfeitures of variable reward for three former Executives (pre-dating
2018) were applied where NAB had not met customer, shareholder, regulator or community expectations. Other impacts on Executive
remuneration this year:
• All deferred and unvested remuneration for the former Group CEO, Andrew Thorburn was forfeited on his resignation (potentially worth $21
million(3)).
• The Board determined significant forfeitures of deferred equity for the majority of the 2018 Executive team. See Section 5.2 for more
information.
• The Board determined all unvested 2017 deferred Short Term Incentive (STI), 2018 deferred VR, 2016 LTI and 2017 LTI awards for the former
Chief Customer Officer, Consumer and Wealth be forfeited (potentially worth $1.7 million(3)).
The Board accepted the resignation of Chairman, Dr Ken Henry (effective November 2019), and determined that other directors would receive a
reduction in fees for 2019, equivalent to 20% of the 2018 director base fees received.
Executive exit arrangements
The following table outlines the exit arrangements for Executives during 2019. See Section 5.1 for more information.
Executive
Andrew Thorburn
Exit arrangement
• Payment in lieu of notice in accordance with his employment contract was made.
(ceased as an Executive and an
• All unvested deferred short-term and LTI awards were forfeited (potentially worth $21 million(3)).
employee on 28 February 2019)
• Statutory entitlements and career transition support were provided.
Lorraine Murphy
• Payment in lieu of notice in accordance with her employment contract was made.
(ceased as an Executive and an
• All unvested LTI awards were forfeited (potentially worth $2.1 million(3)). Other deferred variable
employee on 29 March 2019)
reward was retained and remains subject to the relevant performance hurdles and restriction periods.
• Statutory entitlements and career transition support were provided.
Other remuneration
• No commencement or retention awards were made to Executives during 2019.
• No increases to non-executive director Board or Committee fees were made. Fees were established for the new Board Customer Committee in
March 2019.
(1) All matters relating to the remuneration of the Managing Director and CEO of Bank of New Zealand (BNZ), including variable reward, have been approved by
the BNZ Board as required under BNZ's Conditions of Registration which are set by the Reserve Bank of New Zealand.
(2) Maximum assumes all individual and Group performance scores set at the highest possible level, while at target assumes all individual and Group performance
scores set at target. See Section 1.4 for detail on the Group's actual performance for 2019.
(3) Based on an indicative share price of $25 and assuming full vesting of all rights, shares and cash awards, and excluding the value of any dividends on unvested
shares.
2019 Annual Financial Report
47
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
2019 Annual Variable Reward received by Executives
The table below shows both the maximum Annual VR opportunity (the aggregate Annual VR at target opportunity for Executives
was $9.6 million)(1) and the amount of actual Annual VR determined for Executives in relation to 2019 performance. While
Executives progressed performance against goals in 2019, it would not have been sufficient to achieve either their Annual VR
target or maximum opportunity, and having considered overall collective accountability, the board has determined that Annual
VR be reduced to zero.
Maximum Annual VR
VR deferred
% of maximum Annual
opportunity Total Annual VR Annual VR cash
rights
VR opportunity
Name
Executives
Mike Baird
Sharon Cook
Shaun Dooley
David Gall
Anthony Healy
Gary Lennon
Angela Mentis
Rachel Slade
Patrick Wright
Former Executives
Lorraine Murphy
Andrew Thorburn
Total
$
1,800,000
945,000
1,050,000
1,800,000
1,800,000
1,650,000
1,800,000
1,350,000
2,250,000
N/A
N/A
14,445,000
$
0
0
0
0
0
0
0
0
0
0
0
0
$
0
0
0
0
0
0
0
0
0
0
0
0
$
0
0
0
0
0
0
0
0
0
0
0
0
%
0
0
0
0
0
0
0
0
0
N/A
N/A
0
Section 1.8 set out details of the LTVR awarded for 2019.
Employee conduct and risk management
The Board is improving employee conduct and the Group’s related risk management practices. The Remuneration Committee in
partnership with the Risk Committee has strengthened governance, oversight and rigour around employee conduct. Incidents,
breaches of NAB's Code of Conduct, breaches of policy and misconduct are reported to these committees on a regular basis with
consequences ranging from further training or coaching, adjustments to variable reward outcomes, formal warnings or
termination. In each case, judgment is exercised by senior management as to the appropriate consequence, based on the
relevant circumstances.
In 2019, there were 1,278 Code of Conduct breaches identified that resulted in formal consequences (compared with 1,215 in
2018). Formal consequences included:
• 292 employees leaving NAB (2018: 307)
• 986 employees (excluding Executives) receiving coaching or other remedial actions, including the loss of variable reward
(2018: 908).
In addition, equity forfeitures of $3.69 million, excluding Executives (2018: $0.81 million), occurred as a result of Code of Conduct
breaches and revisiting previous variable reward decisions.
As a result of management’s increased focus on risk management and risk assessment processes, 3,321 employees were
recognised for their positive contribution to risk culture and living NAB's values everyday while 1,706 employees (2018: 369)
participating in the Group Variable Reward Plan were identified as not having met risk expectations and accountabilities.
The Board supports the introduction in 2020 of an enhanced Group framework to manage employee conduct and ensure our
behavioural standards are upheld so customers can have confidence our people do the right thing.
(1) Total maximum annual VR opportunity assumes all individual and Group performance scores set at the highest possible level, while at aggregate Annual VR at
target opportunity assumes all individual and Group performance scores set at target. See Section 1.4 for detail on the Group's actual performance for 2019.
48
National Australia Bank
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
Section 1 - Executive remuneration framework
1.1 Changes to the Executive remuneration framework
The new Executive remuneration framework returns to a traditional variable reward plan with two separate components - Annual
Variable Reward (VR) and Long Term Variable Reward (LTVR). The framework is designed to:
• better respond to and reflect shareholder and community expectations
• set globally competitive remuneration that will attract and retain a high calibre executive team from within financial services
and critical support industries such as technology and risk
• reward Executives for long-term value creation and align the experience of shareholders and Executives more closely
• provide the right balance of non-financial and financial measures to drive exceptional customer service, deliver shareholder
value and progress NAB's desired culture.
The key changes are:
Annual
Variable
Reward
• From 2019 Annual VR for:
– the Group CEO will range from 0% to 150% of FR
– those in Control Roles will range from 0% to 105% of FR
– all other Executives will range from 0% to 150% of FR.
• The amount of Annual VR awarded will depend on Group and individual performance (their balanced scorecard) and the
values and behaviours demonstrated over the performance year.
• Annual VR is now delivered as 50% cash and 50% deferred rights, with 12.5% eligible to vest at the end of year 1, year 2, year 3
and year 4.
• Dividends are no longer paid during deferral periods on deferred equity. A dividend equivalent amount will be paid at the end
of the deferral period if deferred rights are not forfeited.
• All deferred rights continue to be subject to malus and VR cash and vested deferred rights continue to be subject to clawback.
Group
• Group and individual performance measures continue to align with our remuneration principles of ensuring rewards are
performance
supported by sustainable, risk-adjusted long-term performance. They are designed to be simple, and align with the Group
(One NAB
strategy and culture.
Score)
• The measures which support the Group’s One NAB Score (and their relative weighting) are:
– Return on Total Allocated Equity (risk-adjusted financial): 50%
– Cash earnings (financial): 25%
– Net Promoter Score (non-financial): 12.5%
– Transformation (two thirds non-financial / one third financial): 12.5%
• The One NAB Score is subject to Board discretion.
Individual
• A balanced scorecard has been retained as the basis for assessing individual Executive performance to determine Annual VR.
performance
• Each Executive’s scorecard has five equally weighted goals - customer, risk, people, transformation and financial.
Long Term
• A specific long-term variable reward has been introduced that will be determined and awarded by the Board independent of
Variable
Reward
Annual VR decisions. The LTVR is designed to encourage long-term decision making critical to creating long-term value for
shareholders, and will be granted subject to minimum individual performance requirements being met by the Executive. The
value of the grant for:
– the Group CEO is 130% of FR
– those in Control Roles, 100% of FR
– all other Executives, 130% of FR.
• The LTVR will only vest at the end of a 4 year performance period if a relative total shareholder return hurdle is achieved. The
actual value of the LTVR is subject to the level of achievement against the performance hurdle and NAB's share price at the
time of vesting.
• LTVR is delivered as performance rights. No dividend equivalent payment will be made for LTVR awards that vest.
• All performance rights will be subject to malus and clawback.
Deferral
• The new framework delivers less variable reward as cash and more as deferred rights:
– a minimum of 50% of total remuneration is now deferred (at maximum opportunity)
– at least one third of deferred variable reward is now subject to long-term relative shareholder return performance.
Board
The Board has increased the rigour and discipline in determining Executive performance and its impact on remuneration
discretion
outcomes, particularly around non-financial risks and customer outcomes. The Board has absolute discretion to adjust variable
reward down or to zero, where appropriate if it determines under-performance or failings in risk, conduct, reputation, values or
sustainability measures have occurred. This can be done:
• when determining the initial value of variable reward
• by reducing the value of deferred variable reward during the deferral or performance period, including at vesting
• through clawback of paid or vested variable reward.
2019 Annual Financial Report
49
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
Reward mix
The new framework delivers less variable reward as cash
and more as deferred equity (a minimum of 50% of total
remuneration at maximum opportunity), with at least 33%
of the maximum total reward opportunity subject to long-
term shareholder return performance.
The figure shows the change in reward mix at maximum
opportunity from 2018 for the Group CEO, Control Roles
and other Executives. The Chief People Officer role had a
reward mix in 2018 the same as the other Executives. The
new Chief People Officer who commenced in October 2019
has the 2019 reward mix shown for Control Roles.
The actual remuneration mix is subject to Group and
individual performance each year.
On introducing the combined variable reward plan in 2018, a discount to the face value of the 2017 LTI award was applied
recognising that performance conditions were more likely to be met. In moving back to Annual VR and LTVR arrangements for
2019, the maximum opportunity values have been set with reference to comparable major Australian peers and also recognises
that performance conditions for the LTVR are less certain. In 2018, the un-hurdled maximum variable reward opportunity for
Executives, other than Control Roles and the Group CEO, was 255% of FR. Under the new framework, the maximum Annual VR
opportunity is 150% of FR and the hurdled LTVR is 130% of FR (see above).
1.2 Timeline for delivery of reward
At maximum opportunity the new framework defers more VR for longer (up to four years), with at least a third of the
opportunity subject to achieving long-term shareholder returns. This rewards long-term decisions critical to creating sustainable
value for customers and shareholders. Deferring remuneration in the form of equity also aligns Executive remuneration more
closely with the shareholder experience.
The Board can determine that all or any unvested deferred variable reward be forfeited at any time. It can also clawback paid or
vested variable reward if performance is not delivered over the long-term or for other matters including risk, conduct,
reputation, values and sustainability.
1.3 How an Executive's Annual Variable Reward outcome is calculated
Each Executive’s Annual VR outcome for the financial year is calculated as:
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National Australia Bank
LTVR PERFORMANCE RIGHTSANNUAL VR DEFERRED RIGHTSANNUAL VR CASHFIXED REMUNERATION45%20%34%30%20%25%26%2018GROUP CEO201917%33%38%17%26%33%36%CONTROL ROLES2018201943%29%28%OTHER EXECUTIVES2018201920%34%20%26%ELIGIBLE FOR PAYMENT OR VESTINGFIXED REMUNERATIONLONG TERM VRANNUAL VRBASE SALARY + SUPERCASHDEFERRED RIGHTSPERFORMANCE RIGHTSPERFORMANCE YEARYEAR 1YEAR 2YEAR 3YEAR 450%12.5%12.5%12.5%12.5%100%ANNUAL VARIABLE REWARDxx=FR x Annual VR target %The Executive’s performance over the financial yearConduct andvaluesThe Group’s performance over the financial year50% cash50% deferred rights that vest equally from years 1 to 4Risk, reputation, shareholder, sustainability and environmentADJUSTED FORADJUSTED FORTARGET OPPORTUNITYINDIVIDUAL SCOREONE NAB SCORESection 1.4Section 1.5Section 1.3Section 1.6 REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
An Executive’s actual Annual VR outcome will range from zero to their maximum Annual VR opportunity. The actual value of the
Annual VR depends on both the Group's performance and the Executive’s individual performance for the financial year, both of
which are assessed against performance goals and determined by the Board (see Sections 1.4 and 1.5). The Board has discretion
to adjust any Annual VR outcome as it sees fit, including for risk, conduct, reputation, values and sustainability (see Section 2.3).
If an Executive and the Group performs significantly above expectations, the Executive could earn their maximum Annual VR.
Similarly, if the Executive or the Group fails to meet the goals set at the beginning of the financial year, their Annual VR outcome
will be less, possibly zero. If the Group and the Executive achieve their goals to the satisfaction of the Board, they will be awarded
their target opportunity.
Position
Group CEO(1)
Control Roles
All other Executives
Annual VR Target
(% of FR)
100%
70%
100%
Maximum Annual VR opportunity
(% of FR)
150%
105%
150%
(1) The new Group CEO, Ross McEwan, will commence on a fixed remuneration of $2.5 million per annum as advised in the ASX announcement issued on 19 July
2019.
No Annual VR has been awarded to Executives for 2019. In 2019, our Executives progressed performance against our key
customer, risk, people and transformation metrics and delivered solid underlying business performance. But financial results
have been impacted by substantial provisions made for customer-related remediation. This year’s outcomes also reflect collective
accountability for NAB’s shortfalls across customer, trust and reputation matters.
1.4 Group Performance and the One NAB Score
The One NAB Score is a measure of the Group’s performance over the financial year.
The Board determines the One NAB Score based on the achievement of performance measures set by the Board at the beginning
of the financial year. These include risk-adjusted financial, financial and non-financial measures which support the Group's
longer-term strategy. The measures and relative weightings determined by the Board for 2019 were:
The final One NAB Score is subject to Board discretion considering qualitative matters such as the quality of the financial results,
management of risk, reputation, shareholder expectations, sustainability and the environment.
For 2019, progress against Group performance measures fell short of expectations. Specifically, cash earnings and ROTAE were
impacted by substantial provisions made for customer-related remediation. Our customer measure of NPS improved and saw
NAB ranked first among our peers, but fell short of our target. Transformation milestones were met, culminating in a successful
second year of the acceleration of the One NAB Plan.
The Board has determined that the One NAB Score be reduced to 0% for Executives to reflect overall collective accountability for
Group performance and our shortfalls across customer, trust and reputation matters.
The following table shows the determination of the One NAB Score before the application of Board discretion.
Performance measure
Weighting Outcome
Result
ROTAE
Cash earnings
50%
25%
Not met
• 9.9% against plan of 13.3%
Not met
• $5.10 billion against plan of $6.72 billion
Net Promoter Score(1)
12.5%
Below target • Priority Segments NPS score of -14 is below the target score of -13 (August 2018 to
August 2019)
Transformation
12.5%
At target
• Key Transformation milestones for 2019 have been assessed by the Board as met
Board adjusted One NAB
Score for Executives
0%
• The Board adjusted the One NAB Score to 0% for Executives reflective of the impact
of the Group's financial results and the collective accountability for shortfalls across
customer, trust and reputation matters
(1) Priority Segments NPS is a simple average of the NPS scores of four priority segments: NAB defined Home Owners (Home Loan @ Bank), Investors, Small
Business ($0.1 million -<$5 million) and Medium Business ($5 million -< $50 million). The Priority Segments NPS data is based on six month moving averages
from DBM Consumer Atlas and BFSM Research.
2019 Annual Financial Report
51
RETURN ON TOTAL ALLOCATED EQUITY(ROTAE)CASH EARNINGSNET PROMOTER SCORE50%25%12.5%12.5%WEIGHTINGWEIGHTINGWEIGHTINGWEIGHTINGTRANSFORMATION(Risk adjusted measure)(Financial measure)( Two thirds non-financial measures / one third financial measures)( Non-financial measure) REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
More broadly, the Board is mindful of the need to continue to attract and retain people at all levels and has been conscious to
reward the majority of employees who have contributed significantly to our solid underlying business performance and the
progress NAB has made against our customer and transformation goals. For the majority of employees, the Board determined a
One NAB Score of 50%. This acknowledges the fact that the majority of employees have lifted the bar on customer service and
progress towards NAB's desired culture, but reflects the impact of matters where NAB has fallen short on risk, conduct,
reputation and values.
1.5 Individual Score
At the start of the financial year, each Executive has balanced scorecard goals set which reflect the Board’s performance
expectations for them for the year. The goals consist of Group, divisional and individual measures that focus on improving the
performance and behaviours that drive exceptional customer service, deliver long-term sustainable returns and progress NAB’s
desired culture. Each Executive’s scorecard complements their accountabilities as set out in their respective BEAR accountability
statements.
For 2019, there were five equally weighted goals in each Executive's scorecard:
At the end of the financial year, the Board assesses each Executive’s performance against their balanced scorecard. The Board
also considers the Executive's conduct and the extent to which they have upheld NAB’s values and behaviours (Passion for
customers, Be bold, Win together, Respect for people and Do the right thing).
The Board then determines an Individual Score for each Executive (using a five point performance rating scale: Not Achieved,
Partially Achieved, Achieved, Highly Achieved or Outstanding). The performance rating is then translated into an individual score
(expressed as a percentage of target Annual VR) that is used to calculate the Executive’s Annual VR outcome for the financial year.
The performance measures below are the elements that make up the individual Executives' balanced scorecard for 2019.
Individuals are assessed across each of these elements as it applies to them. Executives' scorecards contained a mix of Group,
divisional and individual measures. Although progress has been made against many of the measures, there was no Annual VR
awarded to Executives in respect of 2019 due to the One NAB Score being reduced to 0%.
52
National Australia Bank
CUSTOMER20%WEIGHTINGRISK20%WEIGHTINGPEOPLE20%WEIGHTINGTRANSFORMATION20%WEIGHTINGFINANCIALS20%WEIGHTING REMUNERATION REPORT (CONTINUED)
REPORT OF THE DIRECTORS
The Executive is assessed against each goal with 20% received on achieving target, up to a maximum of 30%. The overall
outcome for the Executive will be between 0% and 150%, with 100% awarded for at target performance. The table below
provides the broader assessment of individual Executive performance in 2019 and demonstrates differentiated performance
outcomes across Executives in the ranges shown below.
Performance measure
outcome(1)
Commentary
Executives'
Customer
10% to 25% • NAB’s Priority Segments NPS score of -14 was two points stronger than 2018, but one point behind
• Priority Segments
NPS(2)
• Operational NPS
• Complaint
management
target of -13 (August 2018 to August 2019). As at the end of 2019, NAB was placed equal first
amongst major banks.
• Operational NPS (measuring customers' relationship with NAB) delivered positive results across all
components that make up the Operational NPS goal.
• NAB's Institutional Relationship Strength Index Ranking finished the year 12 points ahead of target,
maintaining its number one ranking.
• NAB reduced the top three categories of customer complaints by 9.5% compared with 2018, but did
not achieve the target reduction of 25%.
Risk
20%
• Material progress has been made to improve the Group’s risk profile, particularly in the areas of risk
• Adherence to risk
frameworks
culture, financial crime and responsible lending, but it is not where NAB want and need it to be.
• Continued focus, attention and progress is required to deliver on customer remediation programs,
improvements in the control environment and other priority risk programs (including financial
crime and compliance).
• Progress has been made on customer remediation following the establishment of the Centre for
Customer Remediation and a Group-wide comprehensive customer complaints review.
• Progress has been made on governance and risk transformation initiatives identified through NAB’s
self-assessment to APRA.
People
0% to 20% • At 54%, NAB’s overall employee engagement is unchanged from 2018, and falls short of the top
• Employee
engagement
• Gender diversity
quartile benchmark (69%). While this is far from NAB's aspiration, it reflects the significant
challenges faced during the year.
• Gender equality continues to be the tilt of NAB's Diversity and Inclusion strategy, and while results
are trending positively compared with 2018, they did not meet 2019 targets.
Transformation
10% to 25% • Completed year 2 of the 3 year acceleration of the One NAB Plan transformation agenda, including
• Strategy milestones
and outcomes
meeting year 2 simplification and sustainable cost savings targets. Achievements include:
– $800 million of cumulative cost savings and a cumulative reduction of 3,713 roles since
September 2017
– revenue per business banker increasing 20%
– 30% reduction in over-the-counter transactions and 17% reduction in call centre volumes
– Product numbers reduced by 30%
– IT legacy applications reduced by 11% and 19% migrated to the cloud
– UBank customer numbers increased by 40% over the two years to September 2019.
Financials
0% to 20% • ROE declined 180 basis points to 9.9% reflecting customer-related remediation provisions, the
• Cash earnings
• ROTAE
• Productivity and
investment benefits
• Balance sheet
strength
change in policy on capitalised software, higher credit impairment charges and higher levels of
equity.
• Cost savings of $480 million were achieved (reduction of 1,816 roles).
• Achieved broadly flat expense growth for 2019 vs. 2018 (excluding large notable items).
• Cost to income ratio decreased 30 basis points to 44.3% (excluding large notable items), reflecting
productivity savings from the Group’s transformation program.
• The Group remained well capitalised during the year to September 2019 with a CET1 ratio of
10.38%. The Group expects to achieve APRA's 'unquestionably strong' capital benchmark from
1 January 2020.
• Cash earnings decreased by $605 million or 10.6%. Cash earnings excluding large notable items
increased by $52 million or 0.8%.
Overall outcome for
individual Executives
50% to 100%
• Individual outcomes are reflective of the Executive's performance against their goals which include
specific Divisional and individual goals.
(1) The outcome range for each goal is 0% to 30% with an overall outcome range from 0% to 150%. Refer Section 1.3 for how the overall outcome for the
individual Executives impacts their Annual VR outcome.
(2) Priority Segments NPS is a simple average of the NPS scores of four priority segments: NAB defined Home Owners (Home Loan @ Bank), Investors, Small
Business ($0.1 million -<$5 million) and Medium Business ($5 million -< $50 million). The Priority Segments NPS data is based on six month moving averages
from DBM Consumer Atlas and BFSM Research.
2019 Annual Financial Report
53
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
1.6 Executive Annual Variable Reward 2019 outcomes
No Annual VR has been awarded to Executives in 2019. In 2019, our Executives progressed performance against our key
customer, risk, people and transformation metrics and delivered solid underlying business performance. But financial results
have been impacted by substantial provisions made for customer-related remediation. This year’s outcomes also reflect collective
accountability for NAB’s shortfalls across customer, trust and reputation matters.
1.7 Realised remuneration
The table below is a voluntary non-statutory disclosure that shows the realised remuneration each Executive received (or was
entitled to receive) during 2019. The amounts shown include fixed remuneration, Annual VR cash to be paid in respect of 2019,
the previous years' deferred VR which vested, and other equity awards that vested during 2019. The value of equity awards is
calculated using NAB's closing share price on the vesting or forfeiture or lapsing date. Not all amounts have been prepared in
accordance with accounting standards and this information differs to the statutory remuneration table (in Section 5.1) which
shows the expense for vested and unvested awards in accordance with accounting standards.
2019 related remuneration
remuneration
Prior years' related and other
Fixed
(1) Annual VR
Total
Deferred VR
(2) Other vested/
(3)
Equity
(4)
remuneration
cash
$
1,142,284
933,181
1,068,090
1,230,625
1,225,588
1,141,153
1,676,828
887,952
1,628,608
423,560
872,806
$
-
-
-
-
-
-
-
-
-
-
-
$
1,142,284
933,181
1,068,090
1,230,625
1,225,588
1,141,153
1,676,828
887,952
1,628,608
423,560
872,806
vested
paid
remuneration
$
$
forfeited/
lapsed
$
93,562
38,112
109,561
363,262
499,225
437,411
586,490
68,846
226,932
12,868
8,176
12,277
-
16,175
10,482
25,765
245,920
701,256
(402,200)
(255,509)
(366,894)
(850,400)
(532,691)
(620,135)
(238,773)
-
-
323,630
1,126,860
427,504
1,345,594
(2,083,537)
(21,712,216)
Name
Executives
Mike Baird
Sharon Cook
Shaun Dooley
David Gall
Anthony Healy
Gary Lennon
Angela Mentis
Rachel Slade
Patrick Wright
Former Executives
Lorraine Murphy (for part year)
Andrew Thorburn (for part year)
Includes cash salary, cash value of non-monetary benefits and superannuation consistent with the statutory remuneration table in Section 5.1.
(1)
(2) Amounts related to prior year variable rewards which vested or were paid during 2019. Includes deferred STI amounts from the 2016 Tranche 2 and 2017
Tranche 1 STI program which fully vested in November 2018.
(3) Other awards or remuneration which vested or were paid during 2019. Includes General Employee Share Offers granted in March 2016 to Shaun Dooley,
Anthony Healy and Gary Lennon which fully vested in March 2019; the third tranche of Rachel Slade's commencement award which fully vested in October
2018; and the fourth tranche of Patrick Wright's commencement award which was paid in March 2019. Dividends received by Executives during 2019 for any
unvested share awards are also included. The amount is calculated for the 2018 final dividend of 99 cents (record date of 9 November 2018) and the 2019
interim dividend of 83 cents (record date of 15 May 2019). Both dividends were fully franked. The amount for Andrew Thorburn and Lorraine Murphy relates to
the payments and benefit they received on cessation of employment. It includes a termination payment in accordance with their contracts and other separation
benefits (see Executive exit arrangements above).
(4) The amounts include the value of lapsed 2013 LTI performance rights for the eligible Executives which were fully forfeited in December 2018; Customer
Advocacy Incentive shares granted to Shaun Dooley in February 2017 which were fully lapsed in December 2018; LTI performance rights, deferred STI rights and
deferred VR cash that were lapsed on cessation of employment for Andrew Thorburn; LTI performance rights that were fully lapsed on cessation of
employment for Lorraine Murphy; and deferred STI performance rights and VR deferred shares fully or partially forfeited in May 2019 for the majority of the
2018 Executive team.
54
National Australia Bank
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
1.8 Long Term Variable Reward
For 2019 and going forward, Executives are eligible for an LTVR award each year. The key features of the LTVR award to be
awarded in respect of 2019 are:
Feature
Purpose
Description
LTVR awards are granted by the Board to encourage long-term decision making critical to creating long-term value for
shareholders. They are determined and awarded independently from Annual VR decisions.
Participants
Executives (the Group CEO and Chief People Officer will not receive an LTVR award in respect of 2019 as they
Award value(1)
The LTVR award values are:
commenced employment after 30 September 2019).
• Control roles - 100% of FR
• Other Executives - 130% of FR
The LTVR will be granted to the Executive subject to minimum individual performance requirements being met by the
Executive. The Board assessed all Executives as meeting the minimum individual performance requirements for 2019
and determined that all Executives would receive the 2019 LTVR grant in full. The actual value delivered to an Executive
is subject to the level of achievement against the performance hurdle and NAB's share price at the time of vesting. This
may be zero if the performance hurdle is not achieved.
Instrument
Performance rights. Each right entitles the Executive to receive one NAB share at the end of the four year performance
Allocation approach
A face value allocation approach is used.
period, subject to meeting the performance hurdle.
The number of performance rights to be granted is calculated by dividing the LTVR award value by the weighted
average share price over the last five trading days of the financial year.
The weighted average share price over the five trading days used for the 2019 financial year is $29.85.
Life of the award
The award is scheduled to be granted in February 2020. The performance rights have a minimum life of approximately
Performance period
Four years from 15 November 2019 to 15 November 2023.
four years from February 2020 to December 2023.
Performance
hurdle
TSR measures the return that a shareholder receives through dividends (and any other distributions) together with
capital gains over a specific period. For the purposes of calculating TSR over the performance period, the value of the
relevant shares on the start date and the end date of the performance period is based on the volume weighted average
Vesting schedule
NAB's TSR is measured against the TSR Peer Group to determine the level of vesting:
price of those shares over the 30 trading days up to and including the relevant date.
NAB's relative TSR outcome
Level of vesting
Below the 50th percentile
At the 50th percentile
0%
50%
Between the 50th and 75th percentiles
Pro-rata vesting from 50% to 100%
At the 75th percentile
100%
TSR Peer Group
AMP Limited, Australia and New Zealand Banking Group Limited, Bank of Queensland Limited, Bendigo & Adelaide
Bank Limited, Commonwealth Bank of Australia, Macquarie Group Limited, Suncorp Group Limited, Westpac Banking
Dividends
No dividends paid.
Corporation.
Board discretion
Board discretion applies to forfeit grants for qualitative matters including risk, reputation, conduct and performance
which are also taken into consideration in the subsequent vesting of the LTVR award as relevant.
The Board has increased the rigour and discipline in determining Executive performance and its impact on
remuneration outcomes, particularly around non-financial risks and customer outcomes. The Board has discretion to
adjust variable reward if it determines under-performance or failings in risk, conduct, reputation, values or
sustainability measures have occurred. This can be done:
• by reducing the value of the LTVR granted during the performance period, including at vesting
• through clawback of vested LTVR.
More details on LTVR performance rights terms and conditions are described in Sections 5.6 and 2.3.
(1) On introducing the combined variable reward plan in 2018, a discount to the face value of the 2017 LTI award was applied recognising that performance
conditions were more likely to be met. In moving back to Annual VR and LTVR arrangements for 2019, the maximum opportunity values have been set with
reference to comparable major Australian peers and also recognises that performance conditions for the LTVR are less certain. In 2018, the un-hurdled
maximum variable reward opportunity for Executives, other than Control Roles and the Group CEO, was 255% of FR. Under the new framework, the maximum
Annual VR opportunity is 150% of FR and the hurdled LTVR is 130% of FR (see Section 1.1).
Refer to Section 3(a) for details of the previous LTI program that was tested during 2019.
2019 Annual Financial Report
55
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
Section 2 - Remuneration governance and framework
2.1 The role of the Remuneration Committee
The Remuneration Committee supports the Board to
oversee NAB’s remuneration policies and practices with the
objective that they:
• Support the Group’s business strategy, and meet the
expectations and requirements of shareholders,
customers and regulators.
• Responsibly reward individuals for performance.
• Encourage behaviour that is ethical, delivers sound
customer outcomes, supports NAB’s long-term financial
soundness, and is aligned with NAB’s Group risk
management framework, purpose and values.
• Are reasonable, fair, and in line with governance, legal
and regulatory requirements.
The principal activities of the Remuneration Committee include:
• Considering Group performance (with the assistance of the Board Risk Committee) and making a One NAB Score
recommendation to the Board, taking into account the overall health of the Group’s financial results against the risk
management framework, risk appetite and other qualitative factors.
• Considering individual Executive performance in the context of Group performance (with the assistance of the Board Risk
Committee), and recommending to the Board annually the fixed remuneration and variable reward outcomes for the Group
CEO, Executives and certain other senior management.
• Monitoring and making recommendations regarding deferred equity vesting outcomes.
• Overseeing NAB’s employee conduct management framework and consequence management outcomes (including impact on
remuneration outcomes).
• Reviewing (at least annually) the effectiveness of the Group’s Remuneration Policy and strategy.
The Charter for the Committee can be found on the NAB website at http://www.nab.com.au/about-us/corporate-governance.
2.2 Other activities of the Committee in 2019
In 2019, the Remuneration Committee invested significant time in undertaking a comprehensive review of NAB’s Executive
remuneration strategy, governance and framework in response to concerns raised by shareholders in 2018. This included
consultation with key stakeholders to fully understand their concerns and discuss the principles of NAB's proposed changes to
the Executive remuneration framework.
Remuneration design and governance in the financial services industry continues to be dynamic, experiencing increased
stakeholder scrutiny and significant regulatory change. Recognising the pace of change, the Remuneration Committee has
assisted the NAB Board by undertaking the following additional activities in 2019:
• Overseeing the Group’s response to remuneration related matters raised in NAB’s self-assessment to APRA, and remuneration
related findings of the Royal Commission.
• Overseeing an independent review of the effectiveness of the Group’s Remuneration Policy. Throughout 2020, the
Remuneration Committee will continue to monitor progress on the actions recommended by the independent reviewer.
• Overseeing enhancements to the detection and review of employee conduct management and consequence management
outcomes.
• Overseeing the Group’s review of APRA’s draft Prudential Standard CPS 511 Remuneration and response to APRA’s consultation
process.
• Considering select strategic people topics to facilitate a deeper focus on the Group’s People Strategy during a time of
significant transformation.
• Increasing the rigour and discipline in determining Executive performance and its impact on remuneration outcomes,
particularly in relation to non-financial risks and customer outcomes.
• Overseeing improvements to the risk assessment process, including:
– the introduction of a five-point risk assessment rating scale to promote and recognise positive risk behaviours and
contributions to cultural change
– enhanced guidance to all employees on how to assess risk behaviours and outcomes and the impact on overall
performance and remuneration outcomes of not fully meeting risk expectations
– the oversight by divisional Chief Risk Officers of the risk assessments of senior leaders.
56
National Australia Bank
SHAREHOLDERSNAB BOARDMANAGEMENTProvides data and recommendations on performance, financial health, customer and risk matters which may affect remuneration. The Group CRO attends both committees.REMUNERATION COMMITTEEOversees the Group’s remuneration policies and practices.RISK COMMITTEEProvides data and guidance to assist the Remuneration Committee.EXTERNAL CONSULTANTOversees the Group’s risk profile and risk management practices, including risk issues which may impact remuneration outcomes.THE REMUNERATION GOVERNANCE FRAMEWORK REMUNERATION REPORT (CONTINUED)
REPORT OF THE DIRECTORS
• Ensuring the Executive remuneration framework accounts for the objectives of the newly formed Board Customer Committee
(whose objective is to oversee a significant improvement in the importance given to the voice of the customer in NAB’s
decision-making and a more intense focus on customer outcomes).
• Considering appropriate exit and appointment arrangements for incoming and departing Executives (including Executives
acting on an interim basis), and making recommendations to the Board.
• Enhancing the Committee's oversight of the remuneration arrangements for material risk takers and other senior executives.
• Continuing to monitor the impact of the changes made in response to the Sedgwick Report following full implementation of
the retail banking remuneration related recommendations in 2018.
In 2019, external remuneration consultants did not make any remuneration recommendations to the Remuneration Committee.
2.3 Remuneration plan governance
The following arrangements apply to all employees, including Executives, except as specified.
Board discretion
The Board regularly reviews Group performance for risk, reputation, conduct and performance considerations. The
Board's review may include the Group's quality of financial results, shareholder experience and other sustainability
metrics relevant at the time.
Board discretion may apply to any employee across the Group, by division, by role or individual, depending on
circumstances.
The Board has absolute discretion to adjust Rewards(1) down, or to zero, where appropriate (including because of
Malus(2)). This includes:
• determining the initial value of Rewards
• reducing the value of deferred Rewards during the deferral or performance period, including at vesting
• through clawback of paid and vested Rewards.
The Board has absolute discretion to extend the deferral period at any time for any Rewards. For example, the Board may
do so if the Board has reason to believe that an employee may not meet conduct standards or comply with their
accountability obligations under the Banking Act 1959 (Cth) or any other analogous or similar legislation or regulations.
Clawback
Clawback (recovery of paid and vested Rewards) may apply to Executives, other accountable persons, some UK employees
and other employees.
Forfeiture or lapsing Unvested Rewards will be forfeited or lapsed if the:
• employee resigns
• the Board determines that some, or all, of the unvested Rewards be forfeited on cessation of employment with the
Group
• the Board determines that the unvested Rewards should be forfeited due to conduct standards not being met as set
out in the NAB Code of Conduct
• the Board determines that the unvested Rewards will be forfeited following the occurrence of a ‘Malus Event’(2) and/or
• the Board exercises its discretion as described above.
Executive mandatory
Executives are required to accumulate and retain NAB equity(3) over a five year period from commencement as KMP to an
shareholding
requirement
amount equal to:
• two times fixed remuneration for the Group CEO
• one times fixed remuneration for the Executives.
Conduct standards
Vesting and grant of all forms of Rewards are subject to the employee meeting conduct standards as set out in NAB's
Code of Conduct (NAB's Code of Conduct is found online at: www.nab.com.au).
Hedging policy
Directors and employees are prohibited from protecting the value of their equity Rewards by hedging. Further details are
available in the Group Securities Trading Policy, found online at: www.nab.com.au.
Change of control
The Board generally has discretion to determine the treatment of unvested Rewards at the time a change of control event
occurs. Vesting of Rewards will not be automatic or accelerated and the Board will retain discretion in relation to the
vesting outcome including absolute discretion to forfeit all Rewards.
(1)
In this Section, the term ‘Rewards’ refers to all forms of variable reward including cash provided under a variable reward plan, deferred variable reward (cash
and equity), deferred variable reward to be paid or granted, LTVR performance rights, and any variable rewards granted in previous years.
(2) Examples include where the Executive has failed to comply with their accountability obligations under BEAR, has engaged in fraud, dishonesty, gross
misconduct, behaviour that may negatively impact the Group’s long-term financial soundness or prudential standing or behaviour that brings NAB into
disrepute, or has materially breached a representation, warranty, undertaking or obligation to the Group.
Includes NAB shares held by the Executive, equity received under NAB’s employee equity plans that has vested and is retained by the Executive, and unvested
deferred STI performance rights, VR deferred shares and VR deferred rights.
(3)
2019 Annual Financial Report
57
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
Section 3 - Long Term Incentive outcomes
(a) Testing of 2013 and 2014 LTI awards
The table below shows the performance of the Group against the LTI performance hurdles for the 2013 and 2014 LTI awards
which were tested during 2019. Both awards had two TSR performance hurdles. Vesting for both hurdles was based on NAB’s TSR
result against a defined peer group. The vesting schedule was: 50% vesting at the 50th percentile on a straight line scale up to
100% vesting at the 75th percentile or better. There was no vesting below the 50th percentile.
The performance hurdles for the 2013 LTI, measured over a five year performance period, were not achieved and therefore none
of the 2013 LTI performance rights vested during 2019. NAB's TSR over the performance period was 6.4%. The first test of this
award in 2018 also resulted in no vesting. Accordingly, this award has been fully lapsed with no value being delivered to any
Executives.
The performance hurdles for the 2014 LTI, measured over a four year performance period, were not achieved and therefore none
of the 2014 LTI performance rights vested. NAB's TSR over the performance period was 6.4%. The 2014 LTI performance rights are
subject to a final test over a five year performance period (10 November 2014 to 10 November 2019) in November 2019.
Details of the LTI awards granted in respect of previous years, including 2013 and 2014, can be found in NAB's previous
remuneration reports which are available at www.nab.com.au/about-us/shareholder-centre/financial-disclosuresandreporting/
annual-reports-and-presentations.
Percentile
% of rights
% of rights
% of rights
LTI Award
Performance hurdle
Performance period
ranking
vested
lapsed
remaining
2013
2013
2014
2014
TSR relative to S&P/ASX50 (50%)(1)
11/11/2013 to 11/11/2018
TSR relative to Top Financial Services (50%)(2)
11/11/2013 to 11/11/2018
TSR relative to S&P/ASX50 (50%)(3)
10/11/2014 to 10/11/2018
TSR relative to Top Financial Services (50%)(2)
10/11/2014 to 10/11/2018
35th
43rd
20th
43rd
-
-
-
-
100
100
-
-
-
-
100
100
(1) 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 as at 1 October 2013. The following companies were de-listed during the performance period and have been excluded from the performance
hurdle test: Asciano, Novion Property Group (formerly CFS Retail PR. TST. Group), Toll Holdings, Twenty-First Century Fox CDI.'B' (formerly News Corp CDI. 'B'),
Westfield Group and Westfield Retail Trust. Under the terms of the award, there is no substitution for de-listed companies.
(2) 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.
(3) 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 as at 1 October 2014. The following companies were de-listed during the performance period and have been excluded from the performance
hurdle test: Asciano, Novion Property Group (formerly CFS Retail PR. TST. Group), Toll Holdings and Westfield. Under the terms of the award, there is no
substitution for de-listed companies.
(b) Group historical performance
The table below shows the Group's annual financial performance over the last five years and its impact 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)
Cash earnings ($m)
Dividends paid per share
Company share price at start of year
Company share price at end of year
Absolute Total Shareholder Return for the year
2019
178.9
5,097
$1.82
$27.81
$29.70
13.3%
2018
215.6
5,702
$1.98
$31.50
$27.81
(5.4%)
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%)
58
National Australia Bank
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
Section 4 - Key Management Personnel
(a) Key Management Personnel in 2019
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 2019 were:
Name
Non-executive directors
Ken Henry
Philip Chronican(1)
David Armstrong
Peeyush Gupta
Anne Loveridge
Geraldine McBride
Douglas McKay
Ann Sherry
Anthony Yuen
Executives
Mike Baird
Sharon Cook
Shaun Dooley
David Gall
Anthony Healy
Gary Lennon(2)
Angela Mentis
Rachel Slade
Patrick Wright
Position
Director, Chairman
Director / Interim Group Chief Executive Officer and Chairman-elect
Director
Director
Director
Director
Director
Director
Director
Chief Customer Officer - Consumer Banking
Chief Legal and Commercial Counsel
Group Chief Risk Officer
Chief Customer Officer - Corporate and Institutional Banking
Chief Customer Officer - Business and Private Banking
Group Chief Financial Officer (CFO)
Managing Director and CEO of Bank of New Zealand
Chief Customer Experience Officer
Chief Technology and Operations Officer
Executives acting on an interim basis
Greg Braddy(3)
Julie Rynski(4)
Former Executives
Lorraine Murphy(5)
Andrew Thorburn(6)
Group CFO (acting from 21 December 2018 to 28 February 2019)
Chief People Officer (acting from 30 March 2019 to 30 September 2019)
Chief People Officer (to 29 March 2019)
Executive Director and Group Chief Executive Officer (to 28 February 2019)
Term as KMP
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Full year
Part year
Part year
Part year
Part year
(1) Philip Chronican was a non-executive director until 28 February 2019. He was appointed as the interim Group Chief Executive Officer on 1 March 2019 and will
hold that position until 14 November. Effective 15 November 2019 he will transition to Chairman of the Board.
(2) Gary Lennon acted as Group CEO from 21 December 2018 to 28 February 2019 while Andrew Thorburn was on leave.
(3) Greg Braddy returned to his permanent role at the end of the acting period.
(4)
Julie Rynski returned to her permanent role at the end of the acting period.
(5) Lorraine Murphy ceased to be a KMP and an employee of NAB and the Group on 29 March 2019.
(6) Andrew Thorburn ceased to be a KMP and an employee of NAB and the Group on 28 February 2019.
(b) KMP changes after 30 September 2019
• The new Group CEO and Managing Director, Ross McEwan, will commence employment with NAB on 2 December 2019.
• Philip Chronican will transition from the interim Group CEO role to Chairman of the Board on 15 November 2019.
• Dr Ken Henry will resign as a director and Chairman of the Board on 14 November 2019.
• Gary Lennon will be acting Group CEO from 15 November to 1 December 2019.
• Susan Ferrier commenced as Chief People Officer and KMP on 1 October 2019.
• Kathryn Fagg will commence as a non-executive director on 16 December 2019 and will stand for election at NAB's 2019
Annual General Meeting.
• Anthony Yuen will retire as a director of NAB following NAB's 2019 Annual General Meeting.
2019 Annual Financial Report
59
REMUNERATION REPORT (CONTINUED)
Section 5 - Executive statutory remuneration disclosures
5.1. Statutory remuneration
The following table has been prepared in accordance with Australian Accounting Standards and Section 300A of the Corporations Act 2001 (Cth). The table shows details of the nature and
amount of each element of remuneration paid or awarded to Executives (including Executives acting on an interim basis) for services provided during the year while they were KMP
(including variable reward amounts in respect of performance during the year which are paid following the end of the year). In addition to the remuneration benefits below, NAB paid an
insurance premium for a contract insuring all Executives (including Executives acting on an interim basis) 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.
REPORT OF THE DIRECTORS
Short-term benefits
Post-employment
benefits
Equity-based benefits
Annual VR
Non-
Other long-
term
Other
Cash salary(1)
cash(2)
monetary(3)
Superannuation(4)
benefits(5)
Shares(6)
Rights(7)
remuneration(8)
$
1,079,771
1,169,141
907,563
768,874
1,002,322
1,181,631
1,252,717
1,199,832
1,400,464
1,095,249
1,009,047
1,302,491
1,203,364
859,062
51,028
1,395,805
1,272,377
$
-
571,200
-
362,880
-
-
305,760
-
571,200
-
418,880
-
571,200
-
19,347
-
1,071,000
$
33,713
28,216
-
7,968
7,706
4,454
4,992
(3,044)
76,280
5,606
54,123
309,404
384,931
103
9
204,252
456,977
2019
2018
2019
2018
2019
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
$
$
$
$
22,148
21,225
20,629
22,883
22,871
23,334
26,943
22,148
37,876
20,824
22,758
32,544
24,492
22,859
1,379
20,236
-
6,652
4,383
4,989
3,288
35,190
21,206
21,905
6,652
4,383
19,474
18,363
32,389
27,362
5,928
249
8,315
5,479
220
166,689
144
105,897
56,520
(89,228)
89,228
28,578
559,713
325,422
290,857
144,304
190,776
713,495
744,540
1,027,951
167,402
1,080,658
287
135,088
167,281
382,232
121,729
31,158
313,397
312,542
739,710
672,204
1,066,590
1,035,857
372,581
13,914
726,474
520,834
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
36,369
34,990
Total(9)
$
1,702,217
2,286,276
1,224,182
1,416,094
1,315,385
1,854,892
2,446,085
2,282,117
3,338,263
1,881,150
2,330,463
2,910,699
3,629,438
1,382,262
117,084
2,704,848
3,674,199
Name
Executives
Mike Baird
Sharon Cook
Shaun Dooley
David Gall
Anthony Healy
Gary Lennon
Angela Mentis
Rachel Slade
Patrick Wright(10)
60
National Australia Bank
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
Name
Executives acting on an interim basis
Greg Braddy (for part year)(11)
Julie Rynski (for part year)(12)
Former Executives
Antony Cahill (for part year)
Andrew Hagger
Lorraine Murphy (for part year)(13)
Andrew Thorburn (for part year)(14)
Total Executives
Total Executives
2019
2019
2018
2018
2019
2018
2019
2018
2019
2018
Short-term benefits
Post-employment
benefits
Equity-based benefits
Annual VR
Non-
Other long-
term
Other
Cash salary(1)
cash(2)
monetary(3)
Superannuation(4)
benefits(5)
Shares(6)
Rights(7)
remuneration(8)
$
$
$
$
$
$
104,169
355,470
1,071,159
1,148,935
403,091
730,027
808,553
2,181,408
11,695,009
13,258,541
29,774
106,438
-
357,000
-
285,600
-
837,200
136,212
1,199
10,321
7,733
8,149
2,844
7,852
40,647
40,247
617,205
5,371,267
1,077,477
5,133
11,472
18,299
21,225
14,529
21,225
6,835
21,318
245,562
239,623
$
-
-
-
752,351
414,636
Total(9)
$
155,562
525,321
(91,513)
3,708,225
782,000
1,940
1,967
13,347
25,810
$
-
13,843
215,305
(1,416,372)
-
1,400,345
345,031
198,454
(401,227)
462,183
12,363
20,220
3,096
4,247
16,771
39,538
164,569
161,780
-
1,709,588
(244,313)
(6,955,235)
1,345,594
(4,981,148)
244,314
3,026,411
-
6,390,436
738,803
(1,654,472)
1,796,599
13,739,487
2,048,309
8,010,300
787,341
30,954,638
(1)
Includes cash allowances and short-term compensated absences, such as annual leave entitlements accrued. The 2018 comparative amount has been restated for Angela Mentis due to an adjustment to the prior year salary.
(2) The VR cash received in respect of 2019 is scheduled to be paid on 11 December 2019 in Australia and 28 November 2019 in New Zealand. The cash component of VR received in respect of 2018 was paid in full during 2019 for all
(3)
(4)
Executives (including Executives acting on an interim basis) as previously disclosed, with no adjustment.
Includes any motor vehicle benefits, parking, relocation costs, travel for family members, gifts 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 New Zealand but
such payments may be made as part of cash salary. The 2018 comparative amount has been restated for Angela Mentis due to an adjustment to the prior year superannuation.
Includes long service leave entitlements accrued based on an actuarial calculation.
(5)
(6) 2019 expense based on the grant date fair value, amortised on a straight line basis over the vesting period for:
(a) General Employee shares granted in March 2016, December 2016, December 2017, December 2018 and to be granted in December 2019.
(b) Customer Advocacy Incentive (CAI) shares granted to Shaun Dooley in February 2017 for performance in his previous role. The shares were subject to achievement of 2017 and 2018 NPS targets and service conditions which were not
met and were fully lapsed in December 2018.
(c) Commencement shares allocated to Rachel Slade in February 2017 with 24% vested in October 2018 and a further 9% scheduled to vest in October 2019. The shares were subject to performance and service hurdles. The remaining
shares vested in October (33%) and July (34%) 2017.
(d) 2017 deferred STI shares granted in February 2018 to Shaun Dooley and Rachel Slade and 2018 deferred STI shares granted in February 2019 to Shaun Dooley, Julie Rynski and Greg Braddy for performance in their previous roles. The
shares are restricted for approximately 1 year and subject to performance and service hurdles.
(e) 2018 VR deferred shares granted in February 2019. The shares are restricted for approximately 4 years, subject to performance and service conditions. The Board determined full or partial forfeiture of this award for the majority of the
2018 Senior Executive team in May 2019 and the associated expense has been reversed.
(7) 2019 expense based on the grant date fair value, amortised on a straight line basis over the vesting period for:
(a) 2016 and 2017 deferred STI performance rights granted in February 2017 and December 2017, respectively. The performance rights are granted with half of each grant restricted for approximately 1 year and the remaining half for
approximately 2 years.
(b) 2014, 2015, 2016 and 2017 LTI performance rights granted in 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 previous LTI program.
(c) 2019 VR deferred rights scheduled to be granted in February 2020 (Refer to Note 34 Equity-based plans).
61
National Australia Bank
REMUNERATION REPORT (CONTINUED)
(d) 2019 LTVR performance rights scheduled to be granted in February 2020 as described in Section 1.8.
Includes remuneration on cessation of employment (refer to (13) and (14)) or exchange rate movements (refer to (10)).
(8)
(9) The percentage of 2019 total remuneration related to performance-based remuneration was: Mike Baird 33%, Sharon Cook 24%, Shaun Dooley 19%, David Gall 34%, Anthony Healy 46%, Gary Lennon 39%, Angela Mentis 42%, Julie Rynski
28%, Rachel Slade 36%, Patrick Wright 38%, Andrew Thorburn N/A, Greg Braddy 28%, Lorraine Murphy N/A.
(10) The amount shown in Other remuneration reflects exchange rate movements related to Patrick Wright's commencement award as disclosed in NAB's 2017 Remuneration report.
(11) Greg Braddy received a VR of $49,623 in respect of his performance while acting as Group CFO. The VR will be provided as 60% cash and 40% deferred shares restricted for 3 years in accordance with the Group’s Variable Reward Plan.
(12) Julie Rynski received a VR of $177,397 in respect of her performance while acting as CPO. The VR will be provided as 60% cash and 40% deferred rights restricted for 4 years in accordance with the Group’s Variable Reward plan and
consistent with BEAR deferred remuneration obligations.
(13) On cessation of employment, Lorraine Murphy received a termination payment (in accordance with her contract) and career transition support. Ms Murphy retained 2017 deferred STI rights and 2018 VR deferred shares. The value of the
retained equity has been fully accounted for on cessation. That equity remains subject to the relevant performance hurdles and restriction periods. All other unvested awards held by Ms Murphy were fully forfeited or lapsed and the
associated expense reversed in accordance with the terms and conditions of the relevant awards.
(14) On cessation of employment, Andrew Thorburn received a termination payment in lieu of notice (in accordance with his contract), transition support and home security for 1 year. All unvested awards held by Mr Thorburn were fully
forfeited or lapsed and the associated expense reversed in accordance with the terms and conditions of the relevant awards.
REPORT OF THE DIRECTORS
62
National Australia Bank
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
5.2 Value of shares and performance rights
The following table shows the number and value of shares and performance rights that were granted by NAB, forfeited, lapsed or
vested for each Executive (including Executives acting on an interim basis) during the year to 30 September 2019. A performance
right is a right to receive one NAB share subject to the satisfaction of the relevant performance conditions. The value shown is
the full accounting value to be expensed over the vesting period, which is generally longer than the current year. Executives
(including Executives acting on an interim basis) did not pay any amounts for performance rights that vested and were exercised
during 2019. 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. All performance rights that vest are automatically exercised when they vest.
For the awards allocated during the year to 30 September 2019, the maximum number of shares or performance rights that may
vest is shown for each Executive (including Executives acting on an interim basis). 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 or
performance rights and the value of the equity awards is zero if the equity is fully forfeited or lapsed.
Name
Executives
Mike Baird
Sharon Cook
Deferred STI rights
VR deferred shares
Deferred STI rights
VR deferred shares
Shaun Dooley
LTI rights
Granted(1) Grant date
lapsed(2) Vested(3) Granted
lapsed(4)
Vested
Forfeited /
Forfeited /
No.
No.
No.
3,918 19/12/2017
-
3,918
$
-
$
-
$
110,370
31,009 27/02/2019
(15,505)
-
856,779
(402,200)
-
1,596 19/12/2017
-
1,596
-
-
44,959
19,700 27/02/2019
(9,850)
12,548 11/12/2013
(12,548)
General employee shares
40
2/03/2016
-
David Gall
CAI Shares
Deferred STI shares
Deferred STI shares
LTI rights
Deferred STI rights
Deferred STI rights
VR deferred shares
Anthony Healy
LTI rights
3,185 22/02/2017
(3,185)
4,588 21/02/2018
4,121 27/02/2019
-
-
11,214 11/12/2013
(11,214)
9,554 22/02/2017
-
11,805 19/12/2017
(6,103)
16,599 27/02/2019
(16,599)
8,470 11/12/2013
(8,470)
General employee shares
40
2/03/2016
Deferred STI rights
Deferred STI rights
VR deferred shares
Gary Lennon
LTI rights
10,948 22/02/2017
10,008 19/12/2017
31,009 27/02/2019
13,945 11/12/2013
General employee shares
40
2/03/2016
Deferred STI rights
Deferred STI rights
VR deferred shares
Angela Mentis
LTI rights
Deferred STI rights
Deferred STI rights
11,058 22/02/2017
7,310 19/12/2017
22,740 27/02/2019
10,239 11/12/2013
13,269 22/02/2017
11,352 19/12/2017
Rachel Slade
Commencement shares
9,013 22/02/2017
General employee shares
33 12/12/2018
VR deferred shares
31,009 27/02/2019
Patrick Wright
Deferred STI shares
VR deferred shares
Deferred STI rights
VR deferred shares
2,883 21/02/2018
11,275 27/02/2019
9,503 19/12/2017
58,143 27/02/2019
-
-
-
(12,921)
(13,945)
-
-
-
(11,370)
(10,239)
-
-
-
-
-
-
-
-
-
-
-
40
-
4,588
-
-
9,554
5,702
-
-
40
10,948
10,008
-
-
40
11,058
7,310
-
-
13,269
11,352
544,311
(255,509)
-
-
-
-
101,253
-
-
-
(292,619)
-
(74,274)
-
-
(261,510)
-
-
994
-
139,246
-
-
-
216,016
(158,312)
160,625
458,630
(430,578)
(197,520)
856,779
(335,171)
(325,197)
628,306
(294,938)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
994
247,534
281,925
-
-
-
994
250,021
205,923
(238,773)
-
-
-
-
-
-
-
-
-
-
-
300,012
319,786
-
-
283,008
87,499
-
267,700
-
-
-
798
856,779
9,013
2,883
-
-
-
311,528
9,503
-
-
1,606,491
2019 Annual Financial Report
63
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
Granted(1) Grant date
lapsed(2) Vested(3) Granted
lapsed(4)
Vested
Forfeited /
Forfeited /
Name
Executives acting on an interim basis
No.
No.
No.
Greg Braddy
LTI rights
10,239 11/12/2013
(10,239)
General employee shares
40
2/03/2016
-
CAI Shares
3,185 22/02/2017
(3,185)
Deferred STI shares
3,738 21/02/2018
General employee shares
33 12/12/2018
Deferred STI shares
3,694 27/02/2019
Julie Rynski
Commencement shares
23,985 13/12/2017
General employee shares
33 12/12/2018
Deferred STI shares
4,379 27/02/2019
-
-
-
-
-
-
$
(238,773)
-
(74,274)
-
-
-
-
-
-
(1,010,471)
$
-
994
-
113,448
-
-
784,310
-
-
-
-
-
175,001
164,738
-
40
-
3,738
-
-
23,985
-
-
-
$
-
-
-
-
798
90,762
-
798
107,592
-
-
-
-
-
-
-
-
-
-
-
LTI rights
Deferred STI rights
Deferred STI rights
LTI rights
39,987 14/12/2016
(39,987)
7,740 22/02/2017
5,848 19/12/2017
-
-
7,740
5,848
42,464 19/12/2017
(42,464)
VR deferred shares
15,504 27/02/2019
-
LTI rights
LTI rights
LTI rights
LTI rights
50,834 11/12/2013
(50,834)
204,113 18/02/2015
(204,113)
297,134
9/03/2016
(297,134)
170,794 22/02/2017
(170,794)
-
-
-
-
-
-
(1,073,065)
428,376
-
(1,185,449)
(5,008,933)
(7,291,668)
(4,191,285)
-
-
-
-
-
-
Deferred STI rights
Deferred STI rights
LTI rights
30,517 22/02/2017
-
30,517
34,807 19/12/2017
(17,995)
16,812
95,252 19/12/2017
(95,252)
-
-
689,989
(441,597)
473,594
(2,337,484)
-
Former Executives
Lorraine Murphy
Andrew Thorburn
(1) The following securities have been granted during 2019:
a) General Employee Share Offer granted to Angela Mentis, Greg Braddy and Julie Rynski in December 2018.
b) Variable reward deferred shares, allocated in February 2019 (in respect of 2018). The shares are restricted for approximately 38 months after the end of the
2019 performance year.
c) Deferred STI shares, allocated in February 2019 (in respect of 2018) to Shaun Dooley, Greg Braddy and Julie Rynski. The shares are restricted for
approximately 14 months after the end of the 2019 performance year.
(2) The following securities have forfeited or lapsed during 2019:
a) Variable reward deferred shares, allocated in February 2019 (in respect of 2018) were partially forfeited for Mike Baird, Sharon Cook, Anthony Healy and Gary
Lennon, and fully forfeited for David Gall in May 2019.
b) LTI performance rights allocated in December 2013 fully lapsed in December 2018. Further details are provided in Section 3.
c) Customer Advocacy Incentive (CAI) shares allocated to Shaun Dooley and Greg Braddy in February 2017 fully lapsed in December 2018.
d) 2017 Tranche 2 deferred STI performance rights allocated in December 2017 were fully forfeited for David Gall in May 2019.
e) Andrew Thorburn's unvested 2014, 2015, 2016 and 2017 LTI performance rights and 2017 Tranche 2 deferred STI performance rights were lapsed in February
2019 on cessation of employment. Note: A deferred cash amount of $1,255,800 was also forfeited in February 2019. This amount was in lieu of VR deferred
shares that were not approved by shareholders at NAB's 2018 Annual General Meeting.
f)Lorraine Murphy's unvested 2016 and 2017 LTI performance rights were lapsed in March 2019 on cessation of employment.
(3) The following securities have vested during 2019:
a) General Employee Share Offer granted to Shaun Dooley, Anthony Healy, Gary Lennon and Greg Braddy in March 2016, fully vested in March 2019.
b) 2016 Tranche 2 deferred STI performance rights allocated in February 2017, fully vested in November 2018.
c) 2017 Tranche 1 deferred STI performance rights allocated in December 2017, fully vested in November 2018.
d) 2017 deferred STI shares allocated in February 2018, fully vested in November 2018.
e) Commencement shares allocated to Rachel Slade in February 2017 with 24% vested in October 2018. The final 9% is scheduled to vest in October 2019.
f) Commencement shares allocated to Julie Rynski in December 2017 with 40% vested in October 2018. The remainder of the commencement shares vested
prior to 2019.
(4) Calculated using NAB's closing share price on the forfeiture / lapsing date.
64
National Australia Bank
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
5.3 Determining the value of equity remuneration
The fair value of shares is set out below for grants provided to Executives (including Executives acting on an interim basis) during
2019. 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.
Except for the General employee shares in Australia and Asia, the expense for each tranche of shares is amortised on a straight
line basis over the vesting period and included in each Executive’s (including Executives acting on an interim basis) disclosed
remuneration in accordance with statutory accounting requirements. The expense for the General employee shares in Australia
and Asia is recognised fully in the year the shares are granted as they are not subject to forfeiture.
No performance rights or performance options have been granted during the year. Shares granted during 2019 have a zero
exercise price.
Type of allocation
General Employee Share Offer
Deferred Short-Term Incentive
Deferred Variable Reward
5.4 Performance rights holdings
Grant date
Fair value
Restriction period end
12 December 2018
27 February 2019
27 February 2019
$
24.19
24.57
27.63
12 December 2021
15 November 2019
15 November 2022
No performance options or performance rights (i.e. entitlements to NAB shares) are granted to Executives' (including interim
Executives') related parties. No performance options (i.e. right requiring payment of a subscription price on vesting) are currently
held by the Executives (including interim Executives). The number of performance rights that vested during the year was
equivalent to the number of performance rights that were exercised during the year. At 30 September 2019, no performance
rights held by the Executives (including interim Executives) were: (i) vested and exercisable; nor (ii) vested but not exercisable.
Name
Executives
Mike Baird
Sharon Cook
Shaun Dooley
David Gall
Anthony Healy
Gary Lennon
Angela Mentis
Rachel Slade
Patrick Wright
Executives acting on an interim basis
Greg Braddy
Julie Rynski
Former Executives
Lorraine Murphy
Andrew Thorburn
Forfeited /
Balance at
Granted
Exercised
lapsed or
beginning
during year as
during
expired
Balance at
of year(1)
remuneration
No.
No.
year
No.
during year
end of year(2)
No.
No.
71,806
33,029
43,573
222,002
305,045
165,650
284,571
17,248
88,678
28,490
17,248
102,299
883,451
-
-
-
-
-
-
-
-
-
-
-
-
-
(3,918)
(1,596)
-
(15,256)
(20,956)
(18,368)
(24,621)
-
(9,503)
-
-
-
-
(12,548)
(17,317)
(8,470)
(13,945)
(10,239)
-
-
-
-
(13,588)
(47,329)
(82,451)
(836,122)
67,888
31,433
31,025
189,429
275,619
133,337
249,711
17,248
79,175
28,490
17,248
6,260
-
(1) Balance may include performance rights granted prior to individuals becoming KMP. For Executives (including Executives acting on an interim basis) who
became KMP during 2019, the balance is at the date they became KMP.
(2) For Executives (including Executives acting on an interim basis) who ceased being KMP during 2019, the balance is as at the date they ceased being KMP.
2019 Annual Financial Report
65
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
5.5 Executives' share ownership
The number of NAB shares held (directly and nominally) by each Executive (including Executives acting on an interim basis) 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
Executives
Mike Baird
Sharon Cook
Shaun Dooley
David Gall
Anthony Healy
Gary Lennon
Angela Mentis
Rachel Slade
Patrick Wright
Executives acting on an interim basis
Greg Braddy
Julie Rynski
Former Executives
Lorraine Murphy
Andrew Thorburn
Balance at
Granted during
Received during
beginning of
year as
year on exercise of
Other changes
Balance at
year(1)
remuneration
performance rights
during year
end of year(2)
No.
No.
No.
No.
No.
2,000
2,000
56,615
93,269
71,015
76,810
82,750
40,536
2,000
37,842
61,082
42,160
273,600
31,009
19,700
4,121
16,599
31,009
22,740
31,042
11,275
58,143
3,694
-
15,504
-
3,918
1,596
-
15,256
20,956
18,368
24,621
-
9,503
-
-
13,588
47,329
(15,505)
(9,850)
(3,185)
(45,187)
(12,759)
(11,370)
-
(12,000)
-
-
(1,999)
21,422
13,446
57,551
79,937
110,221
106,548
138,413
39,811
69,646
41,536
59,083
-
-
71,252
320,929
(1) Balance may include shares held prior to individuals becoming KMP. For Executives (including Executives acting on an interim basis) who became KMP during
2019, the balance is at the date they became KMP. The opening balance for Angela Mentis has been restated to include changes in related party shares.
(2) For Executives (including Executives acting on an interim basis) who ceased being KMP during 2019, the balance is as at the date they ceased being KMP.
There are no other holdings or transactions involving equity instruments, other than equity-based compensation, with Executives
(including Executives acting on an interim) or their related parties.
5.6 Executive contract terms and equity arrangements
All Executives, including the new Group CEO and new Chief People Officer, are employed on the following contractual terms:
Contractual term
Arrangement
Duration
Permanent ongoing employment.
Notice period(1)
• 26 weeks for either NAB or the Group CEO giving notice.
• 2 weeks for Mike Baird, Sharon Cook, Rachel Slade and Patrick Wright, giving notice. This will increase to 3 weeks after
3 years service and 4 weeks after 5 years service. 4 weeks for all other current Executives.
• 26 weeks for NAB giving notice to any of the Executives.
Variable reward
• Executives who resign or are dismissed do not receive any current year variable reward and any unvested variable
arrangements on
reward will be forfeited unless otherwise determined by the Board.
separation
• Unvested variable reward that is retained remains subject to the original terms and conditions.
• Executives may be eligible for pro-rata current year variable reward if separation is due to retirement or retrenchment.
For the LTVR the number of performance rights retained will be based on the period of service during the LTVR
performance period (see Section 1.8).
• Forfeiture and clawback arrangements as described in Section 2.3 apply.
Post-employment
Non-compete and non-solicitation obligations apply.
obligations
(1) Payment in lieu of notice for some or all of the notice period may be approved by the Board in certain circumstances. Termination payments are not paid on
resignation, summary termination or termination for unsatisfactory performance, although the Board may determine exceptions to this. Statutory payments
are also payable on termination.
66
National Australia Bank
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
Section 6 - Non-executive director remuneration
6.1. 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
reward related remuneration.
The total amount of non-executive directors' remuneration is capped at a maximum aggregate fee pool that is approved by
shareholders. The current aggregate fee pool of $4.5 million per annum was approved by shareholders at NAB's 2008 Annual
General Meeting. The total Board and Committee fees, including superannuation, paid to non-executive directors in 2019 is
within the approved aggregate fee pool. Philip Chronican received a special duties fee in his capacity as the interim Group CEO
(an executive director role).
2019 decisions and outcomes
• The Board has recognised the need for accountability and accepted the resignation of Chairman Dr Ken Henry (effective
November 2019) and determining that all other directors receive a reduction in fees for 2019, equivalent to 20% of 2018
director base fees received.
• Non-executive director fees are generally reviewed annually, including against fee levels paid to board members of other
major Australian corporations. As a result of the 2019 fee review, the Board determined not to increase non-executive director
Board or Committee fees.
• A new Board Customer Committee was established in March 2019. The Board Customer Committee will oversee a significant
improvement in the importance given to the voice of the customer in NAB's decision-making and a more intense focus on
customer outcomes. More information on the functions and responsibilities of the Board and its Committees is contained in
the 2019 Corporate Governance Statement.
The following table shows the 2019 fees for the Chairman and non-executive directors on the Board (excluding the 20%
reduction taken during 2019), and to non-executive directors who participate on Board committees.
Board
Audit Committee
Risk Committee
Remuneration Committee
Customer Committee(1)
Nomination & Governance Committee
(1) The Board approved the establishment of a Customer Committee from 1 March 2019.
Chairman ($pa)
Non-executive director ($pa)
790,000
65,000
60,000
55,000
40,000
-
230,000
32,500
30,000
27,500
20,000
10,000
2019 Annual Financial Report
67
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
6.2. Statutory remuneration
The 2019 fees paid to the non-executive directors, takes into account the reduction equivalent to 20% of 2018 director base fees
received and changes in their duties and responsibilities during the year, including the Special Duties fee paid to Philip Chronican
while interim Group CEO (an executive director role), are set out below:
Name
Non-executive directors
Ken Henry (Chairman)
Philip Chronican(3)
David Armstrong
Peeyush Gupta(4)
Anne Loveridge
Geraldine McBride
Douglas McKay(5)
Ann Sherry
Anthony Yuen
Total
Total
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
Short-term benefits
Post-employment benefits
Cash salary and fees(1)
Special duties
Superannuation(2)
$
769,351
769,831
174,704
414,486
275,851
304,831
508,056
659,059
229,928
274,831
209,493
242,331
464,593
482,047
229,006
212,707
241,133
286,604
$
-
-
991,906
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
20,649
20,169
20,649
20,169
20,649
20,169
20,649
20,169
19,072
20,169
18,674
20,169
19,975
20,169
20,464
18,458
5,367
5,896
Total
$
790,000
790,000
1,187,259
434,655
296,500
325,000
528,705
679,228
249,000
295,000
228,167
262,500
484,568
502,216
249,470
231,165
246,500
292,500
3,102,115
3,646,727
991,906
-
166,148
4,260,169
165,537
3,812,264
(1) 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
2019.
(2) 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) Philip Chronican received a Special Duties fee in his capacity as the interim Group CEO (an executive director role) from 1 March 2019. He also received director
fees of $50,967 in his capacity as a director on the board of Bank of New Zealand which were paid in NZD.
(4) Peeyush Gupta received fees of $277,205 in his capacity as a director on the board of a number of Group subsidiaries, including as a director of BNZ Life. The
director fees relating to BNZ Life were paid in NZD.
(5) Douglas McKay received director fees of $236,402 in his capacity as Chairman of Bank of New Zealand, which were paid in NZD.
6.3. Minimum shareholding policy
To align with shareholder's interests, 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
• 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.
All current non-executive directors' shareholdings requirements have been met.
68
National Australia Bank
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
6.4. Non-executive directors' share ownership and other interests
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
Ken Henry
Philip Chronican
David Armstrong
Peeyush Gupta
Anne Loveridge
Geraldine McBride
Douglas McKay
Ann Sherry
Anthony Yuen
Balance at
beginning of
Other
changes
Balance at
year(1) Acquired
during year
end of year
No.
No.
No.
No.
10,360
31,000
16,889
7,480
10,000
5,960
10,000
7,831
12,464
-
10,000
1,274
-
-
1,743
-
-
-
-
(1,000)
-
-
-
-
-
(375)
-
10,360
40,000
18,163
7,480
10,000
7,703
10,000
7,456
12,464
(1) Balance may include shares held prior to individuals becoming KMP.
6.5. 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:
Name
National Income Securities
Philip Chronican
6.6 Other relevant interests
Balance at
beginning of
Changes
Balance at
year
No.
982
during year
end of year
No.
-
No.
982
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 2019 were:
Directors
David Armstrong
Peeyush Gupta
Peeyush Gupta
Peeyush Gupta
Ann Sherry
Nature of product
Convertible Preference Shares II (NABPB)
MLC Private Equity Co-Investment Fund I
MLC Private Equity Co-Investment Fund II
MLC PIC-Wholesale Inflation Plus Assertive portfolio Fund
NAB Capital Notes 3 (NABPF)
Relevant interest (Units)
900
600,000
700,000
578,438
1,500
Note: The Group offers a range of registered schemes. Ken Henry and Ann Sherry have a relevant interest in the JBWere Cash
Trust (ARSN 160 854 277). The JBWere Cash Trust is a registered managed investment scheme which operates as a cash account.
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.
2019 Annual Financial Report
69
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
Section 7 - Loans and other transactions
7.1. Loans
Loans made to directors of NAB are made in the ordinary course of business on terms equivalent to those that prevail in arm's
length transactions. Loans to Executives (including Executives acting on an interim basis) 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). The opening balance is 1 October
and closing balance is 30 September, or the date of commencement or cessation of a KMP.
Total aggregated loans provided to KMP and their related parties
NAB and the Group
KMP(2)
Other related parties(3)
Balance at
Terms and
beginning of
Interest
Interest not
Balance at
conditions
Normal
Employee
Normal
year
$
9,664,072
2,018,248
8,967,535
charged(1)
charged(1)
Write-off(1)
end of year
$
284,689
51,217
370,943
$
-
-
-
$
-
-
-
$
9,084,961
2,483,612
14,261,249
(1) Relates to the period during which the Executive was KMP.
(2) The aggregated loan balance at the end of the year includes loans issued to 22 KMP.
(3)
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.
Aggregated loans to KMP and their related parties above $100,000
Balance at
KMP highest
beginning of
Interest
Interest not
Balance at
indebtedness
charged(1)
charged
Write-off
end of year
during year(2)
$
$
$
$
NAB and the Group
Non-executive directors
David Armstrong
Douglas McKay
Executives
Mike Baird
Sharon Cook
David Gall
Anthony Healy
Gary Lennon
Angela Mentis
Patrick Wright
Executives acting on an interim basis
Greg Braddy
Julie Rynski
Former Executives
Lorraine Murphy
Andrew Thorburn
year
$
366,026
890
4,378,704
1,166,404
5,807,978
-
947,359
1,291
14,134
24,987
178,057
33,650
132,117
99,213
39,917
10,636
3,512,652
115,853
1,573,389
-
2,393,105
319,592
8,323
2,764
42,922
1,759
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
-
23,620
3,633,235
1,167,033
2,413,207
24,218
1,006,956
68,507
73,593
348,397
1,474,685
3,977,848
1,109,390
5,280,676
3,812,702
905,696
681,362
3,421,673
1,558,915
1,573,395
542,963
550,000
2,362,757
2,435,807
323,478
55,844
(1) The interest charged may include the impact of interest offset facilities and only relates to the period during which the Executive was KMP.
(2) Represents aggregate highest indebtedness of the KMP during 2019. All other items in this table relate to the KMP and their related parties.
70
National Australia Bank
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
7.2. Other transactions
During 2019, a related party of Ann Sherry disposed of 1,500 Convertible Preference Shares (NABPA) and subscribed to 1,500 NAB
Capital Notes 3 (NABPF) and a related party of Sharon Cook subscribed to 2,000 NAB Capital Notes 3. NAB Capital Notes 3 were
issued by NAB, each with an issue price of $100, and these instruments were still held as at 30 September 2019 by the relevant
KMP's related party. 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.
2019 Annual Financial Report
71
CORPORATE GOVERNANCE
GOVERNANCE
The Group's corporate governance framework has evolved as NAB seeks continuous improvement.
As a fundamental element of the Group's culture and business practices, the corporate governance framework provides guidance
for effective decision making in all areas of the Group through strategic and operational planning, risk management and
compliance, financial management and external reporting, succession planning and culture and managing customer experiences
and outcomes.
Details of the Group's corporate governance framework and confirmation of NAB’s compliance with the 3rd edition of the ASX
Corporate Governance Principles and Recommendations, are contained in NAB’s 2019 Corporate Governance Statement and
Appendix 4G which are published separately in the corporate governance section of the NAB website at www.nab.com.au/about-
us/corporate-governance.
Board responsibilities and performance
The Board’s responsibilities include:
• Overseeing and guiding the purpose, values, culture,
reputation and standards of conduct of the Group.
• Representing shareholders and serving the interests of
the Company by overseeing and evaluating the
Company’s strategies, policies and performance.
• Approving the Group’s operating budgets, strategic plan,
risk appetite statement, capital management strategy
and funding strategy.
• With the guidance of the Board’s Risk Committee,
reviewing, overseeing and challenging the Company’s
risk management framework and internal compliance
and control systems, and reviewing management’s
implementation of those frameworks and systems in
accordance with regulatory requirements.
The Corporate Governance Statement includes information
on the number of meetings held by the Board and its
Committees in 2019. Information on directors’ attendance
at Board and Committee meetings is contained in the
Report of the Directors within this Annual Financial Report.
Board renewal
Following the resignation of Group CEO Mr Andrew Thorburn in February 2019, Mr Philip Chronican led NAB as interim Group
CEO from March 2019 until 14 November 2019, based on the Board’s recognition of his deep banking experience.
Former Chairman Dr Ken Henry resigned from the Board, effective 14 November 2019. Mr Philip Chronican commenced as
Chairman of the Board on 15 November 2019.
The Board has appointed Ms Kathryn Fagg as a non-executive director, effective 16 December 2019, who will stand for election at
NAB’s 2019 Annual General Meeting (AGM) on 18 December 2019. Mr Anthony Yuen will retire from the Board after the 2019
AGM.
The Board announced the appointment of Mr Ross McEwan as incoming Group CEO on 19 July 2019 and he will commence in
this role and as Managing Director on 2 December 2019.
The Corporate Governance Statement includes information about the Board’s skills matrix, tenure, age profile and gender
diversity.
Shareholder engagement
NAB makes use of technology to communicate with all stakeholders by webcasting significant market briefings and meetings,
including the AGM (all of which are available on the NAB website at www.nab.com.au/shareholder, as well as the NAB Investor
Relations mobile app). Shareholders will again be invited to submit questions in advance of the 2019 AGM to help the Board
understand and address areas of interest or concern.
72
National Australia Bank
FINANCIAL STATEMENTS
Income statements
Statements of comprehensive income
Balance sheets
Cash flow statements
Statements of changes in equity
INTRODUCTION
Note 1
Basis of preparation and measurement
FINANCIAL PERFORMANCE
Segment information
Note 2
Note 3
Net interest income
Note 4
Other income
Note 5
Operating expenses
Note 6
Income tax
Note 7
Earnings per share
FINANCIAL INSTRUMENTS
Assets
Note 8
Cash and balances with other banks
Note 9
Trading instruments
Note 10 Debt instruments
Note 11 Other financial assets
Note 12
Loans and advances
Liabilities
Note 13 Deposits and other borrowings
Note 14
Bonds, notes and subordinated debt
Note 15 Other debt issues
Note 16 Other financial liabilities
Risk management
Note 17
Provision for credit impairment on loans at
amortised cost
Note 18 Hedge accounting
Note 19
Financial risk management
Note 20
Fair value of financial instruments
Note 21
Financial asset transfers
74
75
76
77
79
81
81
83
84
86
87
88
90
92
93
96
97
98
98
99
99
100
102
103
104
109
114
127
132
OTHER ASSETS AND LIABILITIES
Note 22 Goodwill and other intangible assets
Note 23 Other assets
Note 24
Provisions
Note 25 Other liabilities
CAPITAL MANAGEMENT
Note 26 Contributed equity
Note 27
Reserves
Note 28 Dividends and distributions
UNRECOGNISED ITEMS
Note 29 Contingent liabilities and credit commitments
Note 30 Operating leases
OTHER DISCLOSURES
Note 31
Interest in subsidiaries and other entities
Note 32
Related party disclosures
Note 33
Remuneration of external auditor
Note 34
Equity-based plans
Note 35 Capital adequacy
Note 36 Notes to the cash flow statements
Note 37 Discontinued operations
Note 38
Events subsequent to reporting date
133
133
135
135
137
138
138
140
141
143
143
148
149
149
153
155
156
160
161
163
164
2019 Annual Financial Report
73
FINANCIAL STATEMENTS
INCOME STATEMENTS
For the year ended 30 September
Interest income
Interest expense
Net interest income
Other income
Operating expenses
Credit impairment charge
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
Earnings per share
Basic
Diluted
Basic from continuing operations
Diluted from continuing operations
Group
Company
Note
2019
$m
2018
$m
2019
$m
2018
$m
29,203
28,543
27,450
26,955
(15,645)
(15,038)
(17,333)
(16,860)
13,558
13,505
10,117
10,095
3,006
(7,760)
(811)
4,552
(1,273)
3,279
-
3,279
-
3,279
5,262
(7,787)
(707)
6,863
(1,644)
5,219
-
5,219
-
5,219
4,373
(9,827)
(927)
7,177
(2,087)
5,090
(289)
4,801
3
4,798
cents
168.6
164.4
178.9
173.9
5,596
(9,910)
(791)
8,400
(2,455)
5,945
(388)
5,557
3
5,554
cents
201.3
194.0
215.6
207.2
3
4
5
17
6
37
7
7
7
7
74
National Australia Bank
STATEMENTS OF COMPREHENSIVE INCOME
For the year ended 30 September
Note
Net profit for the year from continuing operations
Other comprehensive income
Items that will not be reclassified to profit or loss
Actuarial gains on defined benefit superannuation plans
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 gains
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 hedge reserve:
Gains / (losses) on cash flow hedging instruments
Cost of hedging reserve
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 / (losses)
Gains from sale transferred to the income statement
Change in loss allowance on debt instruments
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
37
Total comprehensive income for the year
Attributable to non-controlling interests
Total comprehensive income attributable to owners of NAB
FINANCIAL STATEMENTS
Group
Company
2019
$m
5,090
2018
$m
5,945
2019
$m
3,279
2018
$m
5,219
-
167
(2)
-
15
(50)
130
284
(260)
110
(38)
37
(2)
-
(37)
94
224
5,314
(289)
5,025
3
5,022
7
66
-
41
19
(18)
115
(26)
(76)
15
(62)
(88)
(9)
5
38
(203)
(88)
5,857
(388)
5,469
3
5,466
-
149
-
-
6
(37)
118
354
(208)
13
-
37
(2)
-
(57)
137
255
3,534
-
3,534
-
3,534
-
10
-
-
15
(1)
24
(19)
(1)
14
-
(88)
(9)
5
27
(71)
(47)
5,172
-
5,172
-
5,172
2019 Annual Financial Report
75
FINANCIAL STATEMENTS
BALANCE SHEETS
As at 30 September
Assets
Cash and liquid assets
Due from other banks
Trading instruments
Debt instruments
Other financial assets
Hedging derivatives
Loans and advances
Due from customers on acceptances
Current tax assets
Property, plant and equipment
Due from controlled entities
Investments in controlled entities
Goodwill and other intangible assets
Deferred tax assets
Other assets
Total assets
Liabilities
Due to other banks
Trading instruments
Other financial liabilities
Hedging derivatives
Deposits and other borrowings
Current tax liabilities
Provisions
Due to controlled entities
Bonds, notes and subordinated debt
Other debt issues
Other liabilities
Total liabilities
Net assets
Equity
Contributed equity
Reserves
Retained profits
Total equity (parent entity interest)
Non-controlling interest in controlled entities
Total equity
76
National Australia Bank
Note
8
8
9
10
11
18
12
22
6
23
8
9
16
18
13
24
14
15
25
26
27
Group
Company
2019
$m
55,457
32,130
96,828
40,205
7,110
4,689
2018
$m
50,188
30,568
78,228
42,056
10,041
3,840
2019
$m
54,811
29,049
89,552
40,166
6,229
4,059
2018
$m
49,717
28,293
72,961
41,957
8,581
2,703
587,749
567,981
506,527
492,508
2,490
3,816
-
-
1,117
1,199
-
-
5,576
2,670
-
-
5,787
2,083
11,103
10,723
2,490
-
374
114,786
7,979
2,306
2,021
8,817
3,816
82
423
100,483
10,331
2,445
1,447
8,187
847,124
806,510
869,166
823,934
34,273
34,318
33,283
4,037
38,192
22,422
30,437
2,547
32,552
37,945
8,550
2,939
36,371
25,863
7,381
1,818
522,085
503,145
463,026
448,616
468
3,507
-
103
2,196
-
143,258
140,222
6,482
9,809
6,158
8,376
791,520
753,798
55,604
52,712
38,707
35,982
306
16,583
55,596
8
46
16,673
52,701
11
362
3,207
116,033
137,599
6,482
8,582
817,277
51,889
37,921
113
13,855
51,889
-
-
1,879
102,888
136,110
6,158
7,108
774,192
49,742
34,221
108
15,413
49,742
-
55,604
52,712
51,889
49,742
CASH FLOW STATEMENTS
For the year ended 30 September(1)
Cash flows from operating activities
Interest received
Interest paid
Dividends received
Net trading income (paid) / received
Other operating income received
Operating expenses paid
Income tax paid
FINANCIAL STATEMENTS
Group
Company
Note
2019
$m
2018
$m
2019
$m
2018
$m
29,471
28,340
27,694
26,749
(15,992)
(14,778)
(17,639)
(16,635)
28
(1,608)
3,984
(7,739)
(2,251)
49
9,622
4,424
(8,824)
(2,634)
1,370
(1,222)
1,736
(5,799)
(1,515)
2,710
9,125
1,877
(6,878)
(2,083)
Cash flows from operating activities before changes in operating assets and liabilities
5,893
16,199
4,625
14,865
Changes in operating assets and liabilities
Net (increase) / decrease in
Deposits with central banks and other regulatory authorities
Trading securities
Other financial assets
Loans and advances
Due from customers on acceptances
Other assets
Net increase / (decrease) in
Deposits and other borrowings
Other financial liabilities
Other liabilities and provisions
Net funds advanced to and receipts from other banks
Net movement in derivative assets and liabilities
Net changes in operating assets and liabilities
(566)
(271)
(566)
(4,613)
(1,880)
(4,421)
(271)
(818)
3,201
5,421
2,512
2,448
(18,993)
(27,741)
(14,117)
(23,910)
1,294
(794)
2,999
(981)
1,294
3,001
(240)
(1,087)
16,275
(1,842)
12,485
(6,007)
1,179
1,566
(1,161)
7,129
4,517
1,288
1,430
228
(4,046)
(25,395)
431
1,737
(1,241)
6,449
4,323
8,948
744
2,002
226
(2,018)
(25,690)
(10,825)
Net cash provided by / (used in) operating activities
36
10,410
(9,196)
Cash flows from investing activities
Movement in debt instruments at fair value through other comprehensive income
Purchases
Proceeds from disposal and maturity
Net movement in other debt and equity instruments
Net movement in amounts due from controlled entities
Net movement in shares in controlled entities
Proceeds from sale of controlled entities, net of cash disposed
Net movement in associates and joint ventures
Purchase of property, plant, equipment and software
Proceeds from sale of property, plant, equipment and software, net of costs
Net cash provided by / (used in) investing activities
(22,567)
(22,018)
(22,542)
(22,018)
25,947
22,228
25,859
22,216
255
203
-
-
25
67
-
7
-
(342)
(1,135)
(1,051)
21
2,613
19
(954)
238
(1,227)
1,593
-
27
(839)
(1)
2
3,898
(1,724)
-
(342)
(735)
1
3,108
1,298
(1) 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 their disposal. The year to 30 September 2019 includes cash outflows related to the Group's
discontinued operations, being $95 million (September 2018: $33 million) related to the Group's life insurance business and $nil (September 2018: $618
million) related to CYBG.
2019 Annual Financial Report
77
FINANCIAL STATEMENTS
CASH FLOW STATEMENTS (CONTINUED)
For the year ended 30 September
Cash flows from financing activities
Group
Company
2019
$m
2018
$m
2019
$m
2018
$m
Repayments of bonds‚ notes and subordinated debt
(31,001)
(22,951)
(26,430)
Proceeds from issue of bonds‚ notes and subordinated debt‚ net of costs
27,159
32,139
Proceeds from issue of ordinary shares, net of costs
Repayments of other contributed equity
Proceeds from other debt issues, net of costs
Repayments of other debt issues
Dividends and distributions paid (excluding dividend reinvestment plan)
Net cash provided by / (used in) financing activities
Net increase / (decrease) 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
36
1,000
(722)
1,858
(799)
(3,266)
(5,771)
7,252
37,946
1,828
47,026
-
-
-
(41)
(4,221)
4,926
(5,224)
39,800
3,370
37,946
21,542
1,000
-
1,858
(799)
(3,242)
(6,071)
5,985
36,368
1,811
44,164
(17,009)
26,913
-
-
-
(41)
(4,177)
5,686
(3,841)
36,831
3,378
36,368
78
National Australia Bank
STATEMENTS OF CHANGES IN EQUITY
FINANCIAL STATEMENTS
Group
Year to 30 September 2018
Balance at 1 October 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
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(3)
Movement of non-controlling interest in controlled entities
Balance at 30 September 2018
Year to 30 September 2019
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
Conversion of preference shares
Transfer from / (to) retained profits
Transfer from equity-based compensation reserve
Equity-based compensation
Dividends paid
Distributions on other equity instruments
Redemption of Trust Preferred Securities
Changes in ownership interests(3)
Movement of non-controlling interest in controlled entities
Balance at 30 September 2019
(1) Refer to Note 26 Contributed equity for further details.
(2) Refer to Note 27 Reserves for further details.
(3) Changes in ownership interests in controlled entities that do not result in a loss of control.
Contributed
Retained
Non-
controlling
interest in
controlled
Total
equity(1) Reserves(2)
profits
$m
$m
$m
Total
$m
entities
equity
$m
$m
34,627
237
16,442
51,306
11
51,317
3
-
-
3
-
-
-
-
(4)
-
1
11
3
-
-
3
-
-
-
-
-
5,945
(388)
(88)
5,469
1,182
-
-
146
(5,303)
(100)
1
52,712
5,090
(289)
224
5,025
2,803
750
-
-
105
-
-
-
-
1,182
-
173
-
-
-
-
-
-
(143)
(143)
-
(21)
(173)
146
-
-
-
5,942
5,942
(388)
55
(388)
(88)
5,609
5,466
-
21
-
-
1,182
-
-
146
(5,299)
(5,299)
(100)
(100)
-
-
35,982
46
16,673
52,701
5,087
5,087
(289)
110
(289)
224
4,908
5,022
-
-
99
-
-
2,803
750
-
-
105
-
-
-
-
2,803
750
-
147
-
-
-
(975)
-
38,707
-
-
114
114
-
-
(99)
(147)
105
-
-
287
-
306
(4,983)
(4,983)
(4)
(4,987)
(83)
(31)
(83)
(719)
-
-
(83)
(719)
-
-
16,583
55,596
(2)
8
(2)
55,604
2019 Annual Financial Report
79
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN EQUITY (CONTINUED)
Contributed
Retained
equity(1) Reserves(2)
profits
$m
$m
$m
Total
equity
$m
48,601
5,219
(47)
5,172
15,545
5,219
9
5,228
-
(1)
-
-
1,182
-
-
146
190
-
(56)
(56)
-
1
(173)
146
32,866
-
-
-
1,182
-
173
-
-
-
-
-
(5,299)
(5,299)
(60)
(60)
34,221
108
15,413
49,742
-
-
-
2,803
750
-
147
-
-
-
-
151
151
-
-
(104)
(147)
105
3,279
104
3,383
-
-
104
-
-
3,279
255
3,534
2,803
750
-
-
105
-
-
(4,983)
(4,983)
(62)
(62)
37,921
113
13,855
51,889
Company
Year to 30 September 2018
Balance at 1 October 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
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 2018
Year to 30 September 2019
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
Conversion of preference shares
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 2019
(1) Refer to Note 26 Contributed equity for further details.
(2) Refer to Note 27 Reserves for further details.
80
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
INTRODUCTION
NOTE 1
BASIS OF PREPARATION AND MEASUREMENT
These are the financial statements of National Australia Bank Limited (Company) together with its controlled entities (Group) for
the year ended 30 September 2019. National Australia Bank Limited, incorporated and domiciled in Australia, is a for-profit
company limited by shares which are publicly traded on the Australian Securities Exchange.
The directors resolved to authorise the issue of these financial statements on 15 November 2019. The directors have the power to
amend and reissue the financial statements.
The financial statements include information to the extent the Group considers it material and relevant to the understanding of
users. Disclosed information is considered material and relevant if, for example:
• The dollar amount is significant in size or by nature.
• The Group’s results cannot be understood by users without the specific disclosure.
• The information is important to help users understand the impact of significant changes in the Group’s business during the
financial year, for example, a business acquisition, disposal, or an impairment / write-down.
• The information relates to an aspect of the Group’s operations which is important to its future performance.
• The information is required under legislative requirements of the Corporations Act 2001 (Cth), the Banking Act 1959 (Cth) or by
the Group’s principal regulators, including the Australian Securities and Investments Commission (ASIC) and the Australian
Prudential Regulation Authority (APRA).
Basis of preparation
This general purpose financial report has been prepared by a for-profit company, in accordance with the requirements of the
Corporations Act 2001 (Cth), accounting standards and interpretations issued by the Australian Accounting Standards Board
(AASB) and International Financial Reporting Standards (IFRS) and interpretations issued by the International Accounting
Standards Board (IASB).
Amounts are presented in Australian dollars (unless otherwise stated), which is the Company’s functional and presentation
currency. These amounts have been rounded to the nearest million dollars ($m), except where indicated, as allowed by ASIC
Corporations Instrument 2016/191.
Comparative information has been restated to accord with changes in presentation 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 for the effect
of discontinued operations. Refer to Note 37 Discontinued operations for further detail.
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 ASIC Class Order 10/654 dated 26 July 2010.
Basis of measurement
The financial report has been prepared under the historical cost convention, except for certain assets and liabilities (including
derivative instruments) measured at fair value through the income statement or in other comprehensive income.
2019 Annual Financial Report
81
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 BASIS OF PREPARATION AND MEASUREMENT (CONTINUED)
Change in accounting policies
The Group adopted AASB 15 Revenue from Contracts with Customers which 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
adoption of AASB 15 did not have a material impact on the Group's financial statements.
Critical accounting assumptions and estimates
In the process of applying the Group’s accounting policies, management has made a number of judgements and assumptions
and applied estimates of future events. Some of these include areas involving:
• impairment charges on loans and advances
• fair value of financial assets and liabilities
• impairment assessment of goodwill and other intangible assets
• provisions for customer-related remediation and other regulatory matters
• provisions for restructuring-related costs.
Further information on specific judgements and assumptions made and estimates applied, are contained within the notes to the
financial statements.
Future accounting developments
The following issued, but not yet effective, Australian Accounting Standards have not been applied in preparing these financial
statements.
AASB 16 Leases significantly changes accounting for lessees, requiring recognition of all leases (subject to certain exceptions) on-
balance sheet in a manner comparable to finance leases currently accounted under AASB 117 Leases. Lessor accounting remains
unchanged compared to AASB 117. The Group will adopt AASB 16 from 1 October 2019. The Group will apply AASB 16 using the
modified retrospective transition option. All right-of-use assets will be measured with respect to the associated lease liability on
the date of transition as opposed to measuring them as if AASB 16 had always been applied (often referred to as the simplified
approach). The Group will recognise approximately $1,502 million of right-of-use assets and $1,464 million of lease liabilities on
transition. The difference of $38 million relates to make-good provisions recognised as part of the right-of-use asset but not the
lease liability.
AASB Interpretation 23 Uncertainty over Income Tax Treatments clarifies the application of the recognition and measurement
criteria in AASB 112 Income Taxes where there is uncertainty over income tax treatments. The Group will adopt AASB
Interpretation 23 from 1 October 2019. The adoption is not expected to have a material impact to the Group's financial
statements.
In October 2019, the AASB issued AASB 2019-3 Amendments to Australian Accounting Standards - Interest Rate Benchmark Reform
that provides exemptions from certain hedge accounting qualification requirements in IFRS 9 Financial Instruments in response to
market-wide benchmark interest rate reform. The amendments permit an entity to assume no impact to existing hedge
accounting relationships subject to the reform, thereby allowing a continuation of hedge accounting. The amendments apply to
annual periods beginning on or after 1 January 2020. The Group is assessing the impact of these amendments.
Other amendments made to existing standards that are not yet effective are not expected to result in a material impact to the
Group’s financial statements.
82
National Australia Bank
FINANCIAL PERFORMANCE
OVERVIEW
Management reviews the Group’s performance based on the five divisions illustrated below. The Group’s operating segments are
consistent with this divisional split. Refer to the Report of the Directors for a description of the operating activities of the divisions.
NOTES TO THE FINANCIAL STATEMENTS
Management assesses the Group’s and operating segments' performance based on a non-IFRS measure called ‘cash earnings’.
Utilising cash earnings allows management to:
• more effectively assess the current year performance against prior years
• compare performance across business divisions
• compare performance across peer organisations.
Cash earnings is defined as net profit attributable to owners of NAB from continuing operations, adjusted for items the Group
considers appropriate to better reflect the underlying performance of the Group. Cash earnings for the year ended 30 September
2019 has been adjusted for distributions, fair value and hedge ineffectiveness, amortisation of acquired intangible assets and
MLC Wealth divestment separation costs.
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.
The Group earns the vast majority of its revenue in the form of net interest income (NII). NII is the difference between interest
earned on financial assets and interest paid on financial liabilities and other financing costs.
2019 Annual Financial Report
83
NOTES TO THE FINANCIAL STATEMENTS
NOTE 2
SEGMENT INFORMATION
Reportable segment information
Net interest income
Other income
Net operating income
Operating expenses
Underlying profit / (loss)
Credit impairment charge
Cash earnings / (deficit) before tax and distributions
Income tax (expense) / benefit
Cash earnings / (deficit) before distributions
Distributions
Cash earnings / (deficit)
Fair value and hedge ineffectiveness
Other non-cash earnings items
2019
Business
Consumer
Corporate and
New
and Private
Banking
Institutional
Zealand
Corporate
Functions
Banking
and Wealth
Banking
Banking
and Other(1)
$m
$m
$m
$m
$m
Total
$m
13,542
3,679
17,221
(9,013)
8,208
(919)
7,289
335
(857)
(522)
(1,505)
(2,027)
(96)
(2,123)
592
(2,109)
(1,531)
5,180
(83)
(83)
(1,614)
5,097
(9)
32
(23)
13
1,827
1,539
3,366
(1,281)
2,085
(70)
2,015
(507)
1,508
-
1,508
(23)
-
1,828
571
2,399
(911)
1,488
(103)
1,385
(388)
997
-
997
12
-
5,634
1,037
6,671
3,918
1,389
5,307
(2,265)
(3,051)
4,406
(336)
4,070
(1,230)
2,840
-
2,840
(3)
-
2,256
(314)
1,942
(576)
1,366
-
1,366
-
(19)
1,347
-
1,347
Net profit / (loss) for the year from continuing operations
2,837
Net (loss) after tax for the year from discontinued
operations
Net profit / (loss) attributable to the owners of NAB
-
2,837
1,485
1,009
(1,591)
5,087
-
-
1,485
1,009
(289)
(1,880)
(289)
4,798
Reportable segment assets
200,799
230,916
295,042
84,307
36,060
847,124
(1)
Includes customer-related remediation and capitalised software change. Refer Note 3 Net interest income, Note 4 Other income and Note 5 Operating expenses
for further details. It also includes Group eliminations.
2018
Business
Consumer
Corporate and
New
and Private
Banking
Institutional
Zealand
Corporate
Functions
Banking
and Wealth
Banking
Banking
and Other(1)
$m
$m
$m
$m
Reportable segment information
Net interest income
Other income
Net operating income
Operating expenses
Underlying profit / (loss)
Credit impairment (charge) / write-back
Cash earnings / (deficit) before tax and distributions
Income tax (expense) / benefit
Cash earnings / (deficit) before distributions
Distributions
Cash earnings / (deficit)
Fair value and hedge ineffectiveness
Other non-cash earnings items
5,539
1,068
6,607
(2,230)
4,377
(207)
4,170
(1,259)
2,911
-
2,911
(6)
-
Net profit / (loss) for the year from continuing operations
2,905
Net (loss) after tax for the year from discontinued
operations
Net profit / (loss) attributable to the owners of NAB
-
2,905
3,964
1,541
5,505
(3,046)
2,459
(271)
2,188
(649)
1,539
-
1,539
27
(30)
1,536
-
1,536
1,882
1,451
3,333
(1,297)
2,036
43
2,079
(538)
1,541
-
1,541
13
-
1,554
-
1,554
1,698
520
2,218
(869)
1,349
(70)
1,279
(357)
922
-
922
(2)
-
920
-
920
$m
384
(70)
314
(1,550)
(1,236)
(274)
(1,510)
Total
$m
13,467
4,510
17,977
(8,992)
8,985
(779)
8,206
399
(2,404)
(1,111)
(100)
(1,211)
150
88
5,802
(100)
5,702
182
58
(973)
5,942
(388)
(1,361)
(388)
5,554
Reportable segment assets
199,750
228,705
263,752
79,130
35,173
806,510
(1)
Includes customer-related remediation and restructuring-related costs. Refer Note 4 Other income and Note 5 Operating expenses for further details. It also
includes Group eliminations.
84
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 2 SEGMENT INFORMATION (CONTINUED)
Major customers
No single customer contributes revenue greater than 10% of the Group’s revenues.
Geographical information
The Group has operations in Australia (the Company’s country of domicile), New Zealand, Europe, the United States and Asia. The
allocation of income and non-current assets is based on the geographical location in which transactions are booked.
Australia
New Zealand
Other International
Total before inter-geographic eliminations
Elimination of inter-geographic items
Total
Group
Income
Non-current assets(1)
2019
$m
2018
$m
14,688
15,825
2,537
776
2,368
965
18,001
19,158
(70)
(57)
17,931
19,101
2019
$m
6,537
690
47
7,274
-
7,274
2018
$m
6,884
741
41
7,666
-
7,666
(1) Consists of goodwill and other intangible assets, property, plant and equipment and investments in joint ventures and associates. Comparative information has
been restated in accordance with changes in presentation.
2019 Annual Financial Report
85
NOTES TO THE FINANCIAL STATEMENTS
NOTE 3
NET INTEREST INCOME
Accounting policy
Interest income and expense are recognised in the income statements using the effective interest method. The effective interest
method measures the amortised cost of a financial asset or financial liability using the effective interest rate. The effective
interest rate discounts the estimated stream of future cash payments or receipts over the expected life of the financial instrument
to the net carrying amount of the financial instrument.
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 income and expense on trading securities are recognised within net interest income. Interest income and expense on
both hedging instruments and financial assets and liabilities measured at fair value through profit or loss are recognised in net
interest income.
Interest income
Due from other banks
Marketable debt securities
Loans and advances
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
Bonds, notes and subordinated debt
Due to controlled entities
Bank levy
Other debt issues
Other interest expense
Total interest expense
Net interest income
Customer-related remediation
Group
Company
2019
$m
506
2,335
2018
$m
634
2,146
24,942
24,477
155
-
1,265
29,203
638
9,291
4,572
-
383
243
518
15,645
13,558
248
-
1,038
28,543
605
8,825
4,558
-
370
242
438
15,038
13,505
2019
$m
432
2,185
20,093
155
3,398
1,187
2018
$m
553
2,022
19,825
248
3,324
983
27,450
26,955
622
7,916
3,902
3,753
383
243
514
17,333
10,117
585
7,523
3,909
3,797
370
242
434
16,860
10,095
In the 2019 financial year, customer-related remediation of $72 million (2018: $nil) was recognised as a reduction in other
interest income. These costs mainly relate to the refund of interest from various banking-related remediation matters.
86
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 4
OTHER INCOME
Accounting policy
Classes of other income are measured as follows:
Items
Trading instruments
Measurement basis
Trading derivatives - Total fair value change (including interest income or expense), with the
exception of some instruments that form part of an economic hedge relationship.
Hedge ineffectiveness
Financial instruments
designated at fair value
Dividend revenue
Fees and commissions,
banking and money
transfer fees
Trading securities - All fair value changes except for interest income or expense, which is recognised
within net interest income.
Represents hedge ineffectiveness, which is fair value movements (excluding interest income or
expense) that do not offset the hedged risk.
Includes fair value movements except for interest income or expense and movements attributable to
the Group’s own credit risk.
Dividend revenue is recognised in the income statement on an accrual basis when the Group’s right to
receive the dividend is established.
Unless included in the effective interest rate, 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.
Group
Company
Gains less losses on financial instruments at fair value
Trading instruments
Hedge ineffectiveness
Financial instruments designated at fair value
2019
$m
2,320
103
(983)
2018
$m
743
557
225
Total gains less losses on financial instruments at fair value
1,440
1,525
2019
$m
1,820
4
(445)
1,379
2018
$m
675
370
80
1,125
Other operating income
Dividend revenue
Controlled entities
Other entities
Banking fees
Money transfer fees
Fees and commissions
Investment management fees
Other income
Total other operating income
Total other income
Customer-related remediation
-
26
1,064
551
839
297
156
2,933
4,373
-
38
1,008
573
1,916
312
224
4,071
5,596
1,343
2,675
27
876
409
(1,071)
15
28
1,627
3,006
35
840
439
77
-
71
4,137
5,262
In the 2019 financial year, customer-related remediation of $1,135 million (2018: $249 million) in continuing operations and $351
million (2018: $50 million) in discontinued operations was recognised as a reduction in fees and commissions. This related to:
• refunds and compensation to customers impacted by issues in the Wealth business, including adviser service fees charged by
NAB Financial Planning and NAB Advice Partnership, combined with the Wealth advice review
• banking-related matters, including matters where customers were incorrectly charged fees on certain fee-exempt transactions.
2019 Annual Financial Report
87
NOTES TO THE FINANCIAL STATEMENTS
NOTE 5
OPERATING EXPENSES
Accounting policy
Annual leave, long service leave and other employee benefits
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 is accrued using an actuarial calculation, including assumptions regarding
employee 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 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.
Refer to Note 24 Provisions for balances of employee benefit related provisions.
Group
Company
2019
$m
2018
$m
2019
$m
2018
$m
3,517
3,345
2,680
2,578
276
407
282
266
622
728
245
253
256
238
465
645
4,482
4,961
3,434
3,926
447
98
545
540
297
1,115
200
591
179
728
80
632
19
419
451
133
584
612
304
476
226
295
206
657
75
799
174
541
466
84
550
44
149
875
159
608
149
662
54
519
254
303
484
101
585
35
155
375
190
596
174
613
49
665
30
394
4,800
9,827
4,365
9,910
3,776
7,760
3,276
7,787
Personnel expenses
Salaries and related on-costs
Superannuation costs-defined contribution plans
Performance-based compensation
Other expenses
Total personnel expenses
Occupancy-related expenses
Operating lease rental expense
Other expenses
Total occupancy-related expenses
General expenses
Fees and commission expense
Depreciation of property, plant and equipment
Amortisation of intangible assets
Advertising and marketing
Charge to provide for operational risk event losses
Communications, postage and stationery
Computer equipment and software
Data communication and processing charges
Professional fees
Impairment losses recognised
Other expenses
Total general expenses
Total operating expenses
88
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 5 OPERATING EXPENSES (CONTINUED)
Customer-related remediation
In the 2019 financial year, customer-related remediation of $364 million (2018: $111 million) was recognised as a charge to
provide for operational risk event losses. This includes costs for implementing remediation processes.
Capitalised software policy change
In the 2019 financial year, the Group made a change to the application of the software capitalisation policy by increasing the
capitalisation threshold from $0.5 million to $2 million. The impact of this change was an accelerated amortisation charge of
$494 million recognised as amortisation of intangible assets.
Impairment losses
In the 2019 financial year, the Company recognised an amount of $249 million relating to the impairment of its investment in
National Wealth Management Holding (NWMH) Limited. The impairment impacts the profit or loss of the Company and not the
Group. The majority of NWMH Limited's cash flows are included in the Consumer Banking and Wealth cash-generating unit for
purposes of testing goodwill for impairment in the Group.
The impairment in the investment has been driven by the current industry challenges facing the wealth management business.
Restructuring-related costs
In the 2018 financial year, the Group recognised restructuring-related costs of $755 million, which comprises $540 million of
personnel, outplacement and project management costs, $146 million of software write-offs and $69 million of property
rationalisation costs.
The restructuring-related costs are reflected in other operating expenses in 2018 as:
• $427 million of personnel expenses
• $35 million of occupancy-related expenses
• $146 million of impairment losses recognised
• $125 million of professional fees
• $22 million of other expenses.
2019 Annual Financial Report
89
NOTES TO THE FINANCIAL STATEMENTS
NOTE 6
INCOME TAX
Accounting policy
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 statements 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.
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.
Income tax expense
The income tax expense for the year reconciles to the profit before income tax as follows:
Group
Company
2019
$m
7,177
2,153
7
(67)
2
(50)
(1)
(53)
2
73
-
21
2,087
2,771
(684)
2,087
2018
$m
8,400
2,520
7
(38)
4
(61)
(3)
(62)
-
72
-
16
2,455
2,734
(279)
2,455
2019
$m
4,552
1,366
4
(26)
1
(50)
-
(38)
2
73
(187)
128
1,273
1,930
(657)
1,273
2018
$m
6,863
2,059
4
(22)
4
(61)
(3)
(50)
-
72
(588)
229
1,644
1,868
(224)
1,644
Profit before income tax
Prima facie income tax expense at 30%
Tax effect of permanent differences:
Assessable foreign income
Foreign tax rate differences
Losses not tax effected
Foreign branch income not assessable
Over provision in prior years
Offshore banking unit income
Restatement of deferred tax balances for tax rate changes
Non-deductible hybrid distributions
Dividend income adjustments
Other
Income tax expense
Current tax expense
Deferred tax expense
Total income tax expense
90
National Australia Bank
NOTE 6 INCOME TAX (CONTINUED)
Deferred tax assets and liabilities
The balance comprises temporary differences attributable to:
Deferred tax assets
Specific provision for credit impairment
Collective provision for credit impairment
Employee entitlements
Tax losses
Unrealised derivatives in funding vehicles
Other provisions
Depreciation
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
Deferred tax assets not brought to account
NOTES TO THE FINANCIAL STATEMENTS
Group
2019
$m
2018
$m
Company
2019
$m
2018
$m
225
917
250
67
316
759
269
308
205
834
266
72
362
323
99
220
3,111
(441)
2,670
2,381
(298)
2,083
7
47
16
371
441
(441)
-
8
109
14
167
298
(298)
-
182
787
219
67
-
739
156
186
2,336
(315)
2,021
-
-
8
307
315
(315)
-
165
706
230
72
-
305
4
171
1,653
(206)
1,447
-
37
7
162
206
(206)
-
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
2019
$m
1,121
350
2018
$m
1,129
339
2019
$m
1,121
350
2018
$m
1,129
339
2019 Annual Financial Report
91
NOTES TO THE FINANCIAL STATEMENTS
NOTE 7
EARNINGS PER SHARE
Earnings ($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) after tax for the year from discontinued operations
Adjusted earnings from continuing operations
Weighted average number of ordinary shares (millions)
Weighted average ordinary shares (net of treasury shares)
Potential dilutive weighted average ordinary shares
Convertible notes
Convertible preference shares
Share based payments
Group
Basic
Diluted
2019
2018
2019
2018
4,798
(83)
-
-
4,715
(289)
5,004
5,554
(100)
-
-
5,454
(388)
5,842
4,798
(83)
165
90
4,970
(289)
5,259
5,554
(100)
128
122
5,704
(388)
6,092
2,797
2,709
2,797
2,709
-
-
-
-
-
-
133
88
6
104
118
9
Total weighted average ordinary shares
2,797
2,709
3,024
2,940
Earnings per share (cents) attributable to owners of NAB
Earnings per share (cents) from continuing operations
Earnings per share (cents) from discontinued operations
168.6
178.9
(10.3)
201.3
215.6
(14.3)
164.4
173.9
(9.6)
194.0
207.2
(13.2)
92
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
FINANCIAL INSTRUMENTS
OVERVIEW
Financial instruments represent the majority of the Group's balance sheet, including loans and advances, deposits, securities and
derivatives. The carrying amount presented on the balance sheet reflects the Group's business model for managing the asset.
Where that model is to collect contractual cash flows (such as with loans and advances), the financial instrument is measured at
amortised cost. Conversely, where the financial instrument is managed on a fair value basis, that instrument will be measured as
such. This approach presents relevant information about the nature and risks associated with the Group's balance sheet.
Initial recognition of financial instruments
Accounting for a financial instrument begins at initial recognition. 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.
Financial instruments managed on a fair value basis are recognised initially at fair value, with transaction costs recognised in the
income statement as incurred. All other financial instruments are recognised initially at fair value plus / less directly attributable
transaction costs.
Classification
Following initial recognition is classification. AASB 9 Financial Instruments requires the Group to consider the following flow chart
for all debt instruments (including loans and advances), derivative instruments and equity instruments.
Financial liabilities follow a much simpler classification process. The majority of the Group's financial liabilities are subsequently
measured at amortised cost unless the Group elects to measure a financial liability at fair value through profit or loss.
Refer to the table at the end of this section for a summary of the classification applicable to the Group's balance sheet items.
Measurement
In 2014 the Group early adopted AASB 9 Financial Instruments (2014). At that time, 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. The Group adopted the hedge accounting provisions under AASB 9 from 1 April 2018.
2019 Annual Financial Report
93
NOTES TO THE FINANCIAL STATEMENTS
OVERVIEW (CONTINUED)
Financial instruments measured at amortised cost
Amortised cost is the amount at which a financial asset or financial liability is measured at initial recognition adjusted for
principal repayments, amortisation, any relevant transaction costs, premiums or discounts in accordance with the effective
interest method and, for financial assets, any loss allowance.
Financial assets measured at fair value through other comprehensive income
Gains or losses arising from changes in the fair value of financial instruments measured at fair value through other
comprehensive income are recognised in a separate component of equity. Upon disposal, the cumulative gain or loss previously
recognised in other comprehensive income is reclassified from equity to the income statement.
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 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.
Financial instruments at fair value through profit or loss
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.
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 risk is calculated by determining the changes in own credit spreads and is presented separately in other
comprehensive income.
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 initially 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 to its current fair value throughout the life of the contract. Derivatives are presented 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 9 Trading instruments and Note 18 Hedge
accounting.
Derecognition of financial instruments
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.
The Group removes a financial liability from the balance sheet when the obligation specified in the contract is discharged,
cancelled or expires.
94
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
OVERVIEW (CONTINUED)
Summary of classification and measurement basis
Type of Instrument
Financial assets
Classification and
measurement
Reason
Note
Loans and advances (customer loans and
Amortised cost
Cash flows represent solely payments of principal
Note 12 Loans and
facilities)
and interest, held with the objective to collect
advances
Trading securities (bonds, notes or securities
issued by government, financial institutions or
other corporates)
Trading derivatives (forwards, swaps, futures,
options)
Other financial assets
Fair value through
profit or loss
contractual cash flows
Principal purpose is selling or repurchasing in
the near term, or part of a portfolio of financial
instruments that are managed together and for
which there is evidence of short-term profit
taking
Derivatives not in a qualifying hedging
relationship
Note 9 Trading
instruments
Designated at fair value through profit or loss to
Note 11 Other
eliminate an accounting mismatch
financial assets
Debt instruments (bonds, notes or securities
issued by government, financial institutions or
Fair value through
other
Cash flows represent solely payments of principal
and interest, held with the objective to both
Note 10 Debt
instruments
other corporates)
comprehensive
collect contractual cash flows or to sell
income
Hedging derivatives (forwards, swaps, futures,
Fair value(1)
Designated in a qualifying hedging relationship
Note 18 Hedge
options)
Financial liabilities
Trading derivatives (forwards, swaps, futures,
Fair value through
Derivatives not in a qualifying hedging
options)
profit or loss
relationship
accounting
Note 9 Trading
instruments
Deposits and other borrowings (deposits,
commercial paper, securities sold under
repurchase agreements)
Bonds and notes
Perpetual notes, convertible preference shares
and convertible notes
Not designated as at fair value through profit or
Note 13 Deposits and
loss
Amortised cost
other borrowings
Note 14 Bonds, notes
and subordinated
debts
Note 15 Other debt
issues
Certain bonds, notes and deposits
Fair value through
Designated as at fair value through profit or loss
Note 16 Other
profit or loss(2)
to eliminate an accounting mismatch
financial liabilities
(1) The classification of the fair value movements will depend on the type of hedge (i.e. fair value hedge, cash flow hedge, or hedge of a net investment). Refer to
Note 18 Hedge accounting.
(2) Except for changes in own credit risk which are recognised in other comprehensive income.
2019 Annual Financial Report
95
NOTES TO THE FINANCIAL STATEMENTS
NOTE 8
CASH AND BALANCES WITH OTHER BANKS
Accounting policy
Cash and liquid assets, due from and due to other banks are initially measured at fair value then subsequently at amortised cost.
For the purposes of the cash flow statement, cash and cash equivalents includes cash and liquid assets (including reverse
repurchase agreements and short-term government securities) and amounts due from other banks net of amounts due to other
banks that are readily convertible to known amounts of cash within three months, highly liquid 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).
Refer to Note 36 Notes to the cash flow statements for a detailed reconciliation of cash and cash equivalents.
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
Other banks
Total due from other banks
Due to other banks
Central banks and other regulatory authorities
Other banks
Total due to other banks
Group
Company
2019
$m
1,003
53,201
1,253
55,457
9,058
23,072
32,130
7,768
26,505
34,273
2018
$m
919
48,069
1,200
50,188
15,759
14,809
30,568
17,049
21,143
38,192
2019
$m
850
52,976
985
54,811
7,481
21,568
29,049
7,693
24,859
32,552
2018
$m
770
48,015
932
49,717
14,421
13,872
28,293
17,049
19,322
36,371
96
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 9
TRADING INSTRUMENTS
Accounting policy
Trading instruments comprise of:
• Derivatives that are not in a qualifying hedge relationship.
• Securities that are classified as held for trading because they are acquired or incurred principally for the purpose of selling or
repurchasing in the near term, or form part of a portfolio of financial instruments that are managed together and for which
there is evidence of short-term profit taking.
Trading instruments are measured at fair value through profit or loss.
Trading derivatives
Trading securities
Total trading instruments
2019
Assets
$m
35,545
61,283
96,828
Group
2018
2019
2018
Assets
Liabilities
Liabilities
$m
24,997
53,231
78,228
$m
$m
34,318
22,422
-
-
34,318
22,422
2019
Assets
$m
35,007
54,545
89,552
Company
2018
2019
2018
Assets
Liabilities
Liabilities
$m
25,996
46,965
72,961
$m
$m
37,945
25,863
-
-
37,945
25,863
Further details of trading derivatives are disclosed in the below table.
Group
Company
2019
Assets
$m
2018
2019
2018
Assets
Liabilities
Liabilities
$m
$m
$m
2019
Assets
$m
2018
2019
2018
Assets
Liabilities
Liabilities
$m
$m
$m
6,727
8,478
241
5,764
7,520
120
6,913
10,286
138
5,199
6,991
174
5,772
8,800
239
5,156
8,372
119
6,084
14,385
139
4,702
10,652
175
Foreign exchange rate-related
contracts
Spot and forward contracts
Cross currency swaps
Options / swaptions
Total foreign exchange rate-related
contracts
15,446
13,404
17,337
12,364
14,811
13,647
20,608
15,529
Interest rate-related contracts
Forward rate agreements
Swaps
Options / swaptions
Total interest rate-related contracts
Credit derivatives
Commodity derivatives
Other derivatives
27
18,584
1,219
19,830
58
165
46
3
10,494
698
11,195
87
236
75
17
15,364
1,372
16,753
103
88
37
3
8,986
684
9,673
130
198
57
27
18,677
1,219
19,923
61
166
46
3
11,245
698
11,946
91
237
75
16
15,717
1,372
17,105
106
88
38
3
9,257
684
9,944
134
198
58
Total trading derivatives
35,545
24,997
34,318
22,422
35,007
25,996
37,945
25,863
Further details of trading securities are disclosed in the below table.
Government bonds, notes and securities
Semi-government bonds, notes and securities
Corporate / financial institution bonds, notes and securities
Other bonds, notes, securities and other assets
Total trading securities
Group
Company
2019
$m
35,800
6,458
18,034
991
61,283
2018
$m
28,623
5,032
18,152
1,424
53,231
2019
$m
33,484
3,816
16,254
991
54,545
2018
$m
26,043
3,167
16,333
1,422
46,965
2019 Annual Financial Report
97
NOTES TO THE FINANCIAL STATEMENTS
NOTE 10
DEBT INSTRUMENTS
Accounting policy
Debt instruments are measured at fair value through other comprehensive income as they are held in a business model with the
objective of collecting contractual cashflows or realising the asset through sale.
Group
Company
2019
$m
3,005
2018
$m
3,576
21,689
21,011
6,273
9,238
7,696
9,773
40,205
42,056
2019
$m
3,005
21,689
6,256
9,216
40,166
2018
$m
3,576
21,011
7,615
9,755
41,957
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
NOTE 11
OTHER FINANCIAL ASSETS
Accounting policy
In certain circumstances the Group designates financial assets as measured at fair value through profit or loss. This option is
applied where an accounting mismatch is significantly reduced or eliminated that would otherwise occur if the asset was
measured on another basis.
Where assets 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 are
recognised in the income statement as they arise.
Loans at fair value
Other financial assets at fair value
Total other financial assets
Loans
Group
Company
2019
$m
6,761
349
7,110
2018
$m
9,845
196
10,041
2019
$m
4,868
1,361
6,229
2018
$m
7,259
1,322
8,581
The maximum credit exposure of loans (excluding any undrawn facility limits) included in other financial assets is $6,761 million
(2018: $9,845 million) for the Group and $4,868 million (2018: $7,259 million) for the Company. The cumulative change in fair
value of the loans attributable to changes in credit risk amounted to a $65 million loss (2018: $82 million loss) for the Group and
a $54 million loss (2018: $66 million loss) for the Company.
98
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 12
LOANS AND ADVANCES
Accounting policy
Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active
market.
Loans and advances are initially recognised at fair value plus transaction costs directly attributable to the origination of the loan
or advance, which are primarily brokerage and origination fees. These costs are amortised over the estimated life of the loan.
Subsequently, loans and advances are measured at amortised cost using the effective interest rate method, net of any provision
for credit impairment.
Loans and advances
Housing loans
Other term lending(1)
Asset and lease financing
Overdrafts(1)
Credit card outstandings
Other lending
Total gross loans and advances
Deduct:
Unearned income and deferred net fee income
Provision for credit impairment
Total net loans and advances
Group
2019
$m
2018
$m
Company
2019
$m
2018
$m
343,915
216,126
12,763
5,820
6,774
6,703
339,540
200,541
12,428
5,304
7,294
6,822
302,764
180,100
12,230
3,265
5,717
6,242
301,603
166,639
11,938
3,180
6,232
6,367
592,101
571,929
510,318
495,959
(452)
(3,900)
(435)
(3,513)
(510)
(3,281)
(497)
(2,954)
587,749
567,981
506,527
492,508
(1) Comparative information has been restated to align to the presentation in the current period to reflect revised product classifications.
NOTE 13
DEPOSITS AND OTHER BORROWINGS
Accounting policy
Deposits and other borrowings are initially recognised at fair value less directly attributable transaction costs and subsequently
measured at amortised cost.
Term deposits
On-demand and short-term deposits
Certificates of deposit
Deposits not bearing interest
Commercial paper and other borrowings
Securities sold under agreements to repurchase
Total deposits and other borrowings
Group
Company
2019
$m
160,328
210,294
39,620
53,672
26,809
31,362
2018
$m
162,218
194,795
42,316
50,767
25,317
27,732
2019
$m
127,997
190,284
39,620
47,861
25,902
31,362
2018
$m
132,176
176,597
42,316
45,474
24,322
27,731
522,085
503,145
463,026
448,616
2019 Annual Financial Report
99
NOTES TO THE FINANCIAL STATEMENTS
NOTE 14
BONDS, NOTES AND SUBORDINATED DEBT
Accounting policy
Bonds, notes and subordinated debt 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.
Bonds, notes and subordinated debt
Medium-term notes
Securitisation notes
Covered bonds
Subordinated medium-term notes
Other subordinated notes
Total bonds, notes and subordinated debt(1)
Issued bonds, notes and subordinated debt by currency
AUD
USD
EUR
GBP
Other
Group
2019
$m
2018
$m
Company
2019
$m
2018
$m
104,126
106,428
104,147
106,448
4,283
23,999
10,342
508
3,660
22,703
6,931
500
-
23,110
10,342
-
-
22,731
6,931
-
143,258
140,222
137,599
136,110
43,380
41,914
36,359
6,708
14,897
41,094
42,856
32,872
9,586
13,814
38,966
41,813
35,787
6,680
14,353
37,377
42,989
32,833
9,604
13,307
Total bonds, notes and subordinated debt(1)
143,258
140,222
137,599
136,110
(1) The balances include net discounts / premium adjustments.
Subordinated medium-term notes
Currency
Notional amount(1)
Maturity / First optional call date
EUR
EUR
AUD
HKD
JPY
AUD
AUD
JPY
SGD
AUD
AUD
AUD
AUD
AUD
USD
Total
m
750(2)
1,000
1,100
1,137
10,000
150
650
10,000
450
943
1,000
275
20
20
1,500
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
Floating due 2024
Fixed due 2027
Fixed due 2027
Fixed due 2028
Fixed due 2029
Group
Company
2019
$m
1,215
1,637
1,100
213
138
152
650
138
493
938
1,000
309
30
30
2,299
10,342
2018
$m
1,215
1,662
1,100
194
122
148
650
122
451
936
-
277
27
27
-
6,931
2019
$m
1,215
1,637
1,100
213
138
152
650
138
493
938
1,000
309
30
30
2,299
10,342
2018
$m
1,215
1,662
1,100
194
122
148
650
122
451
936
-
277
27
27
-
6,931
(1) Subordinated medium-term notes qualify as Tier 2 capital, in some cases subject to transitional Basel III treatment.
(2) On 13 September 2019, NAB exercised its option to redeem the EUR750 million medium-term notes. The notes were repaid at par on 12 November 2019.
100
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 14 BONDS, NOTES AND SUBORDINATED DEBT (CONTINUED)
Other subordinated notes
On 17 December 2015, BNZ issued NZ$550 million of subordinated unsecured notes in New Zealand (BNZ Subordinated Notes),
treated as Tier 2 capital, subject to an adjustment as the notes are issued by a subsidiary to third parties. 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.
2019 Annual Financial Report
101
NOTES TO THE FINANCIAL STATEMENTS
NOTE 15
OTHER DEBT ISSUES
Accounting policy
Perpetual notes, convertible preference shares and convertible notes are initially recognised at fair value less directly attributable
transaction costs and subsequently measured at amortised cost using the effective interest method. Transaction costs are
recognised using the effective interest method through the income statement from the date of issue.
Perpetual floating rate notes
Convertible preference shares and convertible notes
Total other debt issues
The table below highlights the key features of the Group’s other debt issuances.
Group
Company
2019
$m
77
6,405
6,482
2018
$m
106
6,052
6,158
2019
$m
77
6,405
6,482
2018
$m
106
6,052
6,158
Perpetual floating rate notes
Convertible preference shares
Convertible notes
Issued amount
USD250 million
NAB CPS - $1.51 billion
NAB CPS II - $1.72 billion
NAB Capital Notes - $1.34 billion
NAB Capital Notes 2 - $1.50 billion
NAB Capital Notes 3 - $1.87 billion
Issued date
9 October 1986
NAB CPS - 20 March 2013
NAB Capital Notes - 23 March 2015
NAB CPS II - 17 December 2013
NAB Capital Notes 2 - 7 July 2016
NAB Capital Notes 3 - 20 March 2019
Interest payment
Semi-annually in arrears
Quarterly in arrears
Quarterly in arrears
frequency
Interest rate
0.15% per annum above the 6
NAB CPS - 3.20% per annum above the
NAB Capital Notes - 3.50% per annum
month USD LIBOR
3 month BBSW
above the 3 month BBSW
Maturity / conversion
No final maturity
NAB CPS converted / redeemed on
Mandatory conversion:
NAB CPS II - 3.25% per annum above
NAB Capital Notes 2 - 4.95% per annum
the 3 month BBSW
above the 3 month BBSW
NAB Capital Notes 3 - 4.00% per annum
above the 3 month BBSW
20 March 2019
Mandatory conversion:
NAB CPS II - 19 December 2022
Issuer conversion option:
NAB CPS II - 17 December 2020
NAB Capital Notes - 23 March 2022
NAB Capital Notes 2 - 8 July 2024
NAB Capital Notes 3 - 19 June 2028
Issuer conversion option:
NAB Capital Notes - 23 March 2020
NAB Capital Notes 2 - 7 July 2022
NAB Capital Notes 3 - 17 June 2026
Outstanding amount
USD52.22 million
NAB CPS II - $1.72 billion
NAB Capital Notes - $1.34 billion
NAB Capital Notes 2 - $1.50 billion
NAB Capital Notes 3 - $1.87 billion
Capital treatment
Tier 2 capital, subject to
Additional Tier 1 capital
Additional Tier 1 capital
transitional Basel III arrangements
102
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 16
OTHER FINANCIAL LIABILITIES
Accounting policy
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 that are recognised in other comprehensive income) are recognised in the income
statement as they arise.
Other financial liabilities at fair value
Bonds, notes and subordinated debt
Deposits and other borrowings
On-demand and short-term deposits
Certificates of deposit
Term deposits
Commercial paper and other borrowings
Securities sold short
Other financial liabilities
Total other financial liabilities
Group
2019
$m
2018
$m
Company
2019
$m
2018
$m
25,998
23,580
6,414
5,485
263
1,251
55
3,296
2,204
216
245
1,642
949
1,709
2,027
285
33,283
30,437
-
-
-
-
2,119
17
8,550
-
-
-
-
1,862
34
7,381
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 2019 financial year of $167 million (2018: $66 million gain) for the Group and a gain of $149 million (2018: $10
million gain) 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 gain of $35 million (2018: $132 million loss) for the Group and a gain of $66
million (2018: $83 million loss) for the Company. The contractual amount to be paid at the maturity of the bonds, notes and
subordinated debt is $25,078 million (2018: $23,555 million) for the Group and $5,991 million (2018: $5,452 million) for the
Company.
2019 Annual Financial Report
103
NOTES TO THE FINANCIAL STATEMENTS
NOTE 17
PROVISION FOR CREDIT IMPAIRMENT ON LOANS AT AMORTISED COST
Accounting policy
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
• financial guarantee contracts.
Exposures are assessed on a collective basis in each stage unless there is sufficient evidence that one or more events associated
with an exposure could have a detrimental impact on estimated future cash flows. Where such evidence exists, the exposure is
assessed on an individual basis.
Stage
12-months ECL (Stage 1)
Lifetime ECL – not credit
impaired (Stage 2)
Lifetime ECL – credit
impaired (Stage 3)
Measurement basis
The portion of lifetime ECL associated with the probability of default events occurring within the next
12 months.
ECL associated with the probability of default events occurring throughout the life of an instrument.
Lifetime ECL, but interest revenue is measured based on the carrying amount of the instrument net
of the associated ECL.
At each reporting date, the Group assesses the credit risk of exposures in comparison to the risk at initial recognition, to
determine the stage that applies to the associated ECL measurement. If the credit risk of an exposure has increased significantly
since initial recognition, the asset will migrate to Stage 2. If no significant increase in credit risk is observed, the asset will remain
in Stage 1. Should an asset become impaired it will be transferred to Stage 3.
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 19 Financial risk
management.
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.
Credit quality of financial assets
The Group’s internally developed credit rating system utilises historical default data drawn from a number of sources to assess
the potential default risk of lending, or other financial services products, provided to counterparties or customers. The Group has
defined counterparty probabilities of default across retail and non-retail loans and advances. For non-retail, these can be broadly
mapped to external credit rating agencies and comprise performing (pre-default) and non-performing (post-default) rating
grades.
Inputs, assumptions and techniques used for estimating impairment
In assessing the impairment of financial assets under the expected credit loss model, the Group aligns impairment with the
definition of default prescribed in its Credit Policy and Procedures. 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.
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, including expert credit risk assessment, forward looking information and analysis
based on the Group’s historical experience.
104
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 17 PROVISION FOR CREDIT IMPAIRMENT ON LOANS AT AMORTISED COST (CONTINUED)
• For non-retail facilities, internally derived credit ratings, as described above, represent a key determinant of credit risk. The
Group assigns each customer a credit rating at initial recognition based on available information. 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.
• Retail facilities use the number of days past due (DPD) or the relative change in probability of default at account level, to
determine significant increase in credit risk.
• In addition, the Group considers that significant increase in credit risk occurs when an asset is more than 30 DPD.
Calculation of expected credit losses
• ECLs are calculated using three main parameters 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 information, including 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 uses internal subject matter experts from Risk, Economics and Business Divisions to consider a range of relevant
forward looking data, including macro-economic forecasts and assumptions, for the determination of unbiased general
economic adjustments and any idiosyncratic or targeted portfolio / industry adjustments, in order to support the calculation
of ECLs.
• Forward looking adjustments for both general macro-economic adjustments and more targeted portfolio / industry
adjustments, reflect reasonable and supportable forecasts of potential future 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, commercial and residential property prices, and require an evaluation of both the current and forecast
direction of the macro-economic cycle.
• Incorporating forward looking information, including macro-economic forecasts, increases the degree of judgement required
to assess how changes in these data points, will affect ECLs. The methodologies and assumptions, including any forecasts of
future economic conditions, are reviewed regularly.
Key judgements and estimates
• 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 the performance of
different industries, sectors, geographies or key indicators of performance or emerging stress including unemployment,
property prices, cash rate, demand / supply dynamics etc).
• Judgement is required by management in the estimation of the amount and timing of future cash flows when determining an
impairment loss for individual borrowers in respect of 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 available at the time. As actual results may
differ, future changes to the impairment allowance may be required.
Credit impairment charge
New and increased provisions (net of collective provision releases)
Write-backs of specific provisions
Recoveries of specific provisions
Total charge to the income statement
Group
Company
2019
$m
1,154
(170)
(57)
927
2018
$m
1,057
(193)
(73)
791
2019
$m
987
(134)
(42)
811
2018
$m
903
(144)
(52)
707
2019 Annual Financial Report
105
NOTES TO THE FINANCIAL STATEMENTS
NOTE 17 PROVISION FOR CREDIT IMPAIRMENT ON LOANS AT AMORTISED COST (CONTINUED)
Group
Balance at 1 October 2017
Changes due to financial assets recognised in the opening balance that have
Transferred to 12-months ECL - collective provision
Transferred to Lifetime ECL - collective provision
Transfer to Lifetime ECL credit impaired - collective provision
Transfer to Lifetime ECL credit impaired - specific provision
New and increased provisions (net of collective provision releases)
Write-backs of specific provisions
Write-offs from specific provisions
Foreign currency translation and other adjustments
Balance at 30 September 2018
Changes due to financial assets recognised in the opening balance that have
Transferred to 12-months ECL - collective provision
Transferred to Lifetime ECL - collective provision
Transfer to Lifetime ECL credit impaired - collective provision
Transfer to Lifetime ECL credit impaired - specific provision
New and increased provisions (net of collective provision releases)
Write-backs of specific provisions
Write-offs from specific provisions
Foreign currency translation and other adjustments
Balance at 30 September 2019
Stage 1
Stage 2
Lifetime
ECL not
Stage 3
Lifetime
Lifetime
12-mth
credit
ECL credit
ECL credit
ECL
impaired
impaired
impaired
Collective
Collective
Collective
Specific
provision
provision
provision
provision
$m
313
296
(58)
(2)
(2)
(225)
-
-
2
$m
1,819
(286)
147
(50)
(34)
530
-
-
(1)
$m
403
(10)
(89)
52
(114)
149
-
-
-
324
2,125
391
358
(48)
(2)
(2)
(264)
-
-
2
(348)
104
(65)
(49)
456
-
-
4
(10)
(56)
67
(106)
236
-
-
1
368
2,227
523
$m
689
-
-
-
150
603
(193)
(573)
(3)
673
-
-
-
157
726
(170)
(600)
(4)
782
Total
$m
3,224
-
-
-
-
1,057
(193)
(573)
(2)
3,513
-
-
-
-
1,154
(170)
(600)
3
3,900
Impact of movements in gross carrying amount on provision for expected credit losses for the Group
Provision for credit impairment reflects expected credit losses (ECL) measured using the three-stage approach. The following
explains how significant changes in the gross carrying amount of loans and advances during the 2019 financial year have
contributed to the changes in the provision for credit impairment for the Group under the expected credit loss model.
Overall, the total provision for credit impairment increased by $387 million compared to the balance at 30 September 2018.
Specific provisions increased by $109 million compared to the balance at 30 September 2018, due to new and increased specific
provisions raised for the Business lending portfolios in Australia and New Zealand, combined with a low level of write-off activity.
106
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 17 PROVISION FOR CREDIT IMPAIRMENT ON LOANS AT AMORTISED COST (CONTINUED)
Collective provisions increased by $278 million compared to the balance at 30 September 2018, comprised of:
Collective provision 12-months ECL (Stage 1) – increased by $44 million as a result of:
• $146 billion of loans and advances that were newly originated or migrated into Stage 1 from Stage 2 or Stage 3 due to credit
quality improvement.
• Partially offset by $134 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.
Collective provision Lifetime ECL – not credit impaired (Stage 2) – increased by $102 million as a result of:
• $33 billion of loans and advances migrating into Stage 2 as a result of loans and advances transferred from Stage 1 or Stage 3.
• Net increase in forward looking adjustments (FLAs) raised for targeted sectors.
• Partially offset by $52 billion of loans and advances that were repaid, experienced movement in underlying account balances
during the period, migrated to Stage 1 as a result of improved credit quality or into Stage 3 due to deterioration in credit
quality.
Collective provision Lifetime ECL – credit impaired (Stage 3) – increased by $132 million as a result of:
• $5 billion of loans and advances that experienced movement in underlying account balances during the period or were
transferred into Stage 3 from Stage 1 and Stage 2 due to credit quality deterioration.
• Partially offset by $3 billion of loans and advances that were repaid or migrated to Stage 1 or Stage 2 due to credit quality
improvement or migrated to individually credit assessed with specific provisions raised.
Stage 1
Stage 2
Lifetime
ECL not
Stage 3
Lifetime
12-mth
credit
ECL credit
Lifetime
ECL
credit
Company
Balance at 1 October 2017
Changes due to financial assets recognised in the opening balance that have
Transferred to 12-months ECL - collective provision
Transferred to Lifetime ECL - collective provision
Transferred to Lifetime ECL credit impaired - collective provision
Transferred to Lifetime ECL credit impaired - specific provision
New and increased provisions (net of collective provision releases)
Write-backs of specific provisions
Write-offs from specific provisions
Foreign currency translation and other adjustments
Balance at 30 September 2018
Changes due to financial assets recognised in the opening balance that have
Transferred to 12-months ECL - collective provision
Transferred to Lifetime ECL - collective provision
Transferred to Lifetime ECL credit impaired - collective provision
Transferred to Lifetime ECL credit impaired - specific provision
New and increased provisions (net of collective provision releases)
Write-backs of specific provisions
Write-offs from specific provisions
Foreign currency translation and other adjustments
Balance at 30 September 2019
ECL
impaired
impaired
impaired
Collective
Collective
Collective
Specific
provision
provision
provision
provision
$m
246
220
(46)
(2)
(1)
(159)
-
-
2
$m
1,533
(213)
113
(44)
(30)
425
-
-
1
260
1,785
282
(39)
(2)
(2)
(201)
-
-
2
(275)
88
(60)
(35)
379
-
-
1
$m
334
(7)
(67)
46
(99)
135
-
-
-
342
(7)
(49)
62
(96)
222
-
-
-
300
1,883
474
$m
582
-
-
-
130
502
(144)
(500)
(3)
567
-
-
-
133
587
(134)
(525)
(4)
624
Total
$m
2,695
-
-
-
-
903
(144)
(500)
-
2,954
-
-
-
-
987
(134)
(525)
(1)
3,281
Impact of movements in gross carrying amount on provision for expected credit losses for the Company
Provision for credit impairment reflects expected credit losses (ECL) measured using the three-stage approach. The following
explains how significant changes in the gross carrying amount of loans and advances during the 2019 financial year have
contributed to the changes in the provision for credit impairment for the Company under the expected credit loss model.
Overall, the total provision for credit impairment increased by $327 million compared to the balance at 30 September 2018.
2019 Annual Financial Report
107
NOTES TO THE FINANCIAL STATEMENTS
NOTE 17 PROVISION FOR CREDIT IMPAIRMENT ON LOANS AT AMORTISED COST (CONTINUED)
Specific provisions increased by $57 million compared to the balance at 30 September 2018, due to new and increased specific
provisions raised for the Business lending portfolio, combined with a low level of write-off activity.
Collective provisions increased by $270 million compared to the balance at 30 September 2018, comprised of:
Collective provision 12-months ECL (Stage 1) – increased by $40 million due to:
• $121 billion of loans and advances that were newly originated or migrated into Stage 1 from Stage 2 or Stage 3 due to credit
quality improvement.
• Partially offset by $114 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.
Collective provision Lifetime ECL – not credit impaired (Stage 2) – increased by $98 million due to:
• $29 billion of loans and advances migrating into Stage 2 as a result of loans and advances transferred from Stage 1 or Stage 3.
• Net increase in forward looking adjustments (FLAs) raised for targeted sectors.
• Partially offset by $42 billion of loans and advances that were repaid, experienced movement in underlying account balances
during the period, migrated to Stage 1 as a result of improved credit quality or into Stage 3 due to deterioration in credit
quality.
Collective provision Lifetime ECL – credit impaired (Stage 3) – increased by $132 million due to:
• $4 billion of existing loans and advances that were transferred into Stage 3 from Stage 1 and stage 2 due to credit quality
deterioration or experienced movement in underlying account balances during the period.
• Partially offset by $2 billion of loan and advances that were repaid, migrated to Stage 1 or Stage 2 due to credit quality
improvement or migrated to individually credit assessed with specific provisions raised.
Write-offs still under enforcement activity
The contractual amount outstanding on loans and advances that were written off during the 2019 financial year, and are still
subject to enforcement activity was $67 million (2018: $47 million) for the Group and $57 million (2018: $39 million) for the
Company.
Information about total impaired assets
The following table provides details on impaired assets. Gross amounts are shown before taking into account any collateral held
or other credit enhancements. Refer to Note 19 Financial risk management for analysis of the credit quality of the Group’s loans
and advances.
Summary of total impaired assets
Gross impaired assets(1)
Specific provision for credit impairment
Net impaired assets(2)
Group
Company
2019
$m
1,972
(782)
1,190
2018
$m
1,521
(675)
846
2019
$m
1,355
(624)
731
2018
$m
1,263
(567)
696
(1) Gross impaired assets include $5 million (2018: $16 million) for the Group and $nil (2018: $nil) for the Company of gross impaired other financial assets at fair
value, $22 million (2018: $10 million) of impaired off-balance sheet credit exposures for the Group and $20 million (2018: $7 million) for the Company, and $nil
(2018: $2 million) for the Group and $nil (2018: $nil) for the Company, of New Zealand Banking dairy exposures currently assessed as no loss based on security
held. Collective provision are held against these loans.
(2) The fair value of security in respect of impaired assets is $1,161 million (2018: $798 million) for the Group and $703 million (2018: $661 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.
108
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 18
HEDGE ACCOUNTING
Accounting policy
The Group utilises the following three types of hedge relationships in managing its exposure to risk. At inception of all hedge relationships the Group documents the relationship between
the hedging instrument and hedged item, the risk being hedged, the Group’s risk management objective and strategy and how effectiveness will be measured throughout the hedge
relationship.
Objective
Methods for testing
hedge
effectiveness
Potential sources of
ineffectiveness
Recognition of effective
hedge portion
Recognition of
ineffective
hedge portion
Hedging instrument
expires, is sold, or when
hedging criteria are no
longer met
Hedging strategy
Cash flow hedge
To hedge changes to cash flows arising from interest
rate and foreign currency risk.
Principally regression analysis. For portfolio hedges,
capacity analysis to ensure interest cash flows arising
from the portfolio of hedged items are in excess of the
hedging instruments.
Mainly mismatches in terms of the hedged item and
the hedging instrument. For example, frequency and
timing of interest rate resets.
Fair value changes of the hedging instrument
associated with the hedged risk are recognised in the
cash flow hedge reserve in equity.
Fair value hedge
To hedge fair value changes to recognised assets
and liabilities arising from interest rate and foreign
currency risk.
Regression analysis and the cumulative dollar offset
method.
Net investment hedge
To hedge foreign currency exposure arising from
foreign operations of the Group.
Regression analysis.
Mainly mismatches in terms of the hedged item
and the hedging instrument as well as prepayment
risk.
Fair value changes of the hedging instrument and
those arising from the hedged risk on the hedged
item are recognised in the income statement.
None expected as the net investment is only hedged
to the extent of the notional or carrying amount of
the hedging instrument.
Fair value changes of the hedging instrument are
recognised in the foreign currency translation
reserve within equity.
Recognised in the income statement as ineffectiveness arises.
Transferred to the income statement as / when the
hedged item affects the income statement. If the
hedged item is no longer expected to occur the
effective portion accumulated in equity is transferred
to the income statement immediately.
Cumulative hedge adjustment to the hedged item
is amortised to the income statement on an
effective yield basis.
Cumulative fair value changes arising from the
hedging instrument will remain in equity until the
foreign operation is disposed.
The Group’s hedging strategy is to manage its exposure to interest rate risk on a net variable basis in Australian dollars. For Australian denominated exposures this requires the Group to
enter into interest rate swaps where the exposure is to a fixed interest rate. In some instances cash flow hedges of interest rate risk are also used to arrive at a net variable rate position.
Foreign currency exposures are swapped to Australian dollars using cross-currency interest rate swaps. These may be float-to-float or fixed-to-float cross currency swaps depending on
whether the underlying interest rate exposure is floating or fixed, respectively.
109
National Australia Bank
NOTE 18 HEDGE ACCOUNTING (CONTINUED)
Not all exposures are automatically managed under the above strategy. Where a risk is within acceptable limits the Group may decide not to apply hedge accounting to that risk. Instead, the
Group will manage its exposure under broader risk management processes.
Hedging instruments
The table below sets out hedging derivative assets and liabilities by the hedged risk and type of hedge relationship in which they are designated. The Group may designate separate
derivatives to hedge different risk components of one hedged item. In such scenario the notional amount of hedging derivatives will, in sum, exceed the notional amount of the hedged
item. In the case of cross-currency swaps the Group will often designate a single instrument to hedge both interest rate risk in a fair value hedge and currency risk in a cash flow hedge.
NOTES TO THE FINANCIAL STATEMENTS
Derivative assets
Cash flow hedges
Cash flow hedges
Cash flow hedges
Fair value hedges
Hedging instrument
Risk
Interest rate swaps
Cross-currency swaps
Foreign exchange contracts
Interest rate swaps
Interest
Currency
Currency
Interest
Fair value and cash flow hedges
Cross-currency swaps
Interest and currency
Cash flow hedges
Futures
Interest
Derivative liabilities
Cash flow hedges
Cash flow hedges
Cash flow hedges
Fair value hedges
Interest rate swaps
Cross-currency swaps
Foreign exchange contracts
Interest rate swaps
Interest
Currency
Currency
Interest
Fair value and cash flow hedges
Cross-currency swaps
Interest and currency
Cash flow hedges
Futures
Net investment hedges
Foreign exchange contracts
Interest
Currency
Financial liabilities
Net investment hedges
Financial liabilities
Currency
110
National Australia Bank
Group
2019
2018
2019
Carrying
amount
$m
Notional
Carrying
amount
$m
$m
Notional
$m
190,263
91,719
8,444
17,255
6,629
12,921
150,117
32,184
5,479
75,050
18,073
15,597
3
178,447
98,374
24,405
53,390
7,201
19,900
162,951
49,804
19,040
45,646
17,918
19,593
150
83
3,101
80
134
438
4
86
881
30
135
1,410
5
-
-
1,846
1,846
152
3,530
163
331
500
13
156
1,162
114
113
2,450
27
15
-
Company
2018
Carrying
Notional
amount
Notional
$m
$m
$m
171,741
93,649
24,405
42,706
4,608
18,428
157,837
47,770
19,040
28,948
11,290
18,851
150
-
82
2,120
80
64
353
4
86
834
30
136
727
5
-
-
184,112
83,899
8,444
14,097
4,052
8,617
145,559
30,961
5,479
53,646
11,466
11,705
3
-
Carrying
amount
$m
152
3,153
163
219
359
13
156
1,141
114
112
1,374
27
15
-
NOTES TO THE FINANCIAL STATEMENTS
NOTE 18 HEDGE ACCOUNTING (CONTINUED)
The following table shows the maturity profile of hedging derivatives based on their notional amounts.
Group
Interest rate swaps
Foreign exchange contracts
Futures
Cross-currency swaps - interest and currency
Cross-currency swaps - currency
Company
Interest rate swaps
Foreign exchange contracts
Futures
Cross-currency swaps - interest and currency
Cross-currency swaps - currency
2019
2018
0 to 12 months
1 to 5 years
Over 5 years
$m
$m
$m
286,494
122,583
31,357
43,595
32,068
6,834
20,271
277,513
43,595
29,854
6,834
20,271
-
7,425
13,343
87,481
94,560
-
7,425
8,564
81,463
-
-
4,942
40,426
29,159
-
-
500
39,685
Total
$m
440,434
43,595
39,493
25,119
148,178
401,232
43,595
37,279
15,898
141,419
0 to 12 months
1 to 5 years
Over 5 years
$m
$m
$m
287,095
116,959
28,631
13,926
24,208
716
16,498
275,177
13,926
16,012
716
14,018
-
4,310
18,729
69,713
95,342
-
4,310
14,249
63,842
-
-
5,257
37,692
26,895
-
-
553
37,000
The average rate for major currencies of the final exchange of cross-currency swaps designated in hedge relationships are as follows:
USD:AUD
EUR:AUD
GBP:AUD
111
National Australia Bank
Group
Company
2019
1.329
1.472
1.735
2018
1.296
1.460
1.752
2019
1.324
1.499
1.776
Total
$m
432,685
13,926
28,518
24,702
123,903
397,414
13,926
20,322
15,518
114,860
2018
1.311
1.491
1.795
NOTES TO THE FINANCIAL STATEMENTS
NOTE 18 HEDGE ACCOUNTING (CONTINUED)
Hedged items
The balance of the cash flow hedge reserve, which represents the effective portion of the movements in the hedging instrument, is presented in Note 27 Reserves. The movements in hedging
instruments recognised in other comprehensive income are reported in the Group’s statement of other comprehensive income. There are no amounts recognised in the cash flow hedge
reserve for which hedge accounting is no longer applied (2018: $nil).
The following table shows the carrying amount of fair value hedged items in hedge relationships, and the accumulated amount of fair value hedge adjustments in these carrying amounts.
The Group does not hedge its entire exposure to a class of financial instruments, therefore the carrying amounts below do not equal the total carrying amounts disclosed in other notes. The
accumulated amount of fair value hedge adjustments included in the carrying amount of hedged items that have ceased to be adjusted for hedging gains and losses is $nil (2018: $nil) for
the Group and $nil (2018: $nil) for the Company.
Group
Company
2019
2018
2019
2018
Carrying amount
adjustments
Carrying amount
adjustments
Carrying amount
adjustments
Carrying amount
adjustments
Fair value hedge
Fair value hedge
Fair value hedge
Fair value hedge
$m
$m
$m
19,680
-
18,795
14,226
2,375
63,802
22,950
6,653
138
73
1,512
1,234
168
11,825
1,902
58,945
21,423
4,245
$m
-
41
(80)
(616)
382
63
$m
$m
$m
$m
19,680
-
2,375
63,802
-
6,653
-
-
73
1,512
-
168
18,795
-
1,902
58,945
-
4,245
-
-
(80)
(616)
-
63
Debt instruments(1)
Semi-government bonds, notes and
securities
Loans and advances
Housing loans
Other term lending
Bonds, notes and subordinated debt
Medium-term notes
Covered bonds(2)
Subordinated medium-term notes
(1) 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.
(2) The Company ceased to apply hedge accounting to covered bonds, which continue to be designated for hedge accounting purposes at the Group level.
112
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 18 HEDGE ACCOUNTING (CONTINUED)
Fair value hedge relationships result in the following changes in value used as the basis for recognising hedge ineffectiveness for the period:
Gains / (losses) on hedging instruments
Gains / (losses) on hedged items attributable to the hedged risk
Hedge ineffectiveness recognised in the income statement
Group
Company
2019
$m
1,717
(1,573)
144
2018
$m
(540)
1,011
471
2019
$m
802
(826)
(24)
2018
$m
(477)
795
318
A loss of $41 million for the Group and gain of $28 million for the Company was recognised in the income statement related to hedge ineffectiveness from cash flow and net investment
hedge relationships (2018: $88 million gain for the Group and $53 million gain for the Company related to hedge ineffectiveness from cash flow and net investment hedge relationships).
Prior to adoption of the hedge accounting requirements in AASB 9 Financial Instruments hedge ineffectiveness from cross-currency basis was included in hedge ineffectiveness from fair value
hedge relationships.
113
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19
FINANCIAL RISK MANAGEMENT
Overview of risk management framework
Effective risk management, including having a Risk Management Strategy and sound culture, is essential to achieving NAB's
vision to be Australia's leading bank, trusted by customers for exceptional service. Risk exists in all of the Group's businesses and
the environment in which it operates. The Risk Management Strategy describes the strategy for managing risk and the Group's
Risk Management Framework. It is reviewed annually or more frequently if there is a material change to the Group's size,
business mix and complexity, or risk profile. It is approved by the Board and submitted to APRA.
The Group's Risk Management Framework consists of systems, structures, policies, processes and people within the Group that
identify, measure, evaluate, mitigate, monitor and report on all internal and external sources of material risks. The Board is
ultimately responsible for the Risk Management Framework and oversees its operation by management. In addition, directors
and senior executives are held personally accountable for the parts of the Group's operations they manage or control as
mandated by the Banking Executive Accountability Regime (BEAR).
The Group applies a Three Lines of Defence operating model in relation to the management of risk. The overarching principle of
the model is that risk management capability must be embedded within the business to be effective. The role of each line of
defence is:
• 1st Line of Defence – Businesses own risks and obligations, and the controls and mitigation strategies that help manage them.
• 2nd Line of Defence – A functionally segregated Risk function develops risk management frameworks, defines risk
boundaries, provides objective review and challenge regarding the effectiveness of risk management within the 1st line
businesses and executes specific risk management activities where a functional segregation of duties and / or specific risk
capability is required.
• 3rd Line of Defence – An independent Internal Audit function, reporting to the Board, monitors the end-to-end effectiveness
of risk management and compliance with the Risk Management Framework.
Further risk management information for the Group is disclosed in the Corporate Governance section of the Group’s website at
www.nab.com.au/about-us/corporate-governance.
Credit Risk
Credit risk overview, management and control responsibilities
Credit is any transaction that creates an actual or potential obligation for a counterparty or a 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 annual or more frequent review.
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 a counterparty are terminated and settled on a net basis.
114
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19 FINANCIAL RISK MANAGEMENT (CONTINUED)
Environmental, Social and Governance (ESG) risks
The Group is exposed to ESG and other emerging risks. The following items are examples of how these risks may impact the
Group:
• Increases in the frequency and severity of climatic events could impact customers’ ability to service their loans or the value of
the collateral we hold to secure the loans.
• Action taken by governments, regulators and society more generally, to transition to a low carbon economy, could impact the
ability of some customers to generate long term returns in a sustainable way or lead to certain assets being stranded in the
future.
• Failure to comply with environmental and social legislation (emerging and current) may impact customers’ ability to generate
sustainable returns and service their loans.
• If in future, customers don’t hold appropriate levels of insurance for physical assets against certain risks, this may impact the
value the Group can recover in the event of certain natural disasters.
The Group considers these risks as part of the credit risk assessment and due diligence process before a customer is granted
credit and for new product development. The Group also manages its total credit portfolio within established risk appetite and
limits, particularly for specific industries or regions that are more exposed to these types of risks. As at 30 September 2019 the
Group does not consider there to be a material risk of loss arising from ESG risks.
Maximum exposure to credit risk
For financial assets recognised on the balance sheet, the maximum exposure to credit risk is the carrying amount. In certain
circumstances there may be differences between the carrying amounts reported on the balance sheet and the amounts reported
in the tables below. Principally, these differences arise in respect of financial assets that are subject to risks other than credit risk,
such as equity instruments which are primarily subject to market risk, or bank notes and coins.
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 committed facilities.
The table below shows the Group’s maximum exposure to credit risk on-balance sheet and off-balance sheet positions before
taking account of any collateral held or other credit enhancements.
Financial assets
Cash and liquid assets
Due from other banks
Trading instruments
Debt instruments
Other financial assets
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
(a)
(b)
(c)
(d)
(e)
(c)
(e)
(e)
(f)
(f)
(g)
(g)
Group
Company
2019
$m
54,454
32,130
96,828
40,205
7,110
4,689
2018
$m
49,269
30,568
78,228
42,056
10,041
3,840
2019
$m
53,961
29,049
89,552
40,166
6,229
4,059
2018
$m
48,947
28,293
72,961
41,957
8,581
2,703
592,101
571,929
510,318
495,959
2,490
3,816
2,490
3,816
-
-
114,786
100,483
9,057
8,747
7,101
7,272
839,064
798,494
857,711
810,972
23,811
155,980
179,791
1,018,855
22,309
156,631
178,940
977,434
22,893
136,259
159,152
1,016,863
21,371
136,602
157,973
968,945
(a) The balance of Cash and liquid assets that is exposed to credit risk is comprised primarily of reverse repurchase agreements
and securities borrowing agreements. These are collateralised with highly liquid securities and collateral is in excess of the
borrowed or loaned amount.
2019 Annual Financial Report
115
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19 FINANCIAL RISK MANAGEMENT (CONTINUED)
(b) The balance of Due from other banks that 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.
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.
(c) At any one time, the maximum exposure to credit risk from Trading instruments 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 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.
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) Debt instruments are generally comprised of 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.
(e) Other financial assets, Loans and advances and Due from customers on acceptances mainly comprise general lending and
line of credit products. The distinction of 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 acceptances 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 includes 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.
116
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19 FINANCIAL RISK MANAGEMENT (CONTINUED)
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.
Offsetting financial assets and liabilities
The tables below illustrate 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 tables 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 tables 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 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 tables below.
2019
Amount subject to enforceable netting arrangements
Effect of offsetting on balance sheet
Related amounts not offset
Net amounts
Amounts not
subject to
enforceable
Gross
Amount
reported on
Financial
Non-cash
Cash
Net
netting
amounts
offset
balance sheet
Instruments
collateral
collateral
Amount
arrangements
Group
$m
$m
Derivative financial assets
100,366
69,497
Reverse repurchase
agreements
Total assets
Derivative financial liabilities
Repurchase agreements
Total liabilities
Company
77,162
177,528
101,473
63,099
164,572
12,353
81,850
69,497
12,353
81,850
$m
30,869
64,809
95,678
31,976
50,746
82,722
$m
18,916
-
18,916
18,916
-
18,916
$m
613
64,809
65,422
352
50,746
51,098
$m
5,562
-
5,562
9,819
-
$m
5,778
-
5,778
2,889
-
9,819
2,889
Derivative financial assets
90,621
59,985
30,636
19,213
613
5,172
5,638
Reverse repurchase
agreements
Total assets
Derivative financial liabilities
Repurchase agreements
Total liabilities
76,608
167,229
95,079
62,985
158,064
12,353
72,338
59,985
12,353
72,338
64,255
94,891
35,094
50,632
85,726
-
19,213
19,213
-
19,213
64,255
64,868
352
50,632
50,984
-
5,172
8,724
-
-
5,638
6,805
-
8,724
6,805
$m
9,365
-
9,365
6,379
-
6,379
8,430
-
8,430
5,790
-
5,790
2019 Annual Financial Report
117
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19 FINANCIAL RISK MANAGEMENT (CONTINUED)
2018
Amount subject to enforceable netting arrangements
Effect of offsetting on balance sheet
Related amounts not offset
Net amounts
Amounts not
subject to
enforceable
Gross
Amount
reported on
Financial
Non-cash
Cash
Net
netting
amounts
offset
balance sheet
Instruments
collateral
collateral
Amount
arrangements
Group
$m
$m
Derivative financial assets
49,221
25,164
Reverse repurchase
agreements
Total assets
Derivative financial liabilities
Repurchase agreements
Total liabilities
Company
71,899
121,120
46,681
58,984
105,665
14,374
39,538
25,164
14,374
39,538
$m
24,057
57,525
81,582
21,517
44,610
66,127
$m
12,301
-
12,301
12,301
-
12,301
$m
513
57,525
58,038
434
44,610
45,044
$m
4,695
-
4,695
5,557
-
$m
6,548
-
6,548
3,225
-
5,557
3,225
Derivative financial assets
46,089
21,717
24,372
12,297
513
4,389
7,173
Reverse repurchase
agreements
Total assets
Derivative financial liabilities
Repurchase agreements
Total liabilities
71,353
117,442
46,040
58,714
104,754
14,374
36,091
21,717
14,374
36,091
56,979
81,351
24,323
44,340
68,663
-
12,297
12,297
-
12,297
56,979
57,492
434
44,340
44,774
-
4,389
5,415
-
-
7,173
6,177
-
5,415
6,177
Derivative financial assets and liabilities
$m
4,780
-
4,780
3,465
-
3,465
4,427
-
4,427
3,255
-
3,255
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. The Group has applied offsetting to certain centrally cleared derivatives and their associated collateral amounts
which were deemed to satisfy the AASB 132 Financial Instruments: Presentation requirements.
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.
118
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19 FINANCIAL RISK MANAGEMENT (CONTINUED)
Credit risk exposure 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).
Stage 1
12-months ECL
Stage 2
Lifetime ECL
Stage 3
Lifetime ECL
Not credit impaired
Not credit impaired
Credit impaired
Total
Group
Loans and advances(1)
Senior investment grade
Investment grade
Sub-investment grade
Default
Total
Other financial assets(2)
Senior investment grade
Investment grade
Sub-investment grade
Default
Total
2019
$m
2018
$m
168,661
321,412
153,963
-
157,179
315,356
158,002
2019
$m
749
9,933
2018
$m
1,037
9,326
107,639
102,301
-
2,054
2,130
644,036
630,537
120,375
114,794
2019
$m
2018
$m
2019
$m
2018
$m
-
-
-
-
-
-
7,481
7,481
5,538
5,538
169,410
331,345
261,602
9,535
158,216
324,682
260,303
7,668
771,892
750,869
39,690
41,860
994
879
-
1,054
1,367
-
-
108
1,016
-
-
164
1,401
-
41,563
44,281
1,124
1,565
-
-
-
8
8
-
-
-
26
26
39,690
1,102
1,895
8
41,860
1,218
2,768
26
42,695
45,872
(1) Loans and advances includes contingent liabilities and credit-related commitments.
(2) Other financial assets represent debt instruments and acceptances.
Stage 1
12-months ECL
Stage 2
Lifetime ECL
Stage 3
Lifetime ECL
Not credit impaired
Not credit impaired
Credit impaired
Total
2019
$m
2018
$m
141,655
291,589
130,342
-
130,387
289,405
135,404
-
563,586
555,196
39,651
41,761
994
879
-
1,054
1,367
-
2019
$m
702
7,061
89,656
2,052
99,471
-
108
1,016
-
2018
$m
709
6,621
84,411
2,130
93,871
-
164
1,401
-
41,524
44,182
1,124
1,565
2019
$m
2018
$m
2019
$m
2018
$m
-
-
-
-
-
-
6,413
6,413
4,865
4,865
142,357
298,650
219,998
8,465
131,096
296,026
219,815
6,995
669,470
653,932
-
-
-
8
8
-
-
-
26
26
39,651
1,102
1,895
8
41,761
1,218
2,768
26
42,656
45,773
Company
Loans and advances(1)
Senior investment grade
Investment grade
Sub-investment grade
Default
Total
Other financial assets(2)
Senior investment grade
Investment grade
Sub-investment grade
Default
Total
(1) Loans and advances includes contingent liabilities and credit-related commitments.
(2) Other financial assets represent debt instruments and acceptances.
2019 Annual Financial Report
119
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19 FINANCIAL RISK MANAGEMENT (CONTINUED)
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 is such that its lending is widely spread both geographically and in terms of the types of
industries it serves.
Industry concentration of financial assets
Net loans and
Other financial
advances(1)
assets(2)
Contingent
liabilities and
credit-related
commitments
Total
2019
$m
2018
$m
2019
$m
2018
$m
2019
$m
2018
$m
2019
$m
2018
$m
1,962
39,255
30,797
2,915
2,070
36,789
25,668
2,768
10,262
10,283
9,488
10,301
23,977
23,397
417
547
39,420
40,177
1
25
-
1
43
-
1,179
10,761
34,599
2,062
6,970
1,266
11,232
30,758
1,970
7,013
27,118
50,433
104,816
4,978
17,257
26,733
48,568
96,603
4,739
17,339
14,632
15,369
24,120
25,670
343,056
338,872
8,900
9,113
52,941
54,724
404,897
402,709
12,635
69,498
75,094
12,325
67,049
72,136
-
1,246
839
-
2,171
991
225
12,972
43,450
122
14,203
42,283
12,860
83,716
12,447
83,423
119,383
115,410
594,962
578,261
74,825
76,440
179,791
178,940
849,578
833,641
1,799
24,156
29,074
1,727
7,197
1,869
22,435
24,024
1,729
7,157
8,165
8,935
23,977
23,397
417
547
513
8,754
587
9,049
36,323
37,821
33,899
29,949
1
25
-
1
43
-
1,805
4,874
1,706
5,193
26,289
33,327
99,296
3,533
12,096
25,853
32,031
91,794
3,436
12,393
12,069
12,774
20,234
21,709
301,974
300,994
8,877
9,094
48,721
50,452
359,572
360,540
12,121
60,683
65,009
11,842
58,494
62,785
-
1,246
839
-
2,171
992
225
10,631
37,661
122
12,019
36,122
12,346
72,560
103,509
11,964
72,684
99,899
511,905
500,264
71,705
74,066
159,152
157,973
742,762
732,303
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
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
(1) Net loans and advances includes loans at fair value.
(2) Other financial assets represents debt instruments and acceptances.
120
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19 FINANCIAL RISK MANAGEMENT (CONTINUED)
Geographic concentration of financial assets
Group
Cash and liquid assets
Due from other banks
Trading instruments
Debt instruments
Other financial assets
Hedging derivatives
Loans and advances
Due from customers on acceptances
Other assets
Total
Company
Cash and liquid assets
Due from other banks
Trading instruments
Debt instruments
Other financial assets
Hedging derivatives
Loans and advances
Due from customers on acceptances
Other assets
Total
Australia
New Zealand
Other International
2019
$m
5,868
18,150
76,558
30,946
5,095
4,688
2018
$m
5,136
11,301
61,857
30,665
7,418
3,823
490,388
480,608
2,490
8,189
3,816
8,904
642,372
613,528
5,639
18,142
80,319
30,946
4,868
4,059
4,922
11,507
65,389
30,666
7,259
2,687
489,101
479,031
2,490
7,939
3,816
7,840
643,503
613,117
2019
$m
193
3,026
11,243
-
2,015
1
79,401
-
1,697
97,576
-
-
-
-
-
-
-
-
-
-
2018
$m
72
2,461
8,866
-
2,623
1
73,417
-
1,247
88,687
-
-
-
-
-
-
-
-
-
-
2019
$m
48,393
10,954
9,027
9,259
-
-
2018
$m
44,061
16,806
7,505
11,391
-
16
17,960
13,956
-
1,142
96,735
48,322
10,907
9,233
9,220
1,361
-
17,426
-
831
-
655
94,390
44,025
16,786
7,572
11,291
1,322
16
13,477
-
360
97,300
94,849
2019 Annual Financial Report
121
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19 FINANCIAL RISK MANAGEMENT (CONTINUED)
Market Risk
Market risk overview and management
Market risk stems from the Group’s trading and balance sheet management activities, the impact of changes and correlation
between interest rates, foreign exchange rates, credit spreads and volatility in bond, commodity or equity prices.
Market risk is represented by the below two categories:
Traded Market Risk
Non-Traded Market Risk
Traded Market Risk is the potential for gains or losses to arise from
The Group has exposure to non-traded market risk, primarily Interest
trading activities undertaken by the Group as a result of movements in
Rate Risk in the Banking Book (IRRBB). IRRBB is the risk that the Group’s
market prices. The trading activities of the Group are principally carried
earnings or economic value will be affected or reduced by changes in
out by Corporate and Institutional Banking.
interest rates. The sources of IRRBB are as follows:
Trading activities represent 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.
• 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 risks.
Measurement of market risk
The Group primarily manages and controls market risk using Value at Risk (VaR), which is a standard measure used throughout
the industry. VaR gauges the Group’s possible loss for the holding period based on historical market movements. 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
during the holding period.
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 management, the Board Risk Committee and ultimately the Board.
These supplementary measures include stress testing, loss, position and sensitivity limits.
Traded Market Risk
The VaR methodology involves multiple revaluations of the trading books using 550 days of historical pricing shifts. The pricing
data is rolled daily.
The use of 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.
122
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19 FINANCIAL RISK MANAGEMENT (CONTINUED)
Traded market risk
The table below shows the Group and Company VaR for the trading portfolio, including both physical and derivative positions:
As at
Group
As at
Company
30 September
Average value
Minimum value
Maximum value
30 September
Average value
Minimum value
Maximum value
2019
$m
2018
$m
2019
$m
2018
$m
2019
$m
2018
$m
2019
$m
2018
$m
2019
$m
2018
$m
2019
$m
2018
$m
2019
$m
2018
$m
2019
$m
2018
$m
Value at Risk at a 99% confidence level
Foreign exchange risk
Interest rate risk
Volatility risk
Commodities risk
Credit risk
Inflation risk
0.9
7.7
4.3
0.5
1.8
1.0
8.2
9.3
5.1
0.4
1.1
1.6
4.5
8.0
2.5
0.6
1.4
1.9
8.3
9.9
5.3
0.3
1.6
2.0
Diversification benefit
(6.9)
(12.2)
(8.9)
(14.3)
Total Diversified VaR at 99% confidence
interval
Other market risks
Total
9.3
2.7
12.0
13.5
0.5
14.0
10.0
1.8
11.8
13.1
0.6
13.7
Non-traded market risk - Balance sheet risk management
0.2
5.8
1.6
0.2
0.8
1.0
n/a
6.3
0.3
6.6
5.3
8.3
3.7
0.1
0.9
0.6
n/a
10.7
0.5
11.2
11.8
12.8
5.2
2.1
2.0
4.0
n/a
16.8
4.2
21.0
12.5
12.2
7.1
1.0
2.6
2.3
n/a
16.7
0.8
17.5
0.8
7.6
4.3
0.5
1.7
1.0
7.8
8.2
5.1
0.4
1.0
1.6
4.4
7.3
2.5
0.6
1.3
1.7
8.3
9.6
5.3
0.3
1.4
2.0
(6.6)
(11.4)
(8.3)
(14.1)
9.3
2.7
12.0
12.7
0.5
13.2
9.5
1.8
11.3
12.8
0.6
13.4
0.5
5.0
1.6
0.2
0.7
1.0
n/a
5.5
0.3
5.8
5.2
8.1
3.7
0.1
0.8
0.5
n/a
10.2
0.5
10.7
11.7
12.2
5.2
2.1
1.8
4.0
n/a
15.9
4.2
20.1
12.6
13.9
7.1
1.0
2.4
2.4
n/a
15.8
0.8
16.6
The principal objective of balance sheet risk management is to maintain acceptable levels of interest rate and liquidity risk to mitigate the negative impact of movements in interest rates on
the earnings and market value of the Group’s banking book, while ensuring the Group maintains sufficient liquidity to meet its obligations as they fall due.
Non-traded market risk – Interest rate risk management
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 Prudential Practice Guides. 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
123
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19 FINANCIAL RISK MANAGEMENT (CONTINUED)
• 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.
The following table shows the Group and the Company aggregate VaR and EaR for the IRRBB:
As at
Group
As at
Company
30 September
Average value
Minimum value
Maximum value
30 September
Average value
Minimum value
Maximum value
2019
$m
2018
$m
2019
$m
2018
$m
2019
$m
2018
$m
2019
$m
2018
$m
2019
$m
2018
$m
2019
$m
2018
$m
2019
$m
2018
$m
2019
$m
2018
$m
261.0
262.6
268.5
240.5
226.3
205.4
303.1
275.6
261.0
262.6
268.5
240.5
226.3
205.4
303.1
275.6
21.4
19.7
26.5
7.6
9.9
20.1
45.4
7.1
14.8
17.4
57.0
5.3
14.7
22.1
32.5
7.4
6.3
14.4
26.5
2.4
7.3
15.9
18.5
3.8
25.8
21.6
109.9
8.3
22.7
25.8
46.3
11.9
-
-
-
-
-
-
19.7
20.1
17.4
22.1
14.4
15.9
-
21.6
26.5
45.4
57.0
32.5
26.5
18.5
109.9
-
-
-
-
-
-
-
-
25.8
46.3
-
Value at Risk
Australia
New Zealand
Other International
Earnings at Risk(1)
Australia
New Zealand
(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.
124
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19 FINANCIAL RISK MANAGEMENT (CONTINUED)
Liquidity risk and funding mix
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.
These risks are governed by the Group’s funding and liquidity risk appetite which is set by the Board. Group Treasury is
responsible for the management of these risks. Objective review and challenge of the effectiveness of risk management is
provided by Group Balance Sheet and Liquidity Risk with oversight by the Group Asset and Liability Committee. 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 and highly rated investment grade paper. The market value of total on
balance sheet liquid assets held at 30 September 2019 was $129,578 million (2018: $125,854 million). In addition, the Group
holds internal RMBS as a source of contingent liquidity. As at 30 September 2019 the amount of unencumbered internal RMBS
after haircuts held was $50,170 million (2018: $40,160 million).
Funding mix
The Group’s funding is comprised of a mix of deposits, term wholesale funding, short-term wholesale funding and equity. The
Group manages this 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 supplements deposit-raising via its term funding programmes, raising $26,231 million of term wholesale funding in
the 2019 financial year (2018: $28,435 million) at a weighted average maturity of approximately 5.7 years to first call (2018: 5.2
years). The Group's issuance was in excess of term wholesale funding maturities in the 2019 financial year supporting
management of future refinancing. In addition, during the 2019 financial year, the Group continued to access international and
domestic short-term wholesale markets.
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.
2019 Annual Financial Report
125
Group
Assets
Cash and liquid assets
Due from other banks
Trading instruments
Debt instruments
Other financial assets
Loans and advances
Due from customers on acceptances
All other assets
Total assets
Liabilities
Due to other banks
Trading instruments
Other financial liabilities
Deposits and other borrowings
Other debt issues
All other liabilities
Total liabilities
Net (liabilities) / assets
Company
Assets
Cash and liquid assets
Due from other banks
Trading instruments
Debt instruments
Other financial assets
Loans and advances
Due from customers on acceptances
All other assets
Total assets
Liabilities
Due to other banks
Trading instruments
Other financial liabilities
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19 FINANCIAL RISK MANAGEMENT (CONTINUED)
Less than 12 months
Greater than 12 months
No specific maturity
Total
2019
$m
2018
$m
2019
$m
2018
$m
2019
$m
2018
$m
2019
$m
2018
$m
55,457
31,905
9,936
7,590
3,813
50,188
30,414
10,796
11,648
3,926
-
225
50,364
32,615
3,069
-
154
41,282
30,408
5,955
115,589
102,350
465,386
458,337
2,490
11,434
3,816
10,363
-
-
3,467
3,010
238,214
223,501
555,126
539,146
-
-
-
-
36,528
26,150
-
228
6,774
-
10,254
53,784
-
160
7,294
-
10,259
43,863
34,273
38,192
-
-
9,328
9,036
517,030
492,897
-
-
-
-
-
-
34,318
22,422
23,847
5,055
21,389
10,248
-
-
11,006
8,424
600,912
573,985
(362,698)
(350,484)
-
2,894
145,779
409,347
-
1,974
148,397
390,749
108
-
-
6,482
3,921
44,829
8,955
12
-
-
6,158
2,824
31,416
12,447
55,457
32,130
96,828
40,205
7,110
50,188
30,568
78,228
42,056
10,041
587,749
567,981
2,490
25,155
3,816
23,632
847,124
806,510
34,273
34,318
33,283
522,085
143,258
6,482
17,821
38,192
22,422
30,437
503,145
140,222
6,158
13,222
791,520
753,798
55,604
52,712
Bonds, notes and subordinated debt
29,275
25,436
113,983
114,786
-
225
46,720
32,596
3,971
-
154
38,836
30,393
5,810
-
-
-
-
35,990
27,149
-
-
-
-
54,811
29,049
89,552
40,166
6,229
49,717
28,293
72,961
41,957
8,581
405,938
402,435
5,717
6,232
506,527
492,508
-
-
-
-
2,836
2,169
128,146
115,538
54,811
28,824
6,842
7,570
2,258
94,872
2,490
9,360
49,717
28,139
6,976
11,564
2,771
83,841
3,816
8,394
32,552
36,371
-
577
-
736
2,490
140,342
869,166
32,552
37,945
8,550
463,026
137,599
6,482
131,123
817,277
51,889
3,816
126,101
823,934
36,371
25,863
7,381
448,616
136,110
6,158
113,693
774,192
49,742
207,027
195,218
492,286
479,797
169,853
148,919
-
-
7,865
2,885
-
-
6,633
7,477
-
-
37,945
25,863
108
-
-
12
-
-
Deposits and other borrowings
460,141
441,139
Bonds, notes and subordinated debt
29,274
25,444
108,325
110,666
Other debt issues
All other liabilities
Total liabilities
Net (liabilities) / assets
-
-
9,718
7,050
532,262
510,740
(325,235)
(315,522)
-
1,797
120,872
371,414
-
6,482
6,158
1,289
119,608
105,354
126,065
353,732
164,143
137,387
5,710
11,532
126
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 20
FAIR VALUE OF FINANCIAL INSTRUMENTS
Accounting policy
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 (CVA) is also incorporated
into the fair value as appropriate as well as an adjustment for funding costs (FVA) related to uncollateralised over-the-counter
derivatives. The fair value measurement technique of each class of instrument is described below.
Instrument
Loans and advances
Deposits and other
borrowings
Bonds, notes and
subordinated debt and
other debt issues
Trading and hedging
derivatives
Trading instruments
and debt instruments
Equity instruments
Other financial assets
and liabilities
Fair value measurement technique
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 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, are 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.
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 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.
The fair values of other financial assets and liabilities are based on quoted closing market prices and
data or valuation techniques, appropriate to the nature and type of the underlying instrument.
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 are not calculated, as very few of the commitments extending beyond six months would commit 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.
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.
Transfers between levels of the fair value hierarchy are deemed to have occurred at the beginning of the reporting period in
which the transfer occurs.
Key judgements and estimates
A significant portion of financial instruments are carried on the balance sheet at fair value.
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
2019 Annual Financial Report
127
NOTES TO THE FINANCIAL STATEMENTS
NOTE 20 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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).
Fair value hierarchy
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.
Transfers into and out of Level 3 occur due to changes in whether the inputs to the valuation techniques are observable. Where
inputs are no longer observable the fair value measurement is transferred into Level 3. Conversely, a measurement is transferred
out of Level 3 when inputs become observable.
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 assumption used to value the instruments as at 30 September 2019 attributable to reasonably possible alternatives would not
have a material effect.
128
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 20 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Fair value of financial instruments, carried at amortised cost
The financial assets and financial liabilities listed in the table below are carried at amortised cost. While this is the value at which
the Group expects the assets to be realised and the liabilities to be settled, the table below includes their fair values as at
30 September:
2019
2018
Carrying
Fair
Carrying
value
Level 1
Level 2
Level 3
Value
value
Level 1
Level 2
Level 3
$m
$m
$m
$m
$m
$m
$m
$m
$m
Fair
Value
$m
587,749
-
6,078 583,436 589,514
567,981
-
5,577 562,879
568,456
522,085
143,258
- 522,404
7,855 137,950
6,482
6,714
68
- 522,404
- 145,805
-
6,782
503,145
140,222
- 503,428
6,130 135,744
6,158
6,157
106
-
-
-
503,428
141,874
6,263
Group
Financial assets
Loans and advances(1)
Financial liabilities
Deposits and other borrowings
Bonds, notes and subordinated debt
Other debt issues
Company
Financial assets
Loans and advances(1)
506,527
-
3,324 504,944 508,268
492,508
-
3,231 489,811
493,042
Financial liabilities
Deposits and other borrowings
Bonds, notes and subordinated debt
Other debt issues
463,026
137,599
- 463,256
7,327 132,293
6,482
6,714
68
- 463,256
- 139,620
-
6,782
448,616
136,110
- 448,704
5,609 132,084
6,158
6,157
106
-
-
-
448,704
137,693
6,263
(1) Comparative information has been restated to align to the presentation in the current period to reflect revised levels in the fair value hierarchy.
2019 Annual Financial Report
129
NOTES TO THE FINANCIAL STATEMENTS
NOTE 20 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Fair value measurements recognised on the balance sheet
2019
2018
Level 1
Level 2
Level 3
$m
$m
$m
Total
$m
Level 1
Level 2
Level 3
$m
$m
$m
Total
$m
96,828
40,205
7,110
4,689
101
91
29,752
48,234
4,012
37,593
-
-
-
-
10,041
3,840
98
224
149,024
33,764 100,030
242
451
-
-
-
84
777
-
22,197
225
697
29,740
-
2,547
-
-
697
54,484
225
27,175
45,544
4,012
37,494
-
-
-
8,581
2,703
224
242
451
-
-
47
740
140,050
31,187
94,546
37,945
8,550
2,939
49,434
-
25,638
225
697
-
6,684
1,818
-
-
697
34,140
225
34,318
33,283
4,037
71,638
89,552
40,166
6,229
4,059
44
78,228
42,056
10,041
3,840
98
308
134,571
22,422
30,437
2,547
55,406
72,961
41,957
8,581
2,703
271
126,473
25,863
7,381
1,818
35,062
Group
Financial assets
Trading instruments
Debt instruments
Other financial assets
Hedging derivatives
Investments relating to life insurance business
Equity instruments(1)
36,776
59,975
3,206
36,520
-
-
-
-
7,110
4,689
101
-
Total financial assets measured at fair value
39,982 108,395
Financial liabilities
Trading instruments
Other financial liabilities
Hedging derivatives
-
34,262
1,249
32,034
-
4,037
Total financial liabilities measured at fair value
1,249
70,333
Company
Financial assets
Trading instruments
Debt instruments
Other financial assets
Hedging derivatives
Equity instruments(1)
34,466
55,009
3,206
36,481
-
-
-
6,229
4,059
-
Total financial assets measured at fair value
37,672 101,778
Financial liabilities
Trading instruments
Other financial liabilities
Hedging derivatives
-
37,889
1,249
-
7,301
2,939
Total financial liabilities measured at fair value
1,249
48,129
(1)
Includes fair value through profit or loss instruments.
77
479
-
-
-
91
647
56
-
-
56
77
479
-
-
44
600
56
-
-
56
130
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 20 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
There were no material transfers between Level 1 and Level 2 during the year for the Group and the Company.
The table below summarises changes in fair value classified as Level 3.
Trading instruments
Debt instruments
Equity instruments(1)
Trading instruments
Assets
Liabilities
Group
Balance at the beginning of year
Gains / (losses) on assets and (gains) /
losses on liabilities recognised:
2019
$m
242
2018
$m
94
In profit or (loss)
(166)
140
2019
$m
451
-
(1)
317
(119)
4
(173)
-
479
2018
$m
427
-
(9)
79
(181)
201
(65)
(1)
451
2019
$m
84
2018
$m
48
2019
$m
225
2018
$m
76
(170)
141
-
9
8
(16)
4
-
2
91
-
(2)
25
(5)
18
-
-
84
-
-
-
-
-
1
56
-
-
-
-
-
1
77
-
-
-
-
-
8
242
In other comprehensive income
Purchases and issues
Sales and settlements
Transfers into Level 3
Transfers out of Level 3
Foreign currency translation
adjustments
Balance at 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
Company
In other comprehensive income
Purchases and issues
Sales and settlements
Transfers into Level 3
Transfers out of Level 3
Foreign currency translation
adjustments
Balance at 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
Balance at the beginning of year
242
94
451
427
47
Gains / (losses) on assets and (gains) /
losses on liabilities recognised:
In profit or (loss)
(166)
140
-
-
-
-
-
1
77
-
-
-
-
-
8
242
-
(1)
317
(119)
4
(173)
-
479
-
(9)
79
(181)
201
(65)
(1)
451
-
-
(4)
-
3
-
(2)
44
(1)
Includes fair value through profit or loss instruments.
(166)
-
140
-
-
(1)
-
(9)
-
-
-
-
-
-
-
8
225
141
-
21
-
-
8
-
18
-
-
47
-
-
225
76
(170)
141
-
-
-
-
-
1
56
(170)
-
-
-
-
-
-
8
225
141
-
2019 Annual Financial Report
131
(166)
-
140
-
-
(1)
-
(9)
-
-
-
(2)
(170)
-
NOTES TO THE FINANCIAL STATEMENTS
NOTE 21
FINANCIAL ASSET TRANSFERS
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.
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
Group
Company
Repurchase
agreements
Covered bonds
Securitisation
Repurchase
agreements
2019
$m
12,565
12,565
n/a
n/a
n/a
2018
$m
8,452
8,452
n/a
n/a
n/a
2019
$m
30,465
26,880
2018
$m
29,936
26,553
n/a
n/a
n/a
n/a
n/a
n/a
2019
$m
4,245
4,283
4,258
4,359
(101)
2018
$m
3,604
3,660
3,607
3,703
(96)
2019
$m
12,429
12,429
n/a
n/a
n/a
2018
$m
7,948
7,948
n/a
n/a
n/a
Covered bonds
Securitisation
2019
$m
26,120
22,816
2018
$m
25,310
22,368
2019
$m
77,976
77,976
2018
$m
64,025
64,025
n/a
n/a
n/a
n/a
n/a
n/a
78,244
79,121
(877)
64,094
64,770
(676)
132
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
OTHER ASSETS AND LIABILITIES
NOTE 22
GOODWILL AND OTHER INTANGIBLE ASSETS
Accounting policy
Goodwill
Goodwill arises on the acquisition of an entity and represents the excess of the consideration paid over the fair value of the
identifiable net assets acquired.
Software costs
External and internal costs that are incurred to acquire or develop software are capitalised and recognised as an intangible asset.
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. Certain software assets are deployed on a
progressive basis, in which case the amortisation is recognised in a manner that is reflective of the expected benefits profile from
the asset's use.
Impairment of intangible assets
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 flows, the recoverable amount is determined for the cash-generating unit (CGU) to which that
asset belongs. 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.
Recoverable amounts of CGUs
The recoverable amount of a CGU is determined using a value in use calculation. 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.
Key judgements and estimates
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.
The determination of appropriate cash flows, growth rates and discount rates for the calculation of value in use is subjective and
requires a significant degree of judgement.
2019 Annual Financial Report
133
NOTES TO THE FINANCIAL STATEMENTS
NOTE 22 GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
Goodwill
Internally generated software
Acquired software
Other acquired intangible assets(1)
Group
Company
2019
$m
2,864
2,628
60
24
2018
$m
2,863
2,821
74
29
2019
$m
-
2,263
43
-
2018
$m
-
2,388
57
-
Total goodwill and other intangible assets
5,576
5,787
2,306
2,445
At cost
Deduct: Accumulated amortisation / impairment losses
Total goodwill and other intangible assets
9,710
(4,134)
5,576
8,908
(3,121)
5,787
5,419
(3,113)
2,306
4,777
(2,332)
2,445
(1) Other acquired intangible assets include brand names and the value of business and contracts in force.
Reconciliation of movements in goodwill and internally generated software
Goodwill
Balance at beginning of year
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
Amortisation(1)
Foreign currency translation adjustments
Balance at end of year
Group
Company
2019
$m
2,863
1
2,864
2018
$m
2,862
1
2,863
2019
$m
2018
$m
-
-
-
-
-
-
2,821
2,608
2,388
2,274
871
(14)
(1,058)
8
2,628
793
(171)
(408)
(1)
709
(3)
(833)
2
609
(164)
(331)
-
2,821
2,263
2,388
(1) The 2019 balance includes a reduction of software assets balance by $494 million (Company: $380 million) following a change to the application of the
software capitalisation policy. Refer to Note 5 Operating expenses for further details.
Goodwill allocation to cash-generating units
The key assumptions used in determining the recoverable amount of CGUs, to which goodwill has been allocated, are as follows:
Discount
rate per
annum
2019
%
10.2
10.2
10.5
n/a
Terminal
growth
rate per
annum
2019
%
4.5
4.5
4.7
n/a
Goodwill
2019
$m
68
2,538
258
2,864
2018
$m
68
2,537
258
2,863
Reportable segments
Business and Private Banking
Consumer Banking and Wealth
New Zealand Banking
Total goodwill
134
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
Group
Company
2019
$m
4,053
1,014
223
586
366
72
526
2,815
1,448
2018
$m
4,196
1,182
222
503
374
290
544
2,188
1,224
11,103
10,723
2019
$m
3,369
884
176
194
-
29
542
2,570
1,053
8,817
2018
$m
3,885
1,038
190
140
-
253
-
2,036
645
8,187
NOTE 23
OTHER ASSETS
Cash collateral placed with third parties
Accrued interest receivable
Prepayments
Receivables
Other debt instruments at amortised cost
Equity instruments at fair value through other comprehensive income
Investment in associates - MLC Limited(1)
Securities sold not delivered
Other
Total other assets
(1) Refer to Note 31 Interest in subsidiaries on page 149 for further details.
NOTE 24
PROVISIONS
Accounting policy
Provisions
Provisions are recognised when the Group has a legal or constructive obligation as a result of a past event, it is probable that an
outflow of economic benefits will be required 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.
Operational risk event losses
Provisions are recognised 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, fraud and the correction of
operational issues.
Customer-related remediation
Provisions for customer-related remediation include provisions for potential refunds and other compensation to customers,
including associated program costs.
Restructuring costs
A provision for restructuring costs is only recognised when the Group has a detailed formal restructuring plan and the
restructuring has either commenced or has been publicly announced. The provision includes the cost of employee termination
benefits and surplus lease space. Costs related to ongoing activities and future operating losses are not provided for.
Key judgements and estimates
Provisions other than loan impairment
Provisions are held in respect of a range of future obligations such as employee entitlements, restructuring costs, customer-
related remediation and litigation. The measurement of some of these provisions involves the exercise of management
judgement about the likely outcome of various events and the related estimated future cash flows. 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.
In relation to customer-related remediation, determining the amount of the provision requires the exercise of significant
judgement. This includes forming a view on a number of different assumptions, including the number of impacted customers,
2019 Annual Financial Report
135
NOTES TO THE FINANCIAL STATEMENTS
NOTE 24 PROVISIONS (CONTINUED)
average refund per customer and the associated costs required to complete the remediation activities. The appropriateness of
underlying assumptions is reviewed on a regular basis against actual experience and other available evidence, and adjustments
are made to the provision where required.
Employee entitlements
Operational risk event losses
Customer-related remediation
Restructuring provision
Other
Total provisions
Reconciliation of movements in provisions
Operational risk event losses
Balance at beginning of year
Provisions made
Payments out of provisions
Provisions no longer required and net foreign currency movements
Balance at end of year
Customer-related remediation
Balance at beginning of year
Provision made (continuing operations)
Provisions made (discontinued operations)
Payments out of provisions
Balance at end of year
Restructuring provision
Balance at beginning of year
Provisions made
Payments out of provisions
Balance at end of year
Group
Company
2019
$m
899
292
2,092
45
179
2018
$m
979
238
461
285
233
3,507
2,196
2019
$m
728
214
2,068
27
170
3,207
Group
Company
2019
$m
238
314
(208)
(52)
292
461
1,571
367
(307)
2,092
285
-
(240)
45
2018
$m
705
583
(1,103)
53
238
80
360
75
(54)
461
-
568
(283)
285
2019
$m
139
261
(157)
(29)
214
461
1,914
-
(307)
2,068
253
-
(226)
27
2018
$m
798
139
461
253
228
1,879
2018
$m
675
515
(1,093)
42
139
80
435
-
(54)
461
-
516
(263)
253
In 2018, the payments out of provisions for operational risk event losses mainly relates to CYBG discontinued operations.
136
National Australia Bank
NOTE 25
OTHER LIABILITIES
Accrued interest payable
Payables and accrued expenses
Cash collateral received from third parties
Securities purchased not delivered
Other
Total other liabilities
NOTES TO THE FINANCIAL STATEMENTS
Group
Company
2019
$m
2,217
934
2,113
3,246
1,299
9,809
2018
$m
2,550
1,057
1,398
1,901
1,470
8,376
2019
$m
1,881
524
2,109
2,930
1,138
8,582
2018
$m
2,177
668
1,396
1,516
1,351
7,108
2019 Annual Financial Report
137
NOTES TO THE FINANCIAL STATEMENTS
CAPITAL MANAGEMENT
NOTE 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 determined 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
Total contributed equity
Reconciliation of movement in ordinary shares
Balance at beginning of year
Shares issued:
Dividend reinvestment plan
Dividend reinvestment plan underwritten allotments
Conversion of preference shares
Transfer from equity-based compensation reserve
Balance at end of year
Group
2019
$m
2018
$m
Company
2019
$m
2018
$m
36,762
33,062
35,976
32,276
1,945
-
1,945
975
1,945
-
1,945
-
38,707
35,982
37,921
34,221
Group
2019
$m
2018
$m
Company
2019
$m
2018
$m
33,062
31,707
32,276
30,921
1,803
1,000
750
147
1,182
-
-
173
1,803
1,000
750
147
36,762
33,062
35,976
1,182
-
-
173
32,276
138
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 26 CONTRIBUTED EQUITY (CONTINUED)
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:
Conversion of convertible preference shares
Dividend reinvestment plan
Dividend reinvestment plan underwritten allotments
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 ordinary shares (including treasury shares)
Less: Treasury shares
Total ordinary shares (excluding treasury shares)
National Income Securities
Company
2019
2018
No. ’000
No. ’000
2,734,119
2,685,469
30,185
73,265
38,053
2,307
4,834
250
6
-
40,803
-
1,984
4,859
986
18
2,883,019
2,734,119
25
(6)
19
43
(18)
25
2,883,038
2,734,144
(7,524)
(7,800)
2,875,514
2,726,344
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 ASX. NIS qualify as Additional Tier 1 capital, subject to transitional Basel III treatment.
Trust Preferred Securities
On 17 December 2018, the Group redeemed the GBP400 million Trust Preferred Securities issued by National Capital Trust I and
guaranteed (on a limited basis) by NAB on 29 September 2003. The Trust Preferred Securities were redeemed for cash at their par
value plus accrued distribution.
2019 Annual Financial Report
139
NOTES TO THE FINANCIAL STATEMENTS
NOTE 27
RESERVES
Accounting policy
Foreign currency translation reserve
Exchange differences arising on translation of the Group’s foreign operations, any offsetting gains or losses on hedging the net
investment and any associated tax effect are reflected in the foreign currency translation reserve.
The results and financial position of Group entities that have a functional currency different from Australian dollars are translated
into Australian dollars as follows:
• assets and liabilities are translated at the closing exchange rate at the balance sheet date
• income and expenses are translated at average exchange rates for the period
• all resulting exchange differences are recognised in the foreign currency translation reserve.
A cumulative credit balance in this reserve would not normally be regarded as being available for payment of dividends until
such gains are realised and recognised in the income statement on sale or disposal of the foreign operation.
Asset revaluation reserve
The asset revaluation reserve is used to record revaluation adjustments on land and buildings. When an asset is sold or disposed
of the related balance in the reserve is transferred directly to retained profits.
Cash flow hedge reserve and cost of hedging reserve
The cash flow hedge reserve comprises fair value gains or losses associated with the effective portion of designated cash flow
hedging instruments, net of tax. The cost of hedging reserve records movements in forward points on a forward contract and
cross-currency basis on cross-currency swaps that have been removed from hedge relationships and amortised over the life of
the hedge. The cumulative movements will reduce to nil by maturity of the hedging instrument.
Equity-based compensation reserve
The equity-based compensation reserve comprises the fair value of shares and performance rights provided to employees.
Debt instruments at fair value through other comprehensive income reserve
The reserve includes all changes in the fair value of investments in debt instruments that are measured at fair value through
other comprehensive income, other than impairment losses, foreign exchange gains and losses, interest income and net of any
related hedge accounting adjustments. The cumulative amount recognised in the reserve is transferred to profit or loss when the
related asset is derecognised.
Equity instruments at fair value through other comprehensive income reserve
The Group has made an irrevocable election to measure certain investments in equity instruments that are not held for trading
purposes at fair value through other comprehensive income. Changes in the fair value of these investments are recognised in this
reserve, while dividends are recognised in profit or loss. The cumulative amount recognised in the reserve is transferred directly
to retained profits when the related asset is derecognised.
140
National Australia Bank
NOTE 27 RESERVES (CONTINUED)
Reserves
Foreign currency translation reserve
Asset revaluation reserve
Cash flow hedge reserve
Cost of hedging reserve
Equity-based compensation reserve
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
Transfer from retained profits
Redemption of Trust Preferred Securities
Currency adjustments on translation of foreign operations, net of hedging
Transfer to the income statement on disposal of foreign operations
Tax on foreign currency translation reserve
Balance at end of year
NOTE 28
DIVIDENDS AND DISTRIBUTIONS
2019
Final dividend determined in respect of the year ended 30 September 2018
Interim dividend determined in respect of the year ended 30 September 2019
Deduct: Bonus shares in lieu of dividend
Dividends paid by the Company during the year ended 30 September 2019
Add: Dividends paid to non-controlling interest in controlled entities
Dividends paid by the Group (before dividend reinvestment plan)
2018
Final dividend determined in respect of the year ended 30 September 2017
Interim dividend determined in respect of the year ended 30 September 2018
Deduct: Bonus shares in lieu of dividend
Dividends paid by the Company during the year ended 30 September 2018
Add: Dividends paid to non-controlling interest in controlled entities
Dividends paid by the Group (before dividend reinvestment plan)
NOTES TO THE FINANCIAL STATEMENTS
Group
Company
2019
$m
20
80
201
(235)
190
46
4
306
2018
$m
(343)
82
10
(53)
243
22
85
46
2019
$m
(214)
-
235
(147)
190
46
3
113
Group
Company
2019
$m
(343)
14
287
110
(38)
(10)
20
2018
$m
(338)
-
-
56
(62)
1
(343)
2019
$m
(227)
-
-
13
-
-
2018
$m
(227)
-
(12)
(1)
243
22
83
108
2018
$m
(241)
-
-
14
-
-
(214)
(227)
Amount
Total
per share
amount
cents
99
83
n/a
n/a
n/a
n/a
99
99
n/a
n/a
n/a
n/a
$m
2,707
2,333
(57)
4,983
4
4,987
2,659
2,696
(56)
5,299
4
5,303
Franked dividends paid during 2019 were fully franked at a tax rate of 30% (2018: 30%).
2019 Annual Financial Report
141
NOTES TO THE FINANCIAL STATEMENTS
NOTE 28 DIVIDENDS AND DISTRIBUTIONS (CONTINUED)
Final dividend
On 7 November 2019, the directors determined the following dividend:
Final dividend determined in respect of the year ended 30 September 2019
Amount
per share
cents
83
Total
Franked
amount
amount
per share
$m
2,393
%
100
The final 2019 ordinary dividend is payable on 12 December 2019. 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 2019 and will be recognised in subsequent financial reports.
NAB has also entered into an agreement to have the DRP on the final dividend partially underwritten up to an amount of $700
million over and above the expected participation in the DRP.
Australian franking credits
The franking credits available to the Group at 30 September 2019, 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
$660 million (2018: $844 million). Franking credits to be utilised as a result of the payment of the proposed final dividend are
$1,026 million (2018: $1,160 million). The Company's franking account fluctuates during the year as a result of the timing of
income tax instalment and dividend payments. While the franking account balance fluctuates during the year, a surplus is only
required as at 30 June each year for the purpose of complying with Australian income tax legislation. Franking is not guaranteed.
The extent to which future dividends on ordinary shares and distributions on frankable hybrids will be franked will depend on a
number of factors, including capital management activities and the level of profits generated by the Group that will be subject to
tax in Australia.
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$0.15 per share will be attached to the final 2019 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
Total distributions paid
Group
2019
$m
62
21
83
2018
$m
60
40
100
Company
2019
2018
$m
62
-
62
$m
60
-
60
Trust Preferred Securities issued by National Capital Trust I and guaranteed (on a limited basis) by NAB were redeemed
on 17 December 2018, at their first optional redemption date. The Trust Preferred Securities were redeemed for cash at their par
value plus accrued distribution.
142
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
UNRECOGNISED ITEMS
NOTE 29
CONTINGENT LIABILITIES AND CREDIT COMMITMENTS
Accounting Policy
The Group discloses certain items as contingent liabilities, as they are either possible obligations whose existence will be
confirmed only by uncertain future events, or they are present obligations where a transfer of economic resources is not
probable or cannot be reliably measured. Contingent liabilities are not recognised on the balance sheet but are disclosed unless
an outflow of economic resources is remote.
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 21 Financial asset transfers.
Contingent liabilities
Bank guarantees and letters of credit
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. The Group
has four principal types of guarantees:
• bank guarantees
• standby letters of credit
• documentary letters of credit
• performance-related contingencies.
The Group considers all bank guarantees and letters of credit as “at call” for liquidity management purposes because it has no
control over when the holder might call upon the instrument.
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
Clearing and settlement obligations
Group
Company
2019
$m
4,515
7,041
878
11,377
23,811
2018
$m
5,596
5,257
1,002
10,454
22,309
2019
$m
4,483
7,041
598
10,771
22,893
2018
$m
5,568
5,257
669
9,877
21,371
The Group is subject to a commitment in accordance with the rules governing clearing and settlement arrangements contained
in the Australian Payments Network 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 Over-The-Counter Central Counterparty, 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
2019 Annual Financial Report
143
NOTES TO THE FINANCIAL STATEMENTS
NOTE 29 CONTINGENT LIABILITIES AND CREDIT COMMITMENTS (CONTINUED)
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.
Credit-related commitments
Binding credit-related 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. Nevertheless, credit-related commitments
are considered “at call” for liquidity management purposes.
Credit-related commitments
Underwriting facilities
Binding credit commitments
Total credit-related commitments
Credit-related commitments by geographical location
Australia
New Zealand
Other International
Total credit-related commitments
Parent entity guarantee and undertakings
Group
2019
$m
2018
$m
Company
2019
$m
2018
$m
2
155,978
155,980
2
156,629
156,631
2
136,257
136,259
2
136,600
136,602
120,756
122,831
120,178
122,214
19,143
16,081
19,412
14,388
155,980
156,631
-
16,081
136,259
-
14,388
136,602
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 $29,636 million (2018: $27,709 million) of commercial paper issuances by National
Australia Funding (Delaware) Inc. Commercial paper of $907 million (2018: $995 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 and associates in the normal course of business.
The letters recognise that the Company has a responsibility to ensure that those subsidiaries and associates continue to meet
their obligations.
General
From time to time the Group is exposed to contingent risks and liabilities arising from the conduct of its business including:
• actual and potential disputes, claims and legal proceedings
• investigations into past conduct, including actual and potential regulatory breaches, carried out by regulatory authorities on
either an industry-wide or Group-specific basis
• internal investigations and reviews into past conduct, including actual and potential regulatory breaches, carried out by the
Group (sometimes with the assistance of third parties)
• contracts that involve giving contingent commitments such as warranties, indemnities or guarantees.
Overall, the number and scale of regulatory investigations, reviews and litigation involving Australian financial institutions has
increased significantly over the current and preceding financial year. Some of these investigations and reviews have resulted in
customer remediation programs which are expected to continue beyond the 2019 financial year. Some of these investigations
and reviews may result in enforcement proceedings.
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission),
which concluded with the issue of the Final Report (the Final Report) on 1 February 2019, has also brought greater focus to a
range of culture and compliance matters, including responsible lending, compliance with the Banking Code of Practice and its
144
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 29 CONTINGENT LIABILITIES AND CREDIT COMMITMENTS (CONTINUED)
predecessor codes and appropriate management of issues relating to deceased estates. The Final Report also contained a
number of referrals of potential misconduct to the relevant regulatory authorities to consider whether further action should be
taken.
There are contingent liabilities in respect of all the above matters. Where appropriate, provisions have been made. The
aggregate potential liability of the Group in relation to these matters cannot be accurately assessed.
Further information on some specific contingent liabilities that may impact the Group is set out below.
Legal proceedings
Bank Bill Swap Reference Rate US 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 relating to the Bank Bill Swap Reference Rate. The complaint named a number of defendants,
including NAB and various other Australian and international banks, and refers to earlier proceedings brought by ASIC in relation
to the Bank Bill Swap Reference Rate. The relevant ASIC proceedings against NAB were resolved in November 2017 pursuant to a
court-approved settlement. The US class action was dismissed against NAB in November 2018 on jurisdictional grounds. However
the plaintiffs were given leave to file a new complaint in April 2019. In May 2019 the defendants, including NAB, filed a motion to
dismiss the class action complaint. The Court's determination of those motions is pending. The potential outcome and total costs
associated with the US class action remain uncertain.
UK conduct issues – potential action and contingent asset
In May 2019, RGL Management Limited (a claims management company) commenced proceedings against CYBG and NAB on
behalf of three customers of CYBG (the First Claim). The First Claim concerns tailored business loans (TBLs) which the customers
entered into with CYBG between 2001 and 2012. NAB did not contract with the customers directly. However, NAB employees
performed various functions in connection with the sale of the TBLs and calculation of break costs. The claimants allege they
were misled about: (1) the cost of breaking fixed interest rate periods; and (2) the composition of fixed interest rates offered
under the TBLs. The alleged misconduct is said to give rise to several causes of action, including negligent misstatement,
misrepresentation and deceit. NAB and CYBG filed and served their defences to the First Claim on 30 July 2019.
RGL has filed, but not yet served, a further claim in similar terms to the First Claim (the Second Claim). The Second Claim includes
a schedule of 146 further claimants. RGL has also been quoted in the press as saying that there are up to 2,000 further potential
claimants on behalf of whom it has authority to bring similar claims. The potential outcome and total costs associated with the
claims by RGL remain uncertain.
In prior periods the Group suffered losses in relation to certain UK customer-related remediation matters. NAB is in the process of
making insurance claims in relation to these losses. Components of the insurance claims are treated by NAB as a contingent
asset. The outcome of such claims remains uncertain.
Regulatory activity, compliance investigations and associated proceedings
Adviser service fees and fee disclosure statements (FDS)
ASIC is conducting an industry-wide investigation into financial advice fees paid by customers pursuant to ongoing service
arrangements with financial advice firms, including entities within the Group. Under the service arrangements, customers
generally pay an adviser service fee to receive a review of their financial circumstances together with a range of other services. In
some instances, customers did not receive the agreed services or, in other cases, there may not be sufficient evidence that the
agreed services were provided. NAB is in the process of identifying impacted customers.
NAB has confirmed with ASIC a review methodology for customers with financial advisers operating in the NAB Financial
Planning and NAB Advice Partnerships businesses. NAB has made significant progress in confirming a review methodology for
customers with financial advisers operating in the JBWere business. NAB is committed to progressing these reviews and, where
appropriate, remediating those customers as soon as possible.
NAB Financial Planning has already remediated some customer cohorts. NAB Advice Partnerships and JBWere are identifying the
cohorts of potentially impacted customers for review. Provisions for customer compensation have been taken based on current
best estimates. However given the early stage of the process, these estimates are subject to considerable uncertainty.
Key variables contributing to uncertainty about customer remediation amounts include ‘no evidence’ rates and recovery rates
from advisers. The total ongoing advice fees received within the period 2009-2018 are estimated to be approximately $1.3 billion
for NAB Advice Partnerships and approximately $650 million for NAB Financial Planning. The potential outcome and total costs
associated with the adviser service fees matter remain uncertain.
2019 Annual Financial Report
145
NOTES TO THE FINANCIAL STATEMENTS
NOTE 29 CONTINGENT LIABILITIES AND CREDIT COMMITMENTS (CONTINUED)
On 12 October 2018, ASIC announced that it would be conducting an industry-wide review of compliance with requirements for
Fee Disclosure Statements and Renewal Notices in the financial advice sector. NAB is assessing its compliance with the FDS
regime. NAB has ceased charging ongoing fees for customers of NAB Financial Planning employed advisers resulting from
concerns about the accuracy of the Fee Disclosure Statements. Aligned to NAB's adviser service fee remediation program, NAB
will refund fees paid from 1 June 2018 for NAB Financial Planning customers up until they entered a new arrangement or the fees
were switched off. The potential outcome and total costs associated with this matter remain uncertain.
Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) program uplift and compliance issues
Since July 2016, NAB has been progressing a program of work to uplift and strengthen the Group AML and CTF program and its
implementation. The work involves significant investment in systems and personnel, 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 as they are identified.
When significant AML or CTF compliance issues are identified, they are notified to the Australian Transaction Reports and
Analysis Centre (AUSTRAC) or equivalent foreign regulators. NAB has reported a number of compliance breaches to relevant
regulators and has responded to a number of requests from regulators requiring the production of documents and information.
Identified issues include certain weaknesses with the implementation of ‘Know Your Customer’ requirements, other financial
crime risks, as well as systems and process issues that impacted transaction monitoring and reporting in some specific areas. NAB
continues to keep AUSTRAC (and where applicable, relevant foreign regulators) informed of its progress in resolving these issues,
and will continue to cooperate with, and respond to queries from, such regulators.
As this work progresses, further issues may be identified and additional uplifting and strengthening may be required. The
potential outcome and total costs associated with the investigation and remediation process for specific issues identified to date,
and for any issues identified in the future, remain uncertain.
Banking matters
A number of investigations into banking-related matters are being carried on across the Group, including matters where
customers may not have been provided notice of increases to loan repayments within the timeframe required by the National
Credit Code, and matters where customers were incorrectly charged certain periodical payment fees. The potential outcome and
total costs associated with these matters remain uncertain.
Consumer Credit Insurance (CCI)
In 2017, as part of an industry-wide review, ASIC requested that NAB and other lenders undertake a review of their compliance
with ASIC Report 256 Consumer Credit Insurance: A review of sales practices by authorised deposit-taking institutions.
In response to this request, NAB conducted an internal audit on the sale of CCI products. The audit findings identified potential
issues with sales of these products across certain NAB channels.
NAB is currently in the process of implementing a remediation program for CCI customers who are potentially impacted. Where
customer compensation is able to be reliably estimated, provisions have been taken. There is also an ongoing ASIC investigation
into the matter. The outcome and total costs associated with this matter remain uncertain.
On 27 September 2018, plaintiff law firm Slater & Gordon filed a class action in the Federal Court, alleging that NAB and MLC
Limited engaged in unconscionable conduct and/or misleading and deceptive conduct in contravention of the Australian
Securities and Investments Commission Act 2001 (ASIC Act) in connection with the sale of a particular CCI product (being NAB
Credit Card Cover).
On 13 June 2019 the Federal Court granted leave for the addition of a claim alleging that NAB and MLC Limited engaged in
unconscionable conduct in contravention of the ASIC Act in connection with the sale of a second CCI product (being NAB
Personal Loan Cover).
The trial is scheduled to commence on 2 December 2019, however NAB continues to engage in commercial negotiations which
may result in a settlement being reached between the parties. The potential outcome and total costs associated with this matter
remain uncertain.
Contingent tax risk
The tax affairs of the Group are subject to regular reviews by the Australian Taxation Office as well as the Revenue Offices of the
various Australian States and Territories. Innovation and Science Australia is currently reviewing various prior year claims made
by the Group for research and development tax incentives. Risk reviews and audits are also being undertaken by tax authorities
146
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 29 CONTINGENT LIABILITIES AND CREDIT COMMITMENTS (CONTINUED)
in other jurisdictions in which the Group conducts business, as part of normal tax authority review activity in those countries.
NAB continues to respond to any notices and requests for information it receives from relevant tax authorities.
The reviews, notices and requests described above may result in additional tax liabilities (including interest and penalties).
Where appropriate, provisions have been made. The potential outcome and total costs associated with these activities remain
uncertain.
Life Events cover
In 2013, a new insurance feature was introduced for members in the Plum Superannuation Fund that permitted members to
increase their Death and Total and Permanent Disability insurance cover amount if certain “Life Events” occur for them, without
having to undergo a medical assessment. Following an internal investigation, it was determined that PFS Nominees Pty Ltd, the
trustee of the Plum Superannuation Fund, had failed to disclose this feature to some superannuation fund members (it was
disclosed to new members in product disclosure statements, however it was not disclosed to existing members at the time it was
introduced). Existing members impacted by this issue have now been informed about the Life Events insurance feature.
NAB has developed a remediation methodology and is re-confirming the impacted members before implementing the
remediation. The outcome and total costs associated with this matter remain uncertain, and will depend on whether impacted
members actually had an eligible Life Event occur, and made a claim, within the period covered by the remediation.
NAB’s introducer payments program
On 23 August 2019, ASIC commenced Federal Court proceedings against NAB in connection with the introducer payments
program. ASIC alleges that NAB engaged in credit activities with unlicensed persons in contravention of the National Consumer
Credit Protection Act 2009 (NCCP). The potential outcome and total costs associated with these proceedings remain uncertain.
The introducer payments program has been the subject of internal reviews, a remediation program and a Royal Commission case
study. In March 2019, NAB announced it would end the introducer payments program with effect from 1 October 2019. The
potential outcome and total costs associated with this matter remain uncertain.
NZ Ministry of Business, Innovation and Employment compliance audit
The Labour Inspectorate of the New Zealand Ministry of Business, Innovation and Employment (MBIE) has undertaken a program
of compliance audits of a number of New Zealand organisations, including BNZ, in respect of the New Zealand Holidays Act 2003
(Holidays Act). Since 2017, BNZ has worked with MBIE to review its compliance with the Holidays Act, including in respect of
annual and public holiday payments to certain employees, and is completing remediation, as agreed with MBIE. In addition, the
legislative interpretation of the definition of “discretionary payments” under the Holidays Act is not yet certain and, once it has
been definitively determined, any potential implications for BNZ will need to be considered.
Plan service fees (PSF)
The Group has finalised the payment of refunds to customers who were charged PSF, including refunds to customers who did not
have a plan adviser attached to their superannuation account and customers who left an employer and were transferred to the
personal division of the relevant corporate superannuation product.
On 6 September 2018, ASIC commenced Federal Court proceedings against two Group entities - NULIS Nominees (Australia)
Limited (NULIS) and MLC Nominees Pty Ltd (MLCN) - in relation to PSF. ASIC is seeking declarations that a number of provisions of
the Australian Securities and Investments Commission Act 2001 (Cth), Corporations Act 2001 (Cth) and the Superannuation Industry
(Supervision) Act 1993 (Cth) have been contravened. The potential outcome and total costs associated with this matter remain
uncertain.
Royal Commission
The Final Report states that the Commissioner will make two referrals to APRA of the conduct by NULIS and MLCN which may
have amounted to misconduct. Both of these referrals relate to conduct of NULIS and MLCN which may have given rise to a
potential conflict of interest namely:
• Grandfathered commissions: the Commissioner found that NULIS “may have breached its duty to act in the best interests of
the affected members” in relation to the maintenance of grandfathered commissions at the time of the successor fund transfer
on 1 July 2016.
• MySuper: the Commissioner found that NULIS might have contravened the ‘best interests’ covenant set out in section 52(2)(c)
of the Superannuation Industry (Supervision) Act 1993 (Cth) in relation to the speed with which it effected transfers of accrued
default amounts to MySuper.
In addition, the Commissioner communicated with ASIC in relation to possible breaches of section 1041G of the Corporations Act
2001 (Cth) arising from fees for no service conduct. The Commissioner informed ASIC that in his opinion, multiple entities may
2019 Annual Financial Report
147
NOTES TO THE FINANCIAL STATEMENTS
NOTE 29 CONTINGENT LIABILITIES AND CREDIT COMMITMENTS (CONTINUED)
have breached section 1041G and invited ASIC to consider whether criminal or other legal proceedings should be instituted. The
Final Report also identified other potential issues, including breach reporting under section 912D of the Corporations Act 2001
(Cth). The potential outcome and total costs associated with any proceedings which may arise out of these matters remain
uncertain.
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 financial 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 offered and paid in a number of cases. Where customer
compensation is able to be reliably estimated, provisions have been taken. The final outcome and total costs associated with this
work remain uncertain.
Contractual commitments
Financial Planning Subsidiaries
Some financial planning subsidiaries have agreements which allow authorised representatives to sell their client book to those
subsidiaries in certain circumstances contingent upon a number of key conditions being met. The agreements provide for the
sale at a multiple of ongoing revenue subject to a range of criteria. It is not currently possible to reliably estimate the financial
impact of these agreements.
MLC Limited life insurance transaction
In connection with the sale of 80% of MLC Limited (MLCL) to Nippon Life Insurance Company (Nippon Life) in October 2016, NAB
gave certain covenants, warranties and indemnities in favour of Nippon Life. The parties also entered into long-term agreements
for the distribution of life insurance products and continued use of the MLC brand. In addition, NAB agreed to take certain
actions to establish MLCL as a standalone entity, including by providing transitional services as well as support for data migration
activities and the development of technology systems.
NOTE 30
OPERATING LEASES
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.
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
2019
$m
397
1,192
1,299
2,888
2018
$m
389
1,162
1,447
2,998
2019
$m
345
1,057
1,275
2,677
2018
$m
334
1,033
1,420
2,787
148
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
OTHER DISCLOSURES
NOTE 31
INTEREST IN SUBSIDIARIES AND OTHER ENTITIES
Accounting policy
Investment in 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 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.
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 arrangement. Depending on the Group's power over the relevant activities of the structured entities
and its exposure to and ability to influence its own return, it may or may not consolidate the entity.
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 entities. 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.
(a) Investment in controlled entities
The following table presents the material controlled entities as at 30 September 2019 and 30 September 2018. Investment
vehicles holding life policyholder assets are excluded from the list below.
Entity name
National Australia Bank Limited
National Equities Limited
National Australia Group (NZ) Limited
Bank of New Zealand
National Wealth Management Holdings Limited
MLC Investments Limited
NULIS Nominees (Australia) Limited
Ownership %
100
100
100
100
100
100
Incorporated /
formed in
Australia
Australia
New Zealand
New Zealand
Australia
Australia
Australia
2019 Annual Financial Report
149
NOTES TO THE FINANCIAL STATEMENTS
NOTE 31 INTEREST IN SUBSIDIARIES AND OTHER ENTITIES (CONTINUED)
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 19 Financial risk
management and capital adequacy requirements in Note 35 Capital adequacy.
(b) Investment in associates
The Group’s investments in associates include a 20% interest in MLC Limited, a provider of life insurance products in Australia. 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 a reconciliation of that information to the equity-accounted carrying amount as at 30 September:
Summarised income statement of MLC Limited
Revenue
Net profit / (loss) for the period
Total comprehensive income for the period
Reconciliation to the Group's share of profit / (loss)
MLC Limited's net profit / (loss) for the period
Prima facie share of profit / (loss) at 20%
Deduct amortisation of intangible assets recognised at acquisition, net of tax
Group's share of profit / (loss) for the period
Summarised balance sheet of MLC Limited
Total assets
Total liabilities
Net assets
Reconciliation to the Group's investment in MLC Limited
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
2019
$m
2018
$m
2,030
1,858
(61)
(61)
(61)
(12)
(8)
(20)
6,223
4,263
1,960
392
134
526
89
89
89
18
(8)
10
5,872
3,836
2,036
407
137
544
The Group received dividends from MLC Limited during the 2019 financial year of $2.6 million (2018: $11.0 million).
Significant restrictions
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 commercial arrangement with Nippon Life and MLC Limited, the Group refers certain bank customers to
MLC Limited, makes available MLC Limited life insurance products on the approved product lists of the Group’s owned and
aligned advice distribution network, and offers MLC Limited life insurance products to the Group's superannuation customers.
Under a financial services agreement and certain linked arrangements, the Group provides MLC Limited with certain financial
services on an arm’s length basis, including:
• On an exclusive basis: custody, transactional banking facilities, 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 financial and investment reporting, infrastructure services
and major systems. In addition, the Group is obligated to support the data migration activities and development of the
technology systems of MLC Limited. MLC Limited also uses the MLC brand under licence from the Group.
150
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 31 INTEREST IN SUBSIDIARIES AND OTHER ENTITIES (CONTINUED)
(c) Consolidated structured entities
The Group has interests in the following types of consolidated structured entities:
Type
Details
Securitisation
The Group engages in securitisation activities for funding, liquidity and capital management 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 2019 is $905 million.
ASIC has granted relief to Titan NZ (MRP Bonds) Trust, a consolidated structured entity, under ASIC Instrument No
18-0620 from the requirement to synchronise its reporting period with that of the Company. The effect of this relief
is immaterial to the financial statements.
Covered bonds
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 covered pool
(d) Unconsolidated structured entities
assets.
The Group has interests in the following types of unconsolidated structured entities:
Type
Details
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.
Loans and advances
Debt instruments
Total carrying value of assets in unconsolidated structured
entities
Commitment / contingencies
Total maximum exposure to loss in unconsolidated
Group
Securitisations
Other financing
Total
2019
$m
10,936
9,253
20,189
5,753
2018
$m
8,105
9,771
17,876
5,584
2019
$m
5,043
-
5,043
2,398
2018
$m
5,773
-
5,773
2,174
2019
$m
15,979
9,253
25,232
8,151
2018
$m
13,878
9,771
23,649
7,758
structured entities
25,942
23,460
7,441
7,947
33,383
31,407
2019 Annual Financial Report
151
NOTES TO THE FINANCIAL STATEMENTS
NOTE 31 INTEREST IN SUBSIDIARIES AND OTHER ENTITIES (CONTINUED)
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 19 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:
Senior investment grade
Investment grade
Sub-investment grade
Total(1)
Group
Securitisations
Other financing
Total
2019
$m
2018
$m
20,007
17,819
179
3
30
27
20,189
17,876
2019
$m
1,559
3,133
351
5,043
2018
$m
1,427
4,031
315
5,773
2019
$m
2018
$m
21,566
19,246
3,312
354
4,061
342
25,232
23,649
(1) Of the total, $25,229 million (2018: $23,644 million) represents the Group’s interest in senior notes and $3 million in subordinated notes (2018: $5 million).
152
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 32
RELATED PARTY DISCLOSURES
The Group 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. The Company also provides various
administrative services to the Group, which may include accounting, secretarial and legal. Fees may be charged for these
services.
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.
Subsidiaries
The table below shows the aggregate amounts receivable / (payable) from subsidiaries for the years ended 30 September:
Balance at beginning of year
Net cash (inflows) / outflows
Net foreign currency translation movements and other amounts receivable
Balance at end of year
The table below shows material transactions with subsidiaries for the years ended 30 September:
Net interest (expense)
Dividend revenue
Superannuation plans
The following payments were made to superannuation plans sponsored by the Group:
Company
2019
$m
(2,405)
1,227
(69)
(1,247)
2018
$m
1,562
(3,898)
(69)
(2,405)
Company
2019
$m
(355)
1,343
2018
$m
(473)
2,675
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
2019
$m
239
1
9
7
2018
$m
238
1
11
7
2019
$m
239
-
-
7
2018
$m
238
-
-
7
Transactions between the Group and superannuation plans sponsored by the Group were made on commercial terms and
conditions.
2019 Annual Financial Report
153
NOTES TO THE FINANCIAL STATEMENTS
NOTE 32 RELATED PARTY DISCLOSURES (CONTINUED)
Key Management Personnel (KMP)
KMP are the directors and senior executives of the Group who have authority and responsibility for planning, directing and
controlling the activities of both NAB and the Group. Details of KMP are set out in the Remuneration report of the Report of the
Directors.
Remuneration
Total remuneration of KMP is included within total personnel expenses in Note 5 Operating expenses. The total remuneration is as
follows:
Short-term benefits
Cash salary
Variable reward cash
Non-monetary
Post-employment benefits
Superannuation
Other long-term benefits
Other long-term benefits
Equity-based benefits
Shares
Performance rights
Other
Other remuneration
Special duties
Total
Group
2019
$
2018(1)
$
14,797,124
16,905,268
136,212
617,205
5,371,267
1,077,477
411,710
405,160
164,569
161,780
738,803
2,048,309
(1,654,472)
8,010,300
1,796,599
787,341
991,906
-
17,999,656
34,766,902
(1) The 2018 comparative amounts have been adjusted to include prior year salary and superannuation adjustments. See Section 5.1 for more detail.
Performance rights and shareholdings of KMP are set out in the Remuneration report included in the Report of the Directors.
Loans to KMP and their related parties
During the reporting period, loans made to KMP and other related parties of the Group and Company were $5 million (2018: $10
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
2019, the total loan balances outstanding were $23 million (2018: $20 million).
No amounts were written off in respect of any loans made to directors or other KMP of the Group and Company during the
current or prior reporting period.
Further details regarding loans advanced to KMP of the Group and Company are included in the Remuneration report of the
Report of the Directors.
154
National Australia Bank
NOTE 33
REMUNERATION OF EXTERNAL AUDITOR
EY Australia
Audit services
Audit-related services
Taxation-related services
Non-audit services
Total Australia
Overseas related practices of EY Australia
Audit services
Audit-related services
Taxation-related services
Non-audit services
Total Overseas
Total compensation of auditors
NOTES TO THE FINANCIAL STATEMENTS
Group
Company
2019
$'000
11,717
7,568
60
91
2018
$'000
10,382
5,388
152
202
2019
$'000
8,587
5,970
60
84
2018
$'000
7,303
3,249
152
195
19,436
16,124
14,701
10,899
4,070
3,911
1,953
1,840
731
165
8
4,974
24,410
534
180
602
5,227
21,351
363
151
-
2,467
17,168
232
92
488
2,652
13,551
For a description of the Board Audit Committee’s pre-approval policies and procedures, refer to the NAB 2019 Corporate
Governance Statement which is available online at www.nab.com.au/about-us/corporate-governance. Further details of the
audit-related, taxation-related and non-audit services provided by EY to the Group during 2019 and the fees paid or due and
payable for those services are set out in the Report of the Directors.
2019 Annual Financial Report
155
NOTES TO THE FINANCIAL STATEMENTS
NOTE 34
EQUITY-BASED PLANS
Accounting policy
The value of shares and performance rights provided to employees are measured by reference to their grant date fair value. 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. The grant date fair value of the shares and performance rights with market performance hurdles is
determined using a simulated version of the Black-Scholes model.
With the exception of General employee shares in Australia and Asia, 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 shares provided are received (the vesting period). The expense for General employee shares in Australia and Asia is
recognised in the income statement in the year the shares are granted as they are not subject to forfeiture. A corresponding increase is recorded in the equity-based compensation reserve.
Key judgements and estimates
The key assumptions and inputs used in the Black-Scholes model vary depending on the award and type of security granted. 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 simulated
version of the Black-Scholes model 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.
Under the Group’s employee equity plans, employees of the Group are awarded NAB shares and performance rights. An employee’s right to participate in a plan is often dependent on their
performance or the performance of the Group, and NAB shares and performance rights awarded under the plans are often subject to service and/or performance conditions.
The Board determines the maximum total value of shares or performance rights offered under each plan having regard to the rules of the relevant plan and, where required, the method
used in calculating the fair value per security. Under ASX Listing Rules, shares and performance rights may not be issued to NAB directors under an employee equity plan without specific
shareholder approval.
Under the terms of most offers, there is a period during which shares are held on trust for the employee they are allocated to and cannot be dealt with, or performance rights allocated to an
employee cannot be exercised, by that employee. There may be forfeiture or lapse conditions which apply to shares or performance rights allocated to an employee (as described below),
including as a result of the employee ceasing employment with the Group during those periods or conduct standards not being met. Shares allocated to employees are eligible for any cash
dividends paid by NAB on those shares from the time those shares are allocated to the trustee on their behalf. Performance rights granted to employees are not eligible for any cash
dividends paid by NAB. In some limited circumstances, there may be a cash equivalent payment made in the event that performance rights vest.
156
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 34 EQUITY-BASED PLANS (CONTINUED)
The key equity-based programs offered to employees are:
Description
A proportion of an employee’s annual VR is
LTVRs (including prior year Long-term
Provided to enable the buy-out
Offered to key individuals in
Shares up to a target value of
provided in equity and is deferred for a
Incentive (LTI) grants) are awarded to
of equity or other incentives
roles where retention is critical
$1,000 are offered to eligible
Variable reward (VR)
Long-term variable reward (LTVR)
Commencement awards
awards
General employee shares
specified period. The deferred amount and
encourage long-term decision-making
from an employee’s previous
over the medium-term
employees.
the deferral period is commensurate with
critical to creating long-term value for
employment.
(generally between 2 and 3
Recognition / Retention
the level of risk and responsibility within a
shareholders through the use of
role.
challenging long-term performance
VR was referred to as ‘short-term incentive’
hurdles.
years).
before:
• 2018 financial year, for the Group CEO,
other members of the Executive
Leadership Team and other Accountable
Persons
• 2019 financial year for all other
employees.
Eligibility
Certain permanent employees based in
The Group CEO and Executive Leadership
Provided on a case by case
Provided on a case by case
Generally all permanent
Australia, Asia, New Zealand, United
Team were previously eligible to receive LTI
basis, with the recommendation
basis, with the recommendation
employees.
Kingdom and the United States having
grants except for 2018.
of the Remuneration Committee
of the Remuneration Committee
regard to their individual performance and
the performance of the Group.
Other senior executives were previously
eligible to receive LTI grants prior to 2015.
The Group CEO and Executive Leadership
Team are now eligible to receive LTVR.
and the approval of the Board.
and the approval of the Board.
Type of share-based
Generally shares. However performance
Performance rights.
Generally shares. However,
Generally shares. However,
Shares.
payment
rights are granted to:
• The Group CEO and other members of
the Executive Leadership Team (except
in respect of 2018 when shares were
granted) and other Accountable
Persons
• other employees for jurisdictional
reasons.
157
National Australia Bank
performance rights are also
performance rights are also
granted for jurisdictional
granted for jurisdictional
reasons.
reasons.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 34 EQUITY-BASED PLANS (CONTINUED)
Variable reward (VR)
Long-term variable reward (LTVR)
Commencement awards
awards
General employee shares
Service conditions
Deferred shares or performance rights are
During the vesting period, all of an
Shares or performance rights
Shares or performance rights
Shares are subject to restrictions
and performance
forfeited or lapsed during the vesting
executive’s performance rights will lapse
are subject to restrictions and
are subject to restrictions and
on dealing for three years and, in
hurdles
period if the employee resigns or if
on the executive’s resignation from the
certain forfeiture or lapsing
certain forfeiture or lapsing
Australia and Asia, are not
conduct standards are not met or, subject
Group and a pro rata portion will lapse on
conditions, including forfeiture
conditions, including forfeiture
subject to forfeiture. In New
to certain exclusions, if the employee's
cessation of employment in other
or lapsing on resignation from
or lapsing on resignation from
Zealand, United Kingdom and
employment with the Group is terminated.
circumstances.
the Group or if conduct
the Group or if conduct
United States, the shares are
Recognition / Retention
Performance rights will also lapse if
conduct standards or performance hurdles
are not met. The Board has absolute
discretion to determine vesting or lapsing
outcomes for the performance rights.
standards are not met.
standards are not met.
effectively forfeited if the
employee resigns or is dismissed
from the Group before the end
of the 3 year restriction period.
Vesting,
Defined period to align with the level of
Defined period set at time of grant,
Defined period set at time of
Defined period set at time of
3 years.
performance or
risk and impact of the role on business
generally between 4 and 5 years.
grant, based on satisfactory
grant.
deferral period
performance and results or to meet
(period over which
regulatory requirements. The vesting
expenses are
recognised)
period will generally be between 1 and 4
years.
evidence of forgone awards
from previous employment.
Exercise period
If the applicable conditions are met,
Performance rights granted from 2013 to
If the applicable conditions are
If the applicable conditions are
n/a.
(only applicable for
performance rights will vest and each
2014 generally have an expiry date
met, performance rights will
met, performance rights will
performance rights)
performance right will be automatically
between 5 and 6 years from the effective
vest and each performance right
vest and each performance right
exercised.
n/a for share grants.
date, if they remain unexercised.
will be automatically exercised.
will be automatically exercised.
Performance rights granted from 2015 will
be automatically exercised if they vest.
n/a for share grants.
n/a for share grants.
Board discretion
The Board regularly reviews Group performance for risk, reputation, conduct and performance considerations and has the ability to:
n/a.
• Extend the deferral period or performance beyond the original period for the Group CEO, other members of the Executive Leadership Team, other
Accountable Persons and, in certain circumstances, other employees.
• Forfeit or lapse the deferred shares or performance rights.
• Clawback the deferred shares or performance rights for the Group CEO, other members of the Executive Leadership Team, other Accountable Persons
and, in certain circumstances, other employees.
158
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 34 EQUITY-BASED PLANS (CONTINUED)
Employee Share Plan
Employee share plans
Variable reward deferred shares
Commencement and recognition shares
General employee shares
2019
Fully paid
2018
Fully paid
ordinary shares
Weighted
ordinary shares
Weighted
granted during
average grant
granted during
average grant
the year
date fair value
the year
date fair value
No.
3,993,696
390,944
1,032,504
$
24.76
25.43
24.19
No.
3,637,091
546,675
929,880
$
30.32
29.70
29.54
The closing market price of NAB’s shares at 30 September 2019 was $29.70 (2018: $27.81). The volume weighted average share
price during the year ended 30 September 2019 was $25.80 (2018: $28.87).
Performance rights movements
Number of performance rights
Opening balance as at 1 October
Granted
Forfeited
Exercised
Closing balance as at 30 September
Exercisable as at 30 September
Performance rights outstanding
Terms and conditions
Market hurdle
Non-market hurdle
Individual hurdle
Information on fair value calculation
2019
4,753,714
185,185
(1,882,568)
(261,473)
2,794,858
-
2019
2018
Weighted
Outstanding at
average
Outstanding at
2018
4,887,668
1,999,924
(967,161)
(1,166,717)
4,753,714
10,849
Weighted
average
30 Sep
remaining life
30 Sep
remaining life
No.
months
1,553,319
993,980
247,559
11
20
27
No.
3,185,150
1,185,908
382,656
months
21
32
17
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)
2019
2018
2.3
2.02%
n/a
$24.83
6.92%
n/a
$21.59
2.06
3.3
2.12%
21%
$29.55
6.40%
$9.68
$24.89
3.09
2019 Annual Financial Report
159
NOTES TO THE FINANCIAL STATEMENTS
NOTE 35
CAPITAL ADEQUACY
As an ADI, the Company is subject to regulation by APRA under the authority of the Banking Act 1959 (Cth). APRA has set
minimum Prudential Capital Requirements (PCR) for ADIs consistent with the Basel Committee on Banking Supervision (BCBS)
capital adequacy framework. PCR are expressed as a percentage of total risk-weighted assets. APRA requirements are
summarised below:
Common Equity Tier 1
4.5% minimum
Tier 1 capital
6.0% minimum
Total capital
8.0% minimum
CET1 capital consists of the sum of paid-up
CET1 capital plus certain securities with
Tier 1 capital plus subordinated debt
ordinary share capital, retained profits plus
complying loss-absorbing characteristics
instruments with complying loss-absorbing
certain other items recognised as the highest
known as Additional Tier 1 capital.
characteristics known as Tier 2 capital.
quality components of capital.
An ADI must hold a capital conservation buffer above the PCR for CET1 capital. The capital conservation buffer is 2.5% of the
ADI’s total risk-weighted assets. As a Domestic Systemically Important Bank (D-SIB) in Australia, the Group is also required to hold
an additional buffer of 1% in CET1 capital.
APRA may determine higher PCR for an ADI and may change an ADI’s PCR at any time. 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.
Capital ratios are monitored against internal capital targets that are set by the Board over and above minimum capital
requirements set by APRA.
The Group remained well capitalised during the year to September 2019, and expects to achieve APRA's ‘Unquestionably Strong’
capital benchmark from 1 January 2020. The Group's CET1 ratio as at 30 September 2019 was 10.38%.
160
National Australia Bank
NOTE 36
NOTES TO THE CASH FLOW STATEMENTS
Reconciliation of net profit attributable to owners of NAB to net cash provided by / (used in) operating activities
NOTES TO THE FINANCIAL STATEMENTS
Net profit attributable to owners of NAB
Add / (deduct) non-cash items in the income statement:
(Increase) / decrease in interest receivable
Increase / (decrease) in interest payable
Increase in unearned income and deferred net fee income
Fair value movements on assets, liabilities and derivatives held at fair value
Increase in provisions
Equity-based compensation recognised in equity or reserves
Impairment losses on non-financial assets
Credit impairment charge
Depreciation and amortisation expense
(Increase) / decrease in other assets
Decrease in other liabilities
Increase / (decrease) in income tax payable
(Increase) in deferred tax assets
Increase / (decrease) in deferred tax liabilities
Operating cash flow items not included in profit
Investing or financing cash flows included in profit
(Gain) on sale of controlled entities, before income tax
(Gain) / loss on sale of associates and joint ventures, before income tax
(Gain) on sale of other debt and equity instruments
(Gain) / loss on sale of property, plant, equipment and other assets
Group
Company
2019
$m
4,798
176
(347)
16
(3,034)
2,298
105
19
984
1,412
(58)
(135)
408
(665)
(23)
2018
$m
5,554
(193)
260
12
8,084
810
146
174
791
780
424
(180)
70
(279)
8
2019
$m
3,279
160
(306)
8
(2,589)
2,267
105
217
853
1,024
(34)
(143)
405
(641)
(6)
2018
$m
5,219
(197)
225
13
7,988
725
146
30
707
530
411
(219)
(220)
(229)
10
4,517
(25,395)
4,323
(25,690)
(18)
(32)
(12)
1
(261)
-
-
(1)
-
41
(12)
(3)
(274)
-
-
-
Net cash provided by / (used in) operating activities
10,410
(9,196)
8,948
(10,825)
2019 Annual Financial Report
161
NOTES TO THE FINANCIAL STATEMENTS
NOTE 36 NOTES TO THE CASH FLOW STATEMENTS (CONTINUED)
Reconciliation of liabilities arising from financing activities
Group
Company
Bonds‚ notes
Bonds‚ notes
Bonds‚ notes
Bonds‚ notes
and
and
and
and
subordinated
subordinated
Other debt
subordinated
subordinated
Other debt
debt
debt
issues
debt
debt
issues
At amortised
At amortised
At amortised
At amortised
At fair value
$m
22,869
4,214
(4,637)
cost
$m
124,871
27,925
(18,314)
cost
$m
6,187
-
(41)
At fair value
$m
4,320
990
(134)
cost
$m
121,315
25,923
(16,875)
cost
$m
6,187
-
(41)
Balance at 1 October 2017
Cash flows
Proceeds from issue
Repayments
Non-cash changes
Fair value changes, including fair value
hedge adjustments
(266)
(1,185)
-
(57)
(1,193)
-
Foreign currency translation and other
adjustments
Balance at 30 September 2018
Cash flows
Proceeds from issue
Repayments
Non-cash changes
Conversion of convertible preference shares
Fair value changes, including fair value
hedge adjustments
Foreign currency translation and other
1,400
23,580
4,213
(3,734)
-
982
6,925
140,222
22,946
(27,267)
12
6,158
1,874
(799)
-
(750)
3,131
-
adjustments
Balance at 30 September 2019
957
25,998
4,226
143,258
(1)
6,482
Reconciliation of cash and cash equivalents
366
5,485
227
(170)
-
570
302
6,414
6,940
136,110
21,316
(26,260)
12
6,158
1,874
(799)
-
(750)
2,215
-
4,218
137,599
(1)
6,482
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
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
2019
$m
2018
$m
Company
2019
$m
2018
$m
55,457
50,188
54,811
49,717
795
23,705
79,957
672
24,372
75,232
-
20,635
75,446
-
22,116
71,833
(32,931)
(37,286)
(31,282)
(35,465)
47,026
37,946
44,164
36,368
162
National Australia Bank
NOTE 36 NOTES TO THE CASH FLOW STATEMENTS (CONTINUED)
Non-cash financing and investing activities
New share issues
Dividend reinvestment plan
Conversion of convertible preference shares
NOTES TO THE FINANCIAL STATEMENTS
Group
Company
2019
$m
1,803
750
2018
$m
1,182
-
2019
$m
1,803
750
2018
$m
1,182
-
The Group offered a 1.5% discount on the Dividend Reinvestment Plans for dividends paid during the year ended 30 September
2019. For the year ended 30 September 2018, the Group did not offer a discount on the Dividend Reinvestment Plan for the
interim dividend.
On 20 March 2019, the Group completed the resale of all convertible preference shares (CPS) issued on 20 March 2013 to a
nominated purchaser, in accordance with the resale notice issued on 11 February 2019. Following the resale, $750 million of
CPS were converted into ordinary shares, and the remaining balance of approximately $764 million of CPS was redeemed.
NOTE 37
DISCONTINUED OPERATIONS
Accounting policy
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.
The results set out below represent the discontinued operations of the Group's life insurance business and the UK Banking
operations related to the CYBG demerger which occurred in the 2016 financial year. During the 2019 financial year, a net loss of
$289 million was recognised in discontinued operations. This includes customer-related remediation relating to the insurance
business and additional costs associated with the insurance business sale. Refer to Note 29 Contingent liabilities and credit
commitments for further information.
Analysis of loss for the year from discontinued operations
Total discontinued operations
Net (loss) from life insurance business discontinued operation
Net (loss) from CYBG discontinued operation
Net (loss) from discontinued operations
2019
$m
(289)
-
(289)
2018
$m
(97)
(291)
(388)
2019 Annual Financial Report
163
NOTES TO THE FINANCIAL STATEMENTS
NOTE 38
EVENTS SUBSEQUENT TO REPORTING DATE
On 14 November 2019, Dr Ken Henry resigned as non-executive director and Chairman of the Board. Mr Philip Chronican
commenced as Chairman of the Board, effective 15 November 2019 with his last day as interim Group CEO on 14 November
2019. Mr Gary Lennon, Group CFO will be acting Group CEO from 15 November 2019 to 1 December 2019 while continuing as
Group CFO.
On 13 September 2019, NAB exercised its option to redeem the EUR750 million medium-term notes. The notes were repaid at par
on 12 November 2019.
Other than the matters noted, there are no items, transactions or events of a material or unusual nature that have arisen in the
interval between 30 September 2019 and 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.
164
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 73 to 164 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 Bases of
presentation and measurement 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 2019, and of the performance of NAB and the Group for the year ended 30 September
2019;
(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 15th day of November 2019 and signed in accordance with a resolution of the directors.
Philip Chronican
Chairman
2019 Annual Financial Report
165
INDEPENDENT AUDITOR'S REPORT
166
National Australia Bank
A member firm of Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards LegislationErnst & Young8 Exhibition StreetMelbourne VIC 3000 AustraliaGPO Box 67 Melbourne VIC 3001 Tel: +61 3 9288 8000Fax: +61 3 8650 7777ey.com/auIndependent Auditor's Report to the Members of NationalAustralia Bank LimitedReport on the Audit of the Financial ReportOpinionWe have audited the Financial Report of National Australia Bank Limited (the Company) and itssubsidiaries (collectively the Group), which comprises:the Group consolidated and Company balance sheets as at 30 September 2019;the Group consolidated and Company income statements, statements of comprehensive income,statements of changes in equity and cash flow statements for the year then ended;notes to the financial statements, including a summary of significant accounting policies, andthe Directors’ declaration.In our opinion the accompanying Financial Report is in accordance with theCorporations Act 2001,including:giving a true and fair view of the Company’s and the Group’s financial position as at 30 September2019 and of their financial performance for the year ended on that date; andcomplying with Australian Accounting Standards and theCorporations Regulations2001.Basis for OpinionWe conducted our audit in accordance with Australian Auditing Standards. Our responsibilities underthose standards are further described in the Auditor’s Responsibilities for the Audit of the FinancialReport section of our report. We are independent of the Group in accordance with the auditorindependence requirements of theCorporations Act 2001 and the ethical requirements of theAccounting Professional and Ethical Standards Board’s APES 110Code of Ethics for ProfessionalAccountants (the Code) that are relevant to our audit of the Financial Report in Australia. We have alsofulfilled our other ethical responsibilities in accordance with the Code.We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis forour opinion.Key Audit MattersKey audit matters are those matters that, in our professional judgement, were of most significance inour audit of the Financial Report of the current year. These matters were addressed in the context ofour audit of the Financial Report as a whole, and in forming our opinion thereon, but we do not providea separate opinion on these matters. For each matter below, our description of how our auditaddressed the matter is provided in that context. The key audit matters identified below, unlessotherwise stated, relate to both the Company and the Group. INDEPENDENT AUDITOR'S REPORT
2019 Annual Financial Report
167
A member firm of Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards LegislationWe have fulfilled the responsibilities described in theAuditor’s Responsibilities for the Audit of theFinancial Report section of our report, including in relation to these matters. Accordingly, our auditincluded the performance of procedures designed to respond to our assessment of the risks of materialmisstatement of the Financial Report. The results of our audit procedures, including the proceduresperformed to address the matters below, provide the basis for our audit opinion on the accompanyingFinancial Report.Why significantHow our audit addressed the key audit matterProvision for credit impairmentAs described in Notes 17Provision for creditimpairment on loans at amortised cost and19Financial risk management, the provision forcredit impairment is determined in accordance withAustralian Accounting Standard – AASB 9FinancialInstruments (AASB 9).This was a key audit matter due to the size andtiming of the recognition of the provision, and thedegree of judgement and estimation uncertaintyassociated with the calculations.Key areas of judgement included:the application of the impairment requirementsunder AASB 9 within the Group’s expected creditloss methodology;the identification of exposures with a significantdeterioration in credit quality;assumptions used in the expected credit lossmodel (for exposures assessed on an individualor collective basis); andthe incorporation of forward-looking informationto reflect current or future external factors (e.g.unemployment rates, interest rates, grossdomestic product growth rates, property-priceindices).Our audit procedures included the following:We assessed:the alignment of the Group’s expected credit lossmodel and its underlying methodology with therequirements of AASB 9;the approach determined by the Group for theincorporation of forward-looking macroeconomicfactors;the effectiveness of relevant controls relating to the:capture of data used to determine the provisionfor credit impairment, including transactionaldata captured at loan origination, ongoinginternal credit quality assessments, storage ofdata in data warehouses and interfaces to theexpected credit loss model; andexpected credit loss model, includingfunctionality, ongoing monitoring/validation andmodel governance.We examined a sample of exposures assessed on anindividual basis and evaluated the:timely identification of exposures with a significantdeterioration in credit quality; andexpected loss calculation for these exposures.We assessed the significant modelling assumptions forexposures evaluated on a collective basis and overlays,with a focus on the:basis for and data used to determine overlays; andsensitivity of the collective provisions to changes inmodelling assumptions.We considered the processes used to identify, assessand manage climate-related risks associated with theGroup’s loan portfolio.We considered the adequacy and appropriateness of thedisclosures related to credit impairment within theFinancial Report.We involved our Actuarial and IT specialists in theperformance of these procedures where their specificexpertise was required. INDEPENDENT AUDITOR'S REPORT
168
National Australia Bank
A member firm of Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards LegislationWhy significantHow our audit addressed the key audit matterCustomer-related remediation provisionsAs detailed in Notes 24Provisions and 29Contingentliabilities and credit commitments, the Group isexposed to regulatory activity, complianceinvestigations and associated proceedings in variousjurisdictions (primarily in Australia). In this context,the Group recorded provisions for customer-relatedremediation programs and regulatory activity.This was a key audit matter due to the significantjudgement required to determine a reliable estimateof the provision.Key areas of judgement included the:decision to recognise a provision, includingwhether sufficient information existed to allow aprovision to be reliably measured;assumptions used to estimate the customer-related remediation payments, including refundrates and average compensation amounts; andcosts required to complete the remediationprograms.Our audit procedures included the following:We developed an understanding of potential regulatoryand customer-related remediation obligations throughour industry experience, and discussions withmanagement and Directors, review of Board andcommittee minutes and correspondence withregulators.We assessed and tested key assumptions used toestimate the customer-related remediation payments,including a consideration of industry and historicaltrends.We evaluated the adequacy of the costs recognised withreference to the status of each program and costsincurred to date.For those matters where the Group determined that asufficiently reliable estimate of the amount of theobligation cannot be made and for which no provisionshave been recognised, we considered all availableinformation to assess the appropriateness of thisconclusion as contingent liabilities.We considered the adequacy and appropriateness ofthe disclosures within the Financial Report related toregulatory and customer-related remediation risk andprovisions. INDEPENDENT AUDITOR'S REPORT
2019 Annual Financial Report
169
A member firm of Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards LegislationWhy significantHow our audit addressed the key audit matterInformation Technology (IT) systems and controls over financial reportingA significant part of the Group’s financial reportingprocess is primarily reliant on IT systems withautomated processes and controls relating to thecapture, storage and extraction of information.A fundamental component of IT controls is ensuringthat risks relating to inappropriate user accessunauthorised program changes and IT operatingprotocols are addressed.We focused our audit procedures on those IT systemsand controls that are significant to the Group’s financialreporting process.As audit procedures over IT systems and controlsrequire specific expertise, we involved our ITspecialists.We assessed the design and tested the operatingeffectiveness of the Group’s IT controls, including thoserelated to user access, change management and dataintegrity.Where we identified design and/or operatingdeficiencies in the IT control environment, ourprocedures included the following:We extended our testing to validate the integrity andreliability of the associated systems, data andreporting as it relates to financial reporting.Where automated procedures were supported bysystems with identified deficiencies, we extendedour procedures to test alternative controls. INDEPENDENT AUDITOR'S REPORT
170
National Australia Bank
A member firm of Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards LegislationWhy significantHow our audit addressed the key audit matterNAB Wealth classification and carrying valueGroup and Company:On 3 May 2018, NAB announced to the market theintention to pursue a divestment of the Advice,Platform & Superannuation and Asset Managementbusinesses (Wealth Business). As at 30 September2019, this project had not sufficiently progressed totrigger the application of Australian AccountingStandard – AASB 5Non-current Assets Held for Saleand Discontinued Operations (AASB 5).Company only:In addition, in relation to the Company only, asdetailed in Note 5Operating expenses, the Companyrecognised an impairment of its investment inNational Wealth Management Holdings Limited(NWMH), which is the holding company for theCompany’s Wealth Business. The impairmentamount was calculated by comparing the carryingvalue of the Company’s investment in NWMH with itsrecoverable amount as at 30 September 2019.The recoverable amount was determined using avalue in use calculation. This calculationincorporated a range of assumptions, including:future cash flows;discount rate; andterminal growth rate.This was a key audit matter due to the degree ofjudgement involved in the held-for-saledetermination and the degree of estimationuncertainty associated with the assumptions appliedin the impairment assessment.Our audit procedures included the following:We gained an understanding of the status of thedivestment project through discussions withmanagement and Directors, and review of Board andcommittee minutes and papers.We assessed the progress of the planned divestment ofthe Wealth Business against the requirements of AASB5 to determine whether the application of AASB 5 wastriggered as at 30 September 2019.We assessed whether the methodology used by theCompany for the impairment assessment of NWMH wasin line with the requirements of Australian AccountingStandards.We agreed the forecast cash flows to the most recentBoard or management-approved cash flow forecastsand assessed the accuracy of the Company’s previousforecasts by performing a comparison of historicalforecasts to actual results.We involved our valuation specialists to assess the keyassumptions, including the discount rate, terminalgrowth rate and growth assumptions, used in theimpairment assessment with reference to comparablecompanies and to test the mathematical accuracy ofthe impairment models.We evaluated the adequacy of impairment that wasrecognised during the financial year.We benchmarked the implied valuations to comparablecompany valuation multiples. INDEPENDENT AUDITOR'S REPORT
2019 Annual Financial Report
171
A member firm of Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards LegislationInformation Other than the Financial Report and Auditor’s Report ThereonThe Directors are responsible for the other information. The other information comprises theinformation included in the Company’s Annual Financial Report for the year ended 30 September2019, but does not include the Financial Report and our auditor’s report thereon.Our opinion on the Financial Report does not cover the other information and accordingly we do notexpress any form of assurance conclusion thereon, with the exception of the Remuneration Report andour related assurance opinion.In connection with our audit of the Financial Report, our responsibility is to read the other informationand, in doing so, consider whether the other information is materially inconsistent with the FinancialReport or our knowledge obtained in the audit or otherwise appears to be materially misstated.If, based on the work we have performed, we conclude that there is a material misstatement of thisother information, we are required to report that fact. We have nothing to report in this regard.Responsibilities of the Directors for the Financial ReportThe Directors of the Company are responsible for the preparation of the Financial Report that gives atrue and fair view in accordance with Australian Accounting Standards and theCorporations Act 2001and for such internal control as the Directors determine is necessary to enable the preparation of theFinancial Report that gives a true and fair view and is free from material misstatement, whether due tofraud or error.In preparing the Financial Report, the Directors are responsible for assessing the Company’s andGroup’s ability to continue as a going concern, disclosing, as applicable, matters relating to goingconcern and using the going concern basis of accounting unless the Directors either intend to liquidatethe Company or Group or to cease operations, or have no realistic alternative but to do so.Auditor's Responsibilities for the Audit of the Financial ReportOur objectives are to obtain reasonable assurance about whether the Financial Report as a whole isfree from material misstatement, whether due to fraud or error, and to issue an auditor’s report thatincludes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that anaudit conducted in accordance with the Australian Auditing Standards will always detect a materialmisstatement when it exists. Misstatements can arise from fraud or error and are considered materialif, individually or in the aggregate, they could reasonably be expected to influence the economicdecisions of users taken on the basis of this Financial Report. INDEPENDENT AUDITOR'S REPORT
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National Australia Bank
A member firm of Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards LegislationAs part of an audit in accordance with the Australian Auditing Standards, we exercise professionaljudgment and maintain professional scepticism throughout the audit. We also:Identify and assess the risks of material misstatement of the Financial Report, whether due to fraudor error, design and perform audit procedures responsive to those risks, and obtain audit evidencethat is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting amaterial misstatement resulting from fraud is higher than for one resulting from error, as fraud mayinvolve collusion, forgery, intentional omissions, misrepresentations, or the override of internalcontrol.Obtain an understanding of internal control relevant to the audit in order to design audit proceduresthat are appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s or the Group’s internal control.Evaluate the appropriateness of accounting policies used and the reasonableness of accountingestimates and related disclosures made by the Directors.Conclude on the appropriateness of the Directors’ use of the going concern basis of accounting and,based on the audit evidence obtained, whether a material uncertainty exists related to events orconditions that may cast significant doubt on the Company’s or Group’s ability to continue as agoing concern. If we conclude that a material uncertainty exists, we are required to draw attentionin our auditor’s report to the related disclosures in the Financial Report or, if such disclosures areinadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up tothe date of our auditor’s report. However, future events or conditions may cause the Company orthe Group to cease to continue as a going concern.Evaluate the overall presentation, structure and content of the Financial Report, including thedisclosures, and whether the Financial Report represents the underlying transactions and events ina manner that achieves fair presentation.Obtain sufficient appropriate audit evidence regarding the financial information of the entities orbusiness activities within the Group to express an opinion on the Financial Report. We areresponsible for the direction, supervision and performance of the Group audit. We remain solelyresponsible for our audit opinion.We communicate with the Directors regarding, among other matters, the planned scope and timing ofthe audit and significant audit findings, including any significant deficiencies in internal control that weidentify during our audit.We also provide the Directors with a statement that we have complied with relevant ethicalrequirements regarding independence, and to communicate with them all relationships and othermatters that may reasonably be thought to bear on our independence, and where applicable, relatedsafeguards.From the matters communicated to the Directors, we determine those matters that were of mostsignificance in the audit of the Financial Report of the current year and are therefore the key auditmatters. We describe these matters in our auditor’s report unless law or regulation precludes publicdisclosure about the matter or when, in extremely rare circumstances, we determine that a mattershould not be communicated in our report because the adverse consequences of doing so wouldreasonably be expected to outweigh the public interest benefits of such communication. INDEPENDENT AUDITOR'S REPORT
2019 Annual Financial Report
173
A member firm of Ernst & Young Global LimitedLiability limited by a scheme approved under Professional Standards LegislationReport on the Audit of the Remuneration ReportOpinion on the Remuneration ReportWe have audited the Remuneration Report included in pages 43 to 71 of the Report of the Directorsfor the year ended 30September 2019.In our opinion, the Remuneration Report of National Australia Bank Limited for the year ended30September 2019 complies with section 300A of theCorporations Act 2001.ResponsibilitiesThe Directors of the Company are responsible for the preparation and presentation of the Remune-ration Report in accordance with section 300A of theCorporations Act 2001. Our responsibility is toexpress an opinion on the Remuneration Report, based on our audit conducted in accordance withAustralian Auditing Standards.Ernst & YoungSarah LowePartnerMelbourne15 November 2019 SHAREHOLDER INFORMATION
Twenty largest registered fully paid ordinary shareholders of the Company as at 31 October 2019
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED
J P MORGAN NOMINEES AUSTRALIA PTY LIMITED
CITICORP NOMINEES PTY LIMITED
NATIONAL NOMINEES LIMITED
BNP PARIBAS NOMINEES PTY LTD
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