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Bank of America National Australia Bank Limited ABN 12 004 044 937This 2020 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 the shareholder information line 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 2020
REPORT OF THE DIRECTORS
2020 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
35
40
41
52
54
83
83
85
86
87
88
89
91
93
194
195
203
208
Annual Financial Report 2020
1
REPORT OF THE DIRECTORS
2
National Australia Bank
2020 AT A GLANCE>$600mApproved in Business Support Loans under Australian Government’s Coronavirus SME Guarantee SchemeSME Guarantee Scheme$5mCommitted to support customers, colleagues and communities impacted by the bushfiresSupporting communities through crisis and recovery$0.60$1.06 lower than 2019Dividend per share (for the full year)6.5%490 basis points decrease from 2019Cash return on equity26,62135.3% increase from 2019Customers assisted experiencing financial hardship>148,000Business and home loan customers supported with deferralsSupporting communities through crisis and recovery$2.56bnStatutory net profit$3.71bn36.6% decrease from 2019$4.73bn cash earnings ex large notables of $1.02bn 25.9% decrease from 2019Cash earnings-115 point increase from 2019, #2 amongst major banksStrategic Net Promoter Score5 points above our 2020 target of 71Colleague engagement score76 REPORT OF THE DIRECTORS
The past year has been uniquely confronting for the
customers and communities we serve. In that, we are no
different from most businesses around the world that are
dealing with disruptions unparalleled in most of our
lifetimes.
In Australia, the tragic health and economic impacts of
COVID-19 came on top of the severe drought and
devastating bushfires over the summer of 2019/2020.
Our bank and our people have been tested. I am proud of
how we are responding given the critical role we play in
supporting the economy and our communities.
When the economic shutdowns were brought in earlier in
the year, we knew that we would have to work with
governments and regulators to ensure that our customers
would be supported during these critical times.
NAB was not operating in isolation. The financial services
industry has shown a strong focus on supporting customers
and avoiding unnecessary financial stress on households
and businesses.
Our wider economic contribution through employment,
supplier and government payments, and community
investment, is particularly important during a downturn.
This year we paid $3.5 billion in government payments and
taxes, $5.1 billion to suppliers, $3.3 billion in dividends, and
other payments that flow to employees and into the
community via donations and volunteering.
I am equally conscious of the impact of our COVID-19
response on our shareholders, many of whom rely on
dividends which have been substantially reduced. The total
dividend of 60 cents per share in the 2020 financial year
reflects the economic environment, regulatory guidance
and consideration of our strong capital position. Every
decision the Board makes carefully balances our short and
long-term responsibilities to shareholders and our ability to
serve customers and communities.
Amid all of this, we are building a bank to be more resilient
and to perform better over the long-term. We will not lose
sight of the work to be done to reliably achieve responsible
growth and healthy returns for our shareholders.
Making the necessary hard choices
Earlier this year we took decisive action to strengthen our
capital position, in recognition of the magnitude of the
economic crisis. Endorsed by many shareholders, our
actions have enabled us to continue to support customers
through COVID-19, as well as assist us to manage through
the recession in Australia and economic headwinds globally.
In uncertain times, a strong balance sheet is critical. The
Board will continue to focus on maintaining our strong
balance sheet to target growth opportunities and support
our customers’ ambitions despite the operating
environment.
By serving customers well through this difficult period, we
expect to deliver long-term value to you. We do well when
our customers do well.
The Board and leadership team have also been clear that we
should share the challenges faced by our customers,
shareholders and the community. The Executive Leadership
Team will not receive an annual variable reward as part of
their remuneration for 2020. The Board and Group Chief
Executive Officer Ross McEwan also took a 20% reduction in
base fees and fixed remuneration respectively from 1 April
2020 to 30 September 2020.
The Executive Leadership Team, led by Ross since last
December, has a clear plan to strengthen NAB and is getting
on with it. Ross has quickly shown he is the right leader for
NAB through this crisis and beyond. Alongside a talented
and capable leadership team, he has led the creation of a
refreshed Group Strategy, which sets a simple and impactful
ambition to ‘serve customers well and help our
communities prosper’. We have centred ourselves on the
core notion of being a good bank.
Annual Financial Report 2020
3
REPORT OF THE DIRECTORS
Driving sustainable change
The lessons learnt from the Royal Commission and through
our self-assessment into governance, accountability and
culture remain front of mind. We are making sustainable
progress by addressing the root causes of our failings.
We are holding ourselves accountable by tracking our
performance in areas where we need to improve. Realising
our desired culture will take time however, the right
foundations are in place. Our refreshed strategy and
organisational structure take these lessons to the heart of
how we work.
Expectations of the bank are changing rapidly. Your Board is
paying close attention to the commercial risks and
opportunities that climate change poses for our business.
We are taking a range of actions to help and support
customers and communities through the transition to less
emission intensive technologies. We have a clear ambition,
and we will not walk away from industries working towards
a low carbon economy.
The NAB Board continues to evolve to reflect the skills
required for the future. After serving almost seven years on
the Board, Geraldine McBride has announced she will not
be seeking re-election at the AGM and will retire from the
Board in December. I would like to thank Geraldine for her
contribution. Simon McKeon, an experienced executive and
board member, will stand for election at this year’s AGM in
December with Peeyush Gupta, David Armstrong and Ann
Sherry who all stand for re-election.
In a year characterised by challenges, we remain a strong
and safe bank, well placed for the future. Our ambition is
clear and easily understood. On behalf of the Board, thank
you for your support as shareholders over the past year.
Equally, I would like to thank our 34,000 colleagues who
have remained focused on the right things for customers
and who have understood where they could make the
greatest contribution to helping Australia and New Zealand
through this confronting period.
Philip Chronican, Chairman
4
National Australia Bank
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 2020.
Certain definitions
The Group’s financial year ends on 30 September. The
financial year ended 30 September 2020 is referred to as
2020 and other financial years are referred to in a
corresponding manner. Reference in this document to the
year ended September 2020 are references to the twelve
months ended 30 September 2020. 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.
There are many factors that could cause actual results to
differ materially from those projected in such statements,
including (without limitation) the risks and uncertainties
associated with the ongoing impacts of COVID-19, changes
to the Australian and global economic environment and
capital market conditions, changes to the operating and
regulatory environment of the Group and changes to the
financial position or performance of the Group. Further
information is contained on page 21 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.
REPORT OF THE DIRECTORS
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 to measure the
Group’s overall financial performance and position and
believe the presentation of these financial measures used
by NAB's Australian peers 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 return on equity
• cash return on equity
• net interest margin
• average equity (adjusted)
• average interest earning assets
• total average assets.
The Group regularly reviews the non-IFRS measures
included in the 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.
Annual Financial Report 2020
5
REPORT OF THE DIRECTORS
OPERATING AND FINANCIAL REVIEW (CONTINUED)
Information about net interest margin
Net interest margin (NIM) is a non-IFRS key financial
performance measure that is calculated as net interest
income (derived on a cash earnings basis) expressed as a
percentage of average interest earning assets.
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 NAB believes
more accurately reflect seasonality, timing of accruals and
restructures (including discontinued operations), which
would otherwise not be reflected in a simple average.
Refer to page 7 for a five-year summary of the Group’s
average equity (adjusted), total average assets and average
interest earning assets.
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.
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
2020
$m
13,877
3,384
(9,346)
(2,752)
5,163
(1,665)
3,498
(935)
2,563
4
2,559
Group(1)
2018
$m
13,505
5,596
(9,910)
(791)
8,400
(2,455)
5,945
(388)
5,557
3
5,554
2019
$m
13,555
3,980
(8,263)
(927)
8,345
(2,440)
5,905
(1,104)
4,801
3
4,798
2017
$m
13,182
4,842
(8,539)
(824)
8,661
(2,480)
6,181
(893)
5,288
3
5,285
2016
$m
12,930
5,192
(8,331)
(813)
8,978
(2,553)
6,425
(6,068)
357
5
352
(1)
Information is presented on a continuing operations basis, unless otherwise stated. 2019 has been restated for the presentation of MLC Wealth as a
discontinued operation. No other comparative periods have been restated.
5 Year Key Performance Indicators
Key Indicators
Statutory earnings per share (cents) - basic
Statutory earnings per share (cents) - diluted
Statutory return on equity
Cash return on equity(1)
Profitability, performance and efficiency measures
Dividend per share (cents)
Net interest margin(1)
Total Group Capital(2)
Common Equity Tier 1 ratio
Tier 1 ratio
Total capital ratio
Risk-weighted assets ($bn) (spot)
Volumes ($bn)
Gross loans and acceptances (spot)(3)
Average interest earning assets
Total average assets
Customer deposits (spot)
Average equity (adjusted) - Statutory
Average equity (adjusted) - Cash
Asset quality
Group
2020
2019
2018
2017
2016
82.1
80.5
4.4%
6.5%
60
1.77%
11.47%
13.20%
16.62%
425.1
594.1
781.7
877.0
468.2
56.7
56.7
168.6
164.4
9.1%
11.4%
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
90+ days past due and gross impaired assets to gross loans and acceptances
1.03%
0.93%
0.71%
0.70%
0.85%
Full-time equivalent employees (FTE)(4)
FTE (spot)
FTE (average)
34,944
34,841
34,370
33,950
33,283
33,747
33,422
33,746
34,263
34,567
(1)
Information is presented on a continuing operations basis, unless otherwise stated. 2019 has been restated for the presentation of MLC Wealth as a
discontinued operation. No other comparative periods have been restated.
(2) Capital numbers reflect the reported figures as at the respective dates and have not been restated.
(3)
(4) Excluding discontinued operations, FTE (spot) is 31,372 (2019: 30,776) and FTE (average) is 31,204 (2019: 30,532).
Including loans and advances at fair value.
Annual Financial Report 2020
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.
The Group's Business
The Group is a financial services organisation with more
than 34,000 colleagues, operating through a network of
more than 850 branches, with over 639,000 shareholders
and serving approximately nine million customers.
The majority of the Group's financial services businesses
operate in Australia and New Zealand, with branches
located in Asia, the United Kingdom (UK) and the United
States (US).
In April 2020, the Group redesigned its operational
structure to support the Group's refreshed strategy. The
structure reflects the Group's increased focus on digital and
delivery by elevating UBank and Strategy & Innovation. The
Group operates the following divisions:
• Business and Private Banking focuses on NAB's priority
small and medium customer segments. This includes the
leading NAB Business franchise, specialised Agriculture,
Health, Government, Education and Community services,
along with Private Banking and JBWere, as well as the
micro and small business segments.
• Personal Banking provides customers with products and
services through proprietary networks in NAB, as well as
third party and mortgage brokers. Customers are served
through the Personal 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.
• Corporate and Institutional Banking provides a range of
products and services including client coverage,
corporate finance, markets, asset servicing, transactional
banking and enterprise payments. The division services
its customers in Australia and globally, including
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 provides banking and financial
services across customer segments in New Zealand. It
consists of Partnership Banking, servicing consumer and
SME segments; Corporate and Institutional Banking,
servicing Corporate, Institutional, Agribusiness, and
Property customers, and includes Markets Sales
operations in New Zealand. New Zealand Banking also
includes the Wealth and Insurance franchises operating
under the ‘Bank of New Zealand’ brand, but excludes the
Bank of New Zealand’s Markets Trading operations.
• Corporate Functions and Other business includes UBank
and enabling units that support all businesses including
8
National Australia Bank
Treasury, Technology and Enterprise Operations, Strategy
and Innovation, Support Units and Eliminations.
Significant change in the state of affairs
• On 28 April 2020, the Group completed a fully
underwritten Institutional Share Placement, raising $3.0
billion of Common Equity Tier 1 (CET1) capital.
• On 2 June 2020, the Group issued a further $1.25 billion
of CET1 capital under the Share Purchase Plan.
• On 25 June 2020, National Wealth Management Services
Limited changed its name to MLC Wealth Limited.
• On 31 August 2020, NAB entered into a Sale and
Purchase Agreement to sell 100% of MLC Wealth to IOOF
Holdings Limited (IOOF) for a purchase price of $1,440
million. Refer to Note 37 Discontinued operations.
• A number of changes to the composition of the NAB
Board and Executive Leadership Team were announced
during 2020, namely:
– Mr Simon McKeon commenced as non-executive
director on 3 February 2020.
– Mr Mike Baird ceased as Chief Customer Officer -
Consumer Banking effective 15 April 2020 and ceased
employment with the Group effective 31 May 2020.
– Mr Anthony Waldron, Executive, Digital, Analytics,
Strategy and Execution, acted as Chief Customer
Officer - Consumer Banking, from 16 April 2020 to
31 May 2020.
– Ms Rachel Slade held the position of Chief Customer
Experience Officer until she was appointed to the
position of Group Executive, Personal Banking on
1 June 2020.
– Mr Anthony Healy ceased as Chief Customer Officer -
Business and Private Banking and ceased employment
with the Group effective 30 April 2020.
– Mr Michael Saadie, Chief Risk Officer - Business and
Private Banking acted as Chief Customer Officer -
Business and Private Banking, from 1 May 2020 to 31
August 2020.
– Mr Nathan Goonan commenced as Group Executive,
Strategy and Innovation, effective 1 June 2020.
– Mr Andrew Irvine commenced as Group Executive,
Business and Private Banking, effective 1 September
2020.
– On 6 October 2020, it was announced that Ms
Geraldine McBride will not be standing for re-election
at the 2020 AGM.
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.
Responding to COVID-19
The COVID-19 pandemic continues to challenge the Group
and its customers, with varied impacts across industries,
communities and state borders. The COVID-19 pandemic
contributed to the Group experiencing volatile markets,
subdued credit demand, low interest rates and signs of
deteriorating asset quality.
OPERATING AND FINANCIAL REVIEW (CONTINUED)
The support measures provided by the Australian Federal
Government (the Australian Government) have been vital
and the Australian Government’s 2020 Budget package to
stimulate the economy is welcome. Tax incentives to
encourage job creation and investment in research and
development will help to rebuild the Australian economy.
NAB was also pleased to see investment in industries with
high growth potential such as manufacturing. NAB
continues to work alongside state and federal governments,
regulators and the broader industry to support customers
and the community.
Supporting our customers
NAB has taken active steps to support customers affected by
COVID-19. These steps include:
• Deferring more than 110,000 home loans (value of >
$42.0 billion) and more than 38,000 business loans (value
of >$21.0 billion).
• Approving more than $600 million Business Support
Loans under the Australian Government Small and
Medium Enterprise (SME) Guarantee Scheme.
• When appropriate, providing customers with the option
to extend existing six-month loan deferrals by up to four
months (ending no later than 31 March 2021).
• Providing Business Support Loans designed for small
business customers with an annual turnover of less than
$50 million, offering loans up to $1 million with no
repayments required in the first six months.
Ongoing support provided by NAB include free counselling,
financial coaching and free courses to help customers set
up their businesses online. NAB has had check-in
conversations with more than 41,000 homeowners on
deferrals.
REPORT OF THE DIRECTORS
pandemic leave, and continued support for colleagues'
wellbeing and carer responsibilities.
As banking remains an essential service, NAB has supported
its customers by keeping as many branches open as
possible, and making NAB colleagues available to meet
customer needs.
NAB temporarily closed some branches to use as training
hubs. Bankers in these branches are learning new skills so
they can serve customers remotely through other channels
such as calls and online chat. NAB significantly increased the
number of colleagues directly supporting customers in
hardship, including re-training colleagues from within NAB.
Data security and financial crime
The challenges posed by COVID-19, particularly due to
social distancing requirements and restriction of movement,
have impacted NAB's ability to verify the identity of
customers in person as required by Anti-Money and Counter-
Terrorism Financing Act and Rules (AML/CTF Law)
requirements. NAB responded by implementing alternate
measures to support customers during this time while
continuing to meet its regulatory obligations, noting the
guidance issued by AUSTRAC. The alternate measures are
based on the AML/CTF Law, and may be applied in instances
where the usual verification methods cannot be
undertaken.
Since June 2017, NAB has invested approximately $300
million in expanding its capability to manage financial crime
and has more than 1,000 colleagues dedicated to managing
financial crime risks. NAB has redesigned its financial crime
operating model and recruited subject matter experts with
domestic and global experience.
Adapting for our customers and colleagues
Response to Bushfires
In response to COVID-19, the way the Group's customers are
banking is changing rapidly. This includes how customers
access their money. More than 90% of customers who
interact with NAB are digitally active, with many
transitioning to internet banking during COVID-19. NAB has
adapted in many ways to serve its customers. These include:
• Extending NAB's servicing options to include video
meetings.
• Launching a customer self-serve appointment booking
system.
• Introducing a chat bot function online to answer
recurring customer questions immediately.
• Enabling the Indigenous Customer Service Line team to
remotely open customer accounts using alternative
forms of identification.
NAB colleagues have assisted customers while being
impacted by COVID-19 themselves. Over 30,000 NAB
colleagues adjusted to working from home within three
weeks. The health, safety and wellbeing of the Group's
34,000 colleagues remains NAB's highest priority. NAB has
provided additional support measures for its colleagues to
support them through this time, including 10 days paid
This year, NAB provided support to assist those impacted by
significant natural disasters, with a devastating bushfire
season impacting customers, colleagues and communities
across Australia. NAB’s immediate response focused on the
safety of customers and colleagues. A range of targeted
support options were provided:
• Commitment of $1 billion in concessional loans
supporting customers seeking to restructure existing
facilities to assist in repairs, restocking and re-opening
for business.
• Access to NAB’s financial hardship assistance team in
impacted communities.
• Up to a three-year deferral of interest and repayments for
existing NAB loans.
• A commitment not to foreclose upon, or force the sale of
collateral of existing loans for up to three years.
• Support and counselling services, by making NAB’s
Employee Assistance Program available to customers.
• $5 million committed to the NAB Disaster Relief fund,
with approximately $3 million distributed in small
emergency grants to impacted colleagues and customers
to cover temporary accommodation, food and clothing,
and business costs such as reopening, covering damaged
Annual Financial Report 2020
9
REPORT OF THE DIRECTORS
OPERATING AND FINANCIAL REVIEW (CONTINUED)
property, equipment, and loss of stock or livestock. The
remaining funds support the Australian Red Cross'
disaster preparedness, relief and recovery efforts, and
donations to local organisations in impacted
communities.
• Providing NAB colleagues an additional day of Bushfire
Leave for 2020, to spend in bushfire affected regions and
towns to support with economic recovery.
The Group recognises the influence of climate change on
the frequency and severity of natural disasters, and the
actions taken by the Group to manage and address climate
risk are detailed in the Environmental and social regulation,
risk and opportunities section of the Report of the Directors.
Governance and Accountability
NAB remains dedicated to building a culture that earns the
trust of its customers and community. NAB is working to
address weaknesses in its culture and governance identified
in the Royal Commission into Misconduct in the Banking,
Superannuation and Financial Services Industry (Royal
Commission) and APRA self-assessment.
Implementation of APRA self-assessment actions and
Royal Commission Recommendations
In an update to the ASX on 11 November 2020, NAB
detailed its implementation of self-assessment actions and
progress to improve governance, accountability and culture.
The Board observed a stronger customer focus across the
bank, and noted that under the leadership of Ross McEwan,
NAB’s refreshed strategy and new operating model are
addressing the root causes of the failings identified through
the self-assessment process.
NAB has continued to prioritise implementing the
recommendations of the Royal Commission. NAB has
completed seven recommendations and continues to
progress the implementation of a further 32
recommendations. These include recommendations that
have been completed to the extent possible but are
pending further legislative, regulatory or industry guidance
or are involved in consultation. Of the remainder, eight are
not applicable to NAB and 29 do not currently require
action.
Strategic Highlights
Accelerating our Strategy
In September 2020, the Group completed the three year
acceleration of its strategy announced in November 2017,
aimed at better positioning it for an environment of rapid
and constant change. This involved a cumulative increase in
investment spend over the three years of $1,671 million
against a targeted increase of approximately $1.5 billion,
taking total investment spend to approximately $4,671
million over that period, including MLC Wealth.
The increased investment spend was focused on improving
customer experience with fewer, simpler products
10
National Australia Bank
increasingly delivered via digital channels; enhancing
efficiency with more streamlined and automated processes;
developing a more responsive and resilient technology
environment; and improving risk and compliance outcomes.
Overall, solid progress was achieved as detailed below.
Best Business Bank
The Group invested in transforming its leading Australian
Small and Medium Enterprise (SME) franchise to make it
simpler and easier for customers. Key progress since
September 2017 includes:
• Strengthened small business proposition with business
customers migrated to a new customer service hub, open
7 days a week with extended operating hours.
• Improved digital and decisioning with the proportion of
new small business lending accounts generated via
the Quickbiz digital platform increasing from 14% to
43%, and enhanced resilience and customer experience
of NAB Connect online banking.
• Revenue from bankers with industry specialisations or
focus increased from 20% to 31%.
• Revenue per banker increased approximately 11%
despite the impact of the low interest rate environment.
• While not yet complete, the Group continues to develop
an end-to-end business lending process designed to
deliver simpler, faster and safer outcomes for bankers
and customers.
Simpler and Faster
The Group focused on delivering exceptional customer
service with increased productivity and reduced complexity.
Key progress since September 2017 includes:
• Number of products reduced by more than 30% from
approximately 600 to 411.
• Over-the-counter branch transactions declined 47%.
• Simple consumer product sales via digital increased from
31% to 65%.
• IT applications reduced by 7% against a target of 15-20%,
with the gap to target reflecting a push into
microservices which increased applications count but
creates more speed and flexibility.
• 38% of IT applications have been migrated to the cloud
against a target of 35%, providing increased reliability
and lower run-cost.
• Critical and high priority incidents decreased 70%.
Costs and productivity
Over the three years to September 2020, the Group
achieved cumulative cost savings of $1,168 million against a
target of greater than $1.0 billion. This resulted from
simplifying and automating processes, reducing
procurement and third party costs, and a flatter
organisational structure.
The Group also outlined a target of achieving ‘broadly flat’
expenses (excluding large notable items) in both the
financial years ended September 2019 and September 2020.
This target was met in the financial year ended September
2019. For the financial year ended September 2020, expense
OPERATING AND FINANCIAL REVIEW (CONTINUED)
growth was 2% with the gap to target mostly due to
restructuring-related costs associated with refreshing the
Group’s strategy beyond September 2020 combined with
lower than planned productivity in part reflecting COVID-19
related effects such as additional customer support and
workout resources.
Over the three years to 30 September 2020, the Group
undertook a reshaping of its workforce to allow it to deliver
for customers. The Group targeted the creation of up to
2,000 new roles and a reduction of 6,000 existing roles as it
further automated and simplified its business. Over the
three year period, 3,997 roles were exited - below the target
of 6,000. This primarily reflects additional hires in
technology, operations and risk as the Group strengthened
controls and resilience, combined with delayed
restructuring activity and additional customer support and
workout resourcing mostly in response to COVID-19 in the
year ended September 2020. However, recommencement of
restructuring activity from June 2020 relating to the Group's
strategy refresh is expected to see approximately 550
further roles exited during the quarter ending December
2020. A total of 1,638 new roles were created over the three
year period compared with the target of up to 2,000, with a
focus in areas such as data and analytics, compliance and
specific customer facing roles. In addition, the Group has
added a further 1,697 roles through its strategic investment
in insourcing technical expertise in areas such as network
services and workplace technology, upskilling capabilities
and providing improved flexibility and resilience at lower
cost.
Long-term Strategy Refresh
In April 2020, the Group announced a refresh of its long
term strategy. The refresh builds on progress achieved over
the past three years in reducing complexity, uplifting digital
capability and establishing strong foundations in
technology. It also recognises the need to go further to
create a simpler, more streamlined business with clear
accountability, which is more productive, resilient and
efficient.
The Group exists to serve customers well and help its
communities prosper. To achieve this, the Group has
narrowed its focus on a smaller number of key priorities
which it believes will make a real difference to its customers
and colleagues, and support over time its aim to be known
as:
• Safe; protect customers and colleagues through
financial and operational resilience.
• Easy; a simpler, more seamless and digitally enabled
bank that gets things done faster.
• Relationship-led; building on market leading expertise,
data and insights.
• Long-term; deliver sustainable outcomes for
stakeholders.
The refreshed strategy recognises the Group’s strong
portfolio of core banking businesses, with real strengths in
relationship banking particularly in the SME sector. To allow
REPORT OF THE DIRECTORS
the Group to increase its focus on this portfolio and to
simplify, in August 2020 the sale of 100% of MLC Wealth to
IOOF Holdings Ltd (IOOF) for $1,440 million was
announced, which is also expected to create a stronger
future for MLC Wealth through its combination with IOOF.
Other than the announced sale of MLC Wealth, there are no
major changes planned in the Group’s portfolio, although
the Group will continue to explore some smaller
opportunities to optimise its portfolio and simplify its
business by divesting non-core businesses. The Group also
regularly assesses opportunities to acquire businesses that
support the Group’s growth strategy. More significantly,
there are important shifts in focus and priorities across the
Group's existing businesses outlined below which are
intended to drive growth and improve returns:
• Business and Private Banking will remain a key
differentiator for the Group, with the objective of
extending clear market leadership by investing in
industry-leading bankers, enabled by data and
insight capabilities, continued sector specialisation,
increased focus on transactional banking and leveraging
partnerships, combined with a more integrated high net
worth offering. Importantly, the Group has also
prioritised delivery of a simpler end-to-end business
lending process.
• Personal Banking will invest in delivering radically
simpler products and services, with digital-first
propositions, flexible and professional bankers, easy
customer experiences, simpler unsecured lending offers,
and the delivery of simple home loans via a single
mortgage experience.
• Corporate and Institutional Banking will continue its
strategy of disciplined growth, with highly professional
relationship managers and specialists, and leadership in
infrastructure, investor and renewables sectors, with
returns to be enhanced by further building out
transactional banking and asset distribution capabilities.
• Bank of New Zealand intends to accelerate its portfolio
shift towards SME and personal customer segments to
deliver a simpler business with lower capital intensity,
while also investing to create a step change increase in
digital capability.
• The Group also recognises the opportunity to
differentiate via UBank by investing in market leading
digital experiences and new propositions to drive new
customer acquisition.
Despite the challenges of the current environment, the
Group has moved rapidly to implement its refreshed
strategy.
A new customer-centric organisational structure has been
embedded with clear end-to-end accountabilities, and the
senior leadership team is now largely in place. The Group
has a clear plan to achieve its key priorities including a
discretionary investment spend program and specific
commitments from each senior leader which will bring the
strategy to life.
Annual Financial Report 2020
11
REPORT OF THE DIRECTORS
OPERATING AND FINANCIAL REVIEW (CONTINUED)
A number of customer initiatives have been announced
which support the Group’s strategic objective of being easy
to deal with. This includes the rollout of an online booking
engine for home loan appointments available to customers
via the NAB website, and customer information is now
transferred automatically to home loan origination systems.
A single home loan application experience across the retail
network is being piloted by 50 bankers enabling them to
provide customers with conditional loan approval within 30
minutes. The launch of the StraightUp card in September
2020 is another example. This is a simple credit card with
online conditional approval available within 60 seconds, no
interest, a fixed monthly fee and no other fees or charges.
The Group’s recently announced partnership with Pollinate
is expected to provide small business merchant customers
with valuable real-time insights to help them better manage
and grow their businesses including sales data, average
transaction value, compare day periods and filter by
payment type. Business customers are also set to benefit
from merchant choice routing, which will be rolled out
during the year ending September 2021, with one flat price
of 1.15% on card transactions, replacing 10 separate pricing
plans and enabling savings for businesses with contactless
debit card payments automatically processed on the lowest
cost network.
The Group is also investing in colleagues, with the rollout of
Career Qualified in Banking, an education and accreditation
program building skills and capability to best serve
customers and to raise the bar of professionalism in the
industry. In addition, a single Group-wide leadership
program has been launched to ensure all colleagues can
benefit from having great, consistent leadership.
The Group plans to implement its strategy refresh in the
year ending September 2021 with annual investment spend
of approximately $1.3 billion targeted. This includes
regulatory spend to further enhance the safety and security
of the Group’s business, combined with discretionary
investment spend focused on core projects including
simplified home and business lending processes, simpler
and digital transactional banking and payments, enhanced
use of data and analytics, and continuing to improve
technology resilience via insourcing and migration of
applications to the cloud.
Over time, a simpler, more streamlined business with clear
accountabilities is expected to be more productive and
efficient, enabling better customer outcomes, more
engaged colleagues and improved shareholder value. The
Group will measure the success of its refreshed strategy
according to four key metrics over three to five years:
• Colleague Engagement – top quartile
• Customer NPS – strategic NPS(1) first of major banks and
positive
• Cash EPS growth – driven by market share growth in
target segments while managing risk and pricing
disciplines, and a disciplined approach to managing costs
and investment with absolute costs (excluding large
notable items) targeted to be lower relative to costs in
the year ended September 2020 of $7.7 billion
• Return on Equity – targeting double digit cash ROE.
Balance sheet strength
Critical to the Group’s success and ambition of being safe is
balance sheet strength.
The Group remained well capitalised during the year to
September 2020, with a Group CET1 ratio of 11.47% as at
30 September 2020. Completion of the MLC Wealth(2) sale is
expected to add approximately 35 basis points (bps) of
CET1.
Given the uncertain outlook resulting from COVID-19, the
Group took a number of proactive steps during the year
ended September 2020 to bolster its capital. These actions
are intended to provide sufficient capacity to allow the
Group to continue to support customers through the
challenges presented by COVID-19, as well as manage
through a range of possible scenarios including a
prolonged and severe economic downturn. In combination,
the actions outlined below added 98 bps to the Group’s
CET1 ratio:
• A fully underwritten Institutional Share Placement raising
$3.0 billion.
• A non-underwritten Share Purchase Plan raising
$1.25 billion.
The final dividend of 30 cents per share has been held
stable with the 2020 interim dividend, bringing the total
dividend for the year ended September 2020 to 60 cents per
share. This represents a 64% reduction compared with the
year ended September 2019 and reflects the uncertain
outlook for COVID-19 impacts, APRA’s revised dividend
guidance and consideration of the Group’s strong capital
position.
The Group has maintained strong funding and liquidity
through the year ended September 2020. The Net Stable
Funding Ratio (NSFR) was 127% and the quarterly average
Liquidity Coverage Ratio (LCR) was 139%, both above the
APRA regulatory requirement of 100%.
While overall credit portfolio concentrations continue to be
managed with reference to established Group risk appetite
settings, COVID-19 presents a number of uncertainties and
challenges to credit risk. In particular, the Group has
identified four key sectors of interest which are receiving
close oversight:
• Retail trade, particularly exposures reliant on
discretionary spend.
• Tourism, hospitality and entertainment has been
materially impacted by social distancing restrictions, and
credit impacts will be dependent on length of continued
shutdowns, speed of recovery and mitigating impacts of
government support.
(1) Strategic NPS: Sourced from DBM Atlas, measured on a six month rolling average. Definition has been updated to give all customers within the Business and
Consumer segments equal voice. The overall Strategic NPS result combines the Consumer and Business segment results using a 50% weighting for each.
(2) Expected completion before middle of calendar year 2021, subject to timing of regulatory approvals.
12
National Australia Bank
OPERATING AND FINANCIAL REVIEW (CONTINUED)
• Air travel and related services given ongoing disruption
caused by COVID-19 related travel restrictions with length
and severity unknown.
• Commercial property, where COVID-19 impacts
remain uncertain but are likely to see short-
term impacts on the retail and tourism sectors, and
potential medium term impacts on the office sector.
On a cash earnings basis, credit impairment charges
increased 201% over the year ended September 2020 and
represent 0.46% of gross loans and acceptances. The key
driver of this material increase in charges is $1,856 million
of additional forward looking provisions to reflect potential
COVID-19 impacts, of which $1,468 million is a top-up to the
economic adjustment (EA) and $388 million is for targeted
sectors experiencing elevated levels of risk including
aviation, tourism, hospitality and entertainment, retail
trade, and commercial property.
Total provisions for credit impairment increased 53.9% over
the year to $6,376 million, and the ratio of collective
provisions to credit risk-weighted assets increased from
0.96% to 1.56%.
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 2020 by
10 basis points to 1.03%, largely due to rising Australian
mortgage delinquencies where customers were not part of
the COVID-19 payment deferral program. Eligible customers
receiving COVID-19 payment deferrals are treated as
performing in accordance with regulatory guidance.
REPORT OF THE DIRECTORS
Annual Financial Report 2020
13
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 profit / (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
Group(1)
2020
Large
(2)
2020
2019
Large
(2)
2019
Notable
ex Large
Items
Notable
Notable
Items
ex Large
Notable
$m
13,877
3,384
17,261
(9,346)
(2,752)
$m
(49)
(80)
(129)
(1,328)
-
5,163
(1,457)
(1,665)
434
3,498
(1,023)
(935)
2,563
4
(357)
(1,380)
-
Items
$m
13,926
3,464
17,390
(8,018)
(2,752)
6,620
(2,099)
4,521
(578)
3,943
4
$m
13,555
3,980
17,535
(8,263)
(927)
8,345
(2,440)
5,905
(1,104)
4,801
3
$m
(72)
(78)
(150)
(612)
-
(762)
226
(536)
(1,169)
(1,705)
-
2,559
(1,380)
3,939
4,798
(1,705)
Items
$m
13,627
4,058
17,685
(7,651)
(927)
9,107
(2,666)
6,441
65
6,506
3
6,503
(1)
Information is presented on a continuing operations basis, unless otherwise stated. 2019 has been restated for the presentation of MLC Wealth as a
discontinued operation.
(2) Details of large notable items are outlined on page 15.
September 2020 v September 2019
Net profit attributable to owners of NAB (statutory net
profit) decreased by $2,239 million or 46.7%.
Net interest income increased by $322 million or 2.4%,
including an increase of $222 million which was offset by
movements in economic hedges in other operating income
and a decrease in customer-related remediation of $23
million in 2020. Excluding these movements, the underlying
increase of $77 million or 0.6% was driven by the impact of
repricing in the housing lending portfolio, growth in
lending volumes, lower wholesale funding costs and a
change in customer preferences towards lower cost on-
demand deposits. These movements were partially offset by
competitive pressures impacting housing lending margins,
and lower earnings on deposits and capital due to the low
interest rate environment, partially offset by an increase in
capital held.
Other income decreased by $596 million or 15.0%,
including a decrease of $222 million which was offset by
movements in economic hedges in net interest income. The
underlying decrease of $374 million or 9.4% was mainly due
to lower merchant acquiring and cards income driven by
the reduction in transaction volumes, and fee waivers to
support customers during COVID-19. This was combined
with lower NAB risk management income in Treasury due to
lower level of mark-to-market gains on the high quality
liquids portfolio, lower sales of interest rate risk
management products and gains from asset sales in the
prior period not repeated.
Operating expenses increased by $1,083 million or 13.1%.
Excluding an increase of $716 million in large notable items,
14
National Australia Bank
total operating expenses increased by $367 million or 4.8%.
This was primarily due to an impairment loss relating to the
Group's investment in MLC Life, higher restructuring-related
costs, and increased personnel costs including annual salary
increases and annual leave costs. Investment in technology,
strengthening the compliance and control environment and
improving customer experience, along with increased
customer support costs in response to COVID-19 were
partially offset by productivity benefits achieved through a
reduction in third party spend and simplification of the
Group's operations, combined with lower performance-
based compensation and lower travel and entertainment
costs as a result of COVID-19.
Credit impairment charge increased by $1,825 million
driven primarily by an increase of $1,796 million in forward
looking provisions as a result of COVID-19. Excluding
forward looking provisions, charges are broadly stable due
to the impact of COVID-19 payment deferrals and
government stimulus.
Income tax expense decreased by $775 million or 31.8%
largely due to a lower profit before tax.
Discontinued operations reflect the classification of MLC
Wealth as a discontinued operation for the year ended
30 September 2020. Amounts relating to MLC Wealth
include the business' operating results, large notable items
attributable to MLC Wealth, an impairment loss of $199
million and transaction and separation costs amounting to
$284 million before tax. The net loss attributable to MLC
Wealth is partially offset by a reassessment of customer-
related remediation in respect of MLC Life. The Group
disposed of 80% of it's investment in MLC Life to Nippon
Life Insurance Company (Nippon Life) in 2016.
(1,457)
(762)
Capitalised software policy change
OPERATING AND FINANCIAL REVIEW (CONTINUED)
Large Notable Items
Net interest income
Customer-related remediation
(49)
(72)
Group(1)
2020
$m
2019
$m
Other income
Customer-related remediation
Net operating income
Operating expenses
Customer-related remediation
Payroll remediation
Capitalised software policy change
Impairment of property-related assets
Loss before income tax
Income tax benefit
Customer-related remediation
Payroll remediation
Capitalised software policy change
Impairment of property-related assets
Net loss for the year from continuing
(80)
(129)
(136)
(108)
(950)
(134)
(78)
(150)
(123)
-
(489)
-
80
32
282
40
81
-
145
-
operations
(1,023)
(536)
Net loss after tax for the year from discontinued
operations
Customer-related remediation
Payroll remediation
Capitalised software policy change
(269)
(1,165)
(14)
(74)
-
(4)
Net loss attributable to owners of NAB
(1,380)
(1,705)
(1)
Information is presented on a continuing operations basis, unless
otherwise stated. 2019 has been restated for the presentation of MLC
Wealth as a discontinued operation.
In the September 2020 financial year, large notable items
recognised in net profit attributable to owners of NAB
consist of:
Customer-related remediation
• Charges associated with customer-related remediation
matters of $185 million ($265 million before tax) in
continuing operations (2019: $192 million ($273 million
before tax)). The charges relate to banking-related
matters including additional costs associated with
executing the remediation programs for both existing
and new matters.
• Charges associated with customer-related remediation
matters of $269 million ($383 million before tax) in
discontinued operations (2019: $1,165 million ($1,665
million before tax)). The charges are associated with
matters including:
– non-compliant advice provided to Wealth customers
and costs associated with executing the program
– adviser service fees charged by NAB Financial Planning
(salaried advisers)
– reassessment of provisions associated with MLC Life
resulting in a release
REPORT OF THE DIRECTORS
– other matters, including a higher allowance for
ongoing liabilities associated with the existing Wealth
remediation program.
Payroll remediation
• Charges associated with payroll remediation of $76
million ($108 million before tax) in continuing operations
to address potential payroll issues relating to both
current and former Australian colleagues, comprising
payments to colleagues and costs to execute the
remediation program.
• Charges associated with payroll remediation of $14
million ($20 million before tax) in discontinued
operations relate to MLC Wealth for the reasons
mentioned above.
• Accelerated amortisation charge of $668 million ($950
million before tax) in continuing operations following a
change to the application of the software capitalisation
policy by increasing the threshold for capitalisation of
software from $2 million to $5 million. The change to the
application of the software capitalisation policy made in
the September 2019 financial year to increase the
threshold from $0.5 million to $2 million resulted in an
accelerated amortisation charge of $344 million ($489
million before tax).
• Accelerated amortisation charge of $74 million ($106
million before tax) in discontinued operations (2019: $4
million ($5 million before tax) relate to MLC Wealth for
the reasons mentioned above.
Impairment of property-related assets
• Charges of $94 million ($134 million before tax) for the
impairment of property-related assets. This primarily
relates to plans to consolidate NAB's Melbourne office
space with more colleagues expected to adopt a flexible
and hybrid approach to working over the longer term.
Annual Financial Report 2020
15
REPORT OF THE DIRECTORS
OPERATING AND FINANCIAL REVIEW (CONTINUED)
Review of Group and Divisional Results
Group Balance Sheet Review
Business and Private Banking
Personal Banking
Corporate and Institutional Banking
New Zealand Banking
Corporate Functions and Other(2)
Cash earnings
Cash earnings (excluding large notable items)
Non-cash earnings items
Group(1)
2020
$m
2,489
1,380
1,469
977
(2,605)
3,710
4,733
(212)
2019
$m
2,817
1,260
1,508
997
(729)
5,853
6,389
52
Assets
Cash and liquid assets
Due from other banks
Trading instruments
Debt instruments
Other financial assets
Loans and advances
Due from customers on acceptances
Net loss from discontinued operations
(939)
(1,107)
All other assets
Net profit attributable to the owners of NAB
2,559
4,798
Assets held for sale
Group
2020
$m
2019
$m
64,388
52,351
95,851
40,355
3,860
55,457
32,130
96,828
40,205
7,110
582,485
587,749
1,477
2,490
24,319
25,155
1,479
-
866,565
847,124
50,556
30,021
29,971
34,273
34,318
33,283
546,176
522,085
126,384
143,258
6,191
6,482
15,752
17,821
221
-
805,272
791,520
61,293
55,604
866,565
847,124
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
Liabilities directly associated with assets
held for sale
Total liabilities
Total equity
Total liabilities and equity
September 2020 v September 2019
Total assets increased by $19,441 million or 2.3%. The
increase was mainly due to a net increase in cash and liquid
assets and due from other banks of $29,152 million or
33.3% reflecting the Group's management of liquidity
during the period. The increases were partially offset by a
decrease in loans and advances (net of other financial assets
and due from customers on acceptances) of $9,527 million
or 1.6%, including an increase of $2,111 million in provision
for credit impairments from additional forward looking
provisions to reflect potential COVID-19 impacts, and other
movements of $1,528 million predominantly due to foreign
exchange rate movements during the period. Excluding
these movements, the underlying decrease of $5,888
million or 1.0% reflects declines in housing lending from
competitive pressures and negative investor housing system
growth, and in non-housing driven by customers managing
the impacts of COVID-19.
Total liabilities increased by $13,752 million or 1.7%. The
increase was mainly due to deposits and other borrowings
of $24,091 million or 4.6% reflecting existing customers
managing the impacts of COVID-19 and amounts due to
other banks of $16,283 million or 47.5% from draw downs
of the Reserve Bank of Australia (RBA) Term Funding Facility.
The increases were partially offset by a decrease in bonds,
notes and subordinated debt and other financial liabilities
(1)
(2)
Information is presented on a continuing operations basis, unless
otherwise stated. 2019 has been restated for the presentation of MLC
Wealth as a discontinued operation.
Includes large notable items.
September 2020 v September 2019
Group
Cash earnings decreased by $2,143 million or 36.6%. Cash
earnings excluding large notable items decreased by $1,656
million or 25.9%.
Business and Private Banking
Cash earnings decreased by $328 million or 11.6%, driven
by lower revenue mainly due to the low interest rate
environment, and higher operating expenses due to the
continued investment in technology and compliance
initiatives.
Personal Banking
Cash earnings increased by $120 million or 9.5%, driven by
increased revenue as a result of home loan repricing and
lower funding costs in the housing lending portfolio,
combined with lower credit impairment charges and lower
operating expenses.
Corporate and Institutional Banking
Cash earnings decreased by $39 million or 2.6%, driven by
increased credit impairment charges and higher operating
expenses, partially offset by increased revenue reflecting
higher Markets income.
New Zealand Banking
Cash earnings decreased by $20 million or 2.0% driven by
higher credit impairment charges, partially offset by lower
operating expenses.
Corporate Functions and Other
The cash earnings loss increased by $1,876 million including
an increase of $487 million in large notable items. Cash
earnings loss (excluding large notable items) was driven by
higher credit impairment charges and lower net operating
income.
16
National Australia Bank
OPERATING AND FINANCIAL REVIEW (CONTINUED)
of $20,186 million or 11.4% in line with Group funding
requirements. Total equity increased by $5,689 million or
10.2% mainly due to an increase in contributed equity
attributable to shares issued through the Institutional Share
Placement, Share Purchase Plan, Dividend Reinvestment
Plan (DRP), DRP underwritten allotments and conversion of
convertible notes during the period.
Capital Management and Funding Review
Balance Sheet Management Overview
In the face of the significant economic challenges
associated with the onset of COVID-19, the Group has
maintained a strong capital and liquidity position consistent
with our commitment to balance sheet strength.
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
• The major Australian banks, including NAB, have been
subject to APRA’s ‘unquestionably strong’ target
benchmark capital ratios since January 2020. APRA has
suspended these requirements in response to COVID-19
until 1 January 2023. In suspending these requirements,
APRA has indicated that banks may need to utilise some
of the current capital buffers to facilitate ongoing
lending to the economy. APRA has committed that any
rebuild of capital buffers, if required, will be done in an
orderly manner.
• 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'. APRA has recently deferred the scheduled
implementation of these prudential standards in
Australia by one year to at least 1 January 2023,
consistent with the Basel Committee on Banking
Supervision (BCBS). The deferral supports Authorised
Deposit-taking Institutions (ADIs) in maintaining
operations and supporting customers in response to
COVID-19. APRA has reiterated its view that ADIs
currently hold sufficient capital to meet the new
requirements.
• In October 2019, APRA proposed changes to the
treatment of equity investments in subsidiaries (including
BNZ) for the purpose of calculating Level 1 regulatory
capital, expected to be implemented from 1 January
2022.
• APRA has also proposed a minimum leverage ratio
requirement of 3.5% for internal ratings-based ADIs and
a revised leverage ratio exposure measurement
methodology from 1 January 2023. The Group has a
leverage ratio as at 30 September 2020 of 5.8% (under
current methodology).
Increased Loss-absorbing Capacity for ADIs
• In July 2019, APRA released its framework for the
implementation of an Australian loss-absorbing capacity
REPORT OF THE DIRECTORS
regime, requiring an increase in Total capital of 3% of
risk-weighted assets (RWA) for Domestic Systemically
Important Banks (D-SIBs) by 1 January 2024. APRA has
maintained its overall target calibration of 4% to 5% of
RWA, and will consult on alternative methods for raising
the additional loss-absorbing capacity equal to 1% to 2%
of RWA over the next three years.
Reserve Bank of New Zealand (RBNZ) Capital Review
• In December 2019, the RBNZ finalised its review of the
capital adequacy framework applied to registered banks
incorporated in New Zealand. The RBNZ amendments to
the amount of regulatory capital required of locally
incorporated banks include:
– Increases in credit risk risk-weighted assets for banks
that use the internal ratings-based approach due to an
increase in the scalar, prescribed use of the
standardised approach for banks and sovereign
exposures, and the introduction of an overall
minimum standardised floor.
– An increase in the Tier 1 capital requirement to 16% of
risk-weighted assets, and an increase in the Total
capital requirement equal to 18% of risk-weighted
assets.
• Due to significant uncertainties arising from the impacts
of COVID-19, the RBNZ has delayed the start of the new
capital requirements by one year to 1 July 2021. It is
expected that the changes will be phased in over a seven
year period.
Dividends
• In response to the impacts of COVID-19, the RBNZ and
APRA have introduced restrictions on the payment of
distributions:
– The RBNZ has prohibited the payment of dividends on
ordinary shares and the redemption of non- Common
Equity Tier 1 (CET1) capital instruments.
– APRA has advised that it expects that ADIs will retain
at least half of their earnings for 2020. APRA has also
confirmed that ADI’s should utilise management
buffers and stress testing to inform its capital
management actions, and actively use capital
management initiatives to at least partially offset any
diminution in capital from distributions.
– In each case, these regulatory restrictions remain in
place and will apply until further notice.
Further detail on the regulatory changes impacting the
Group was outlined in the September 2020 Pillar 3 Report.
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 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
Annual Financial Report 2020
17
REPORT OF THE DIRECTORS
OPERATING AND FINANCIAL REVIEW (CONTINUED)
regulatory outlook with the objective of maintaining
balance sheet strength.
Additional Tier 1 Initiatives
• On 12 December 2019, the Group issued $500 million of
NAB Wholesale Capital Notes, which will mandatorily
convert into NAB Ordinary Shares on 12 December 2031,
provided certain conditions are met. With prior written
approval from APRA, NAB may elect to convert, redeem
or resell NAB Wholesale Capital Notes on 12 December
2029, or on the occurrence of particular events, provided
certain conditions are met.
• On 23 March 2020, the Group completed the resale of all
NAB Capital Notes (NCN) issued on 23 March 2015 to a
nominated purchaser, in accordance with the resale
notice issued on 17 February 2020. Following the resale,
$750 million of NCN were converted into ordinary shares,
and the remaining balance of approximately $593 million
NCN were redeemed.
• On 17 July 2020, the Group issued $600 million of NAB
Wholesale Capital Notes 2, which will mandatorily
convert into NAB Ordinary Shares on 17 July 2027,
provided certain conditions are met. With prior written
approval from APRA, NAB may elect to convert, redeem
or resell NAB Wholesale Capital Notes 2 on 17 July 2025,
or on the occurrence of particular events, provided
certain conditions are met.
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 to mitigate the risk of future
funding stress. At 30 September 2020, the Group’s NSFR was
127%, 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, including Term
Funding Facility (TFF) drawdowns.
NAB’s deposit strategy is to grow a stable and reliable
deposit base informed by market conditions, funding
requirements and customer relationships.
(1) As at 2 November 2020, NAB's Additional Allowance has reduced to $4.2 billion.
(2) Weighted average maturity excludes Term Funding Facility drawdowns.
18
National Australia Bank
Over the year ended 30 September 2020, the SFI increased
from 93% to 101%. The increase was driven by strong
deposit inflows in line with system trends.
Term Funding Facility
On 19 March 2020, the RBA announced the establishment
of a collateralised TFF for the Australian banking system to
support ADIs in providing credit into the economy. Changes
to extend and increase the TFF were announced on
1 September 2020, with a further change to the cost of the
facility announced on 3 November 2020. The TFF provides
ADIs with access to three-year funding, with an Initial
Allowance and Supplementary Allowance based on total
domestic credit outstanding and an Additional Allowance
based on credit growth. Drawdowns on or before
3 November 2020 incurred a fixed cost of 0.25% per annum
and drawdowns made from 4 November 2020 incur a fixed
cost of 0.10% per annum.
NAB’s total TFF available as at September 2020 was $25.4
billion, split between $14.3 billion of Initial Allowance and
$11.1(1) billion of Additional Allowance. NAB drew down the
full Initial Allowance of the TFF during the year ended
30 September 2020. The Supplementary Allowance is
available from 1 October 2020 and for NAB is $9.6 billion.
The Additional Allowance and Supplementary Allowance are
available to be drawn down until 30 June 2021.
The TFF is an efficient source of three-year term funding,
providing flexibility to manage refinancing and execution
risk, while also reducing funding costs.
Term Wholesale Funding
The Group maintains a well-diversified funding profile
across issuance type, currency, investor location and tenor.
Global funding conditions deteriorated significantly in late
February following the onset of COVID-19. However,
following significant central bank and government stimulus,
onshore and offshore markets recovered rapidly to be
broadly in line with pre-COVID levels. NAB was largely
insulated from the impact of the significant widening of
credit spreads during the year, having executed the majority
of issuance prior to the time at which COVID-19 began to
significantly disrupt the market. NAB only re- entered the
market during the second half of the year for subordinated
debt issuance once credit spreads had normalised.
The Group raised $15.0 billion of term wholesale funding
during the year ended 30 September 2020. NAB raised $12.8
billion, including $5.6 billion senior unsecured, $5.3 billion
of Tier 2 subordinated debt and $1.9 billion of secured
funding (covered bonds). BNZ raised $2.2 billion during the
year ended 30 September 2020.
The weighted average maturity of term wholesale funding
raised by the Group at issuance, over the year ended
30 September 2020 was approximately 6.7(2) years to the
first call date which was supported by the increase in Tier 2
OPERATING AND FINANCIAL REVIEW (CONTINUED)
subordinated debt issuance over the year. The weighted
average remaining maturity of the Group’s term wholesale
funding portfolio is 3.2(1) years.
Term funding markets will continue to be influenced by
COVID-19 and other global events which shape investor
sentiment, monetary and fiscal policy settings, as well as
hedging costs in various derivative markets.
Short-term Wholesale Funding
During the year ended 30 September 2020, the Group
accessed international and domestic short-term funding
through wholesale markets when required, noting certain
periods of increased volatility particularly associated with
COVID-19 in March and April 2020.
In addition, repurchase agreements have been primarily
utilised to support markets and trading activities.
Repurchase agreements entered into (excluding those
associated with the TFF) are materially offset by reverse
repurchase agreements with similar tenors.
Liquidity Coverage Ratio
The 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, central bank reserves along
with highly rated government and central bank issuance. In
addition to HQLA, other regulatory liquid assets include the
Committed Liquidity Facility (CLF) and the undrawn portion
of the TFF.
The Group maintains a well-diversified liquid asset portfolio
to support regulatory and internal requirements in the
various regions in which it operates. The average value of
regulatory liquid assets held through the September 2020
quarter was $199 billion and included $126 billion of HQLA.
The increase in HQLA during 2020 was primarily driven by
deposit inflows. The Group Alternative Liquid Assets (ALA)
comprise pools of internally securitised mortgages, and
other non-HQLA securities used to collateralise the CLF and
the undrawn portion of the TFF with the RBA or are
securities that are repo-eligible with the RBNZ. Quarterly
average ALA for September 2020 was $73 billion and
comprises unencumbered assets available to the CLF of $51
billion, undrawn TFF amounts of $20 billion and RBNZ
securities of $2 billion.
A detailed breakdown of quarterly average net cash
outflows is provided in the September 2020 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 30 cents
per fully paid ordinary share, 100% franked, payable on
10 December 2020. The proposed payment amounts to
approximately $987 million. The Group periodically adjusts
(1) Weighted average maturity excludes Term Funding Facility drawdowns.
REPORT OF THE DIRECTORS
the Dividend Reinvestment Plan (DRP) to reflect the capital
position and outlook. In respect of the final dividend for the
year ending 30 September 2020, the DRP discount is nil,
with no participation limit, and the DRP is expected to be
satisfied by the issuance of new shares.
Dividends paid since the end of the previous financial year:
• The final dividend for the year ended 30 September 2019
of 83 cents per fully paid ordinary share, 100% franked,
paid on 12 December 2019. The payment amount was
$2,393 million.
• The interim dividend for the year ended 30 September
2020 of 30 cents per fully paid ordinary share, 100%
franked, paid on 3 July 2020. The payment amount was
$895 million.
Information on the dividends paid and determined to date
is contained in Note 29 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$0.09 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
The global economy has sharply contracted in calendar year
2020, with the fall in output exceeding any decline since the
early 1950s.
The contraction in economic activity has been broad-based
globally, driven largely by measures introduced to counter
COVID-19. The fall in activity was most substantial over
March and April with the main exception of China, where it
occurred earlier.
In response to the global downturn, authorities reduced
policy rates and introduced a range of other measures,
including bank funding programs, asset purchases and loan
guarantees to support the flow of credit. In addition,
governments introduced a broad range of fiscal programs
to support businesses and households. These fiscal
programs will increase public debt levels, generating longer
term risk. The unwinding of these programs also presents
near term risk if done too rapidly.
An economic recovery commenced in the third quarter of
calendar 2020, however there remain significant risks
around the global outlook. COVID-19 outbreaks remain
uncontrolled in a number of countries, and there remains
the risk of additional outbreaks – which could impact
Annual Financial Report 2020
19
REPORT OF THE DIRECTORS
OPERATING AND FINANCIAL REVIEW (CONTINUED)
household demand and business activity, regardless of
whether governments reintroduce countermeasures.
In addition, trade tensions between the United States and
China have re-emerged, threatening a resumption of the
economically damaging trade war. Other geopolitical risks
include uncertainty around the European Union (EU) and
UK relationship post the current transition period, tensions
between Hong Kong and mainland China, and uncertainty
around the Middle East and the South China Sea.
Australian Economy
The Australian economy fell into recession with a 7.2% fall
in GDP between the end of calendar 2019 and the June
quarter 2020. The decline was mainly in the June quarter,
which experienced the largest recorded quarterly fall. This
was due to COVID-19 and the associated community
response and government restrictions on movement and
business operations.
The decline over the first half of calendar year 2020 was
concentrated in private sector demand, including:
• An extremely large decline in household consumption,
particularly in services such as transportation, hospitality,
recreation, and health.
• Falls in residential dwelling and business investment.
• Large falls in both exports and imports, particularly in
international tourism.
In contrast, government spending increased in the first half
of calendar 2020 partly due to COVID-19 policy measures,
including support to households and businesses. As a
result, household disposable income over the first half of
calendar 2020 increased, including a more than 20%
increase in unincorporated businesses earnings, and
corporate profits increased by 12%. Additional measures to
support the economy were announced in the October 2020
Federal government Budget.
In the June quarter 2020, final demand fell in all states and
territories, with the largest falls occurring in NSW and
Victoria (over 8%). By industry, there were very large falls in
the gross value added of many sectors, particularly
accommodation and food, arts and recreation, transport,
administrative and support, and real estate services.
Agricultural prices have been mixed, but higher overall this
year while seasonal conditions are also much better than
last year. Increases in tariffs, trade restrictions and other
non-trade barriers by China on some Australian
commodities are a concern.
GDP is expected to increase in the September quarter 2020,
with most states and territories having eased restrictions
internally, although the growth rate will be constrained by
the reintroduction of restrictions in Victoria within the
quarter. While substantially eased by late October, these
restrictions are also likely to weigh on December quarter
growth. Due to the large fall in the first half of the year, GDP
is expected to decline in calendar 2020. Assuming COVID-19
transmission remains under control, and that there is a
relaxation of state border controls by the end of calendar
20
National Australia Bank
2020, a gradual recovery is then projected over calendar
2021. Even so, a return to the end-calendar 2019 level of
GDP is not expected until early-calendar 2022.
The large decline in economic activity led to a deterioration
in the labour market, although there has been a partial
recovery since May 2020:
• Employment fell by 6.7% between February and May, and
total hours worked by 10%. By September, around 50% of
the jobs lost had been recovered.
• Between February and July, the unemployment rate
increased from 5.1% to 7.5% but in September was 6.9%.
After growing solidly between September 2019 and April
2020, dwelling prices in Australian capital cities have since
fallen. The eight capital city CoreLogic Hedonic Home Value
Index declined in each month between April and
September, by a total of 2.8%:
• This was primarily due to falls in Melbourne (-5.2%) and
Sydney (-2.9%). Prices also fell over this period in Perth
(-2.0%) and Brisbane (-0.5%) but had stabilised by the
end of it.
Annual total system credit growth has slowed. Over the year
to September 2020 system credit rose 2.0% with:
• A large fall in other personal credit (-12.5%).
• Steady housing credit growth (3.3%). While business
credit grew 2.0% over the year to September, it declined
in each month from May to September.
Since the beginning of March 2020, the RBA has reduced
the cash rate target by 65 basis points to 0.10% and has
moved to targeting the yield of 3 year Australian
Government bonds (current target is 0.10%) and introduced
the TFF. In November, the RBA also announced a six-month
$100 billion government bond purchase program (QE)
which is in addition to any purchases made to support the 3
year yield target. At its November meeting, the RBA also
indicated that it does not expect to increase the cash rate
target for at least three years.
New Zealand Economy
New Zealand entered into recession in the first half of
calendar 2020, with GDP declining by 1.4% in the March
quarter and by 12.2% in the June quarter. This was due to
COVID-19 and the containment measures that were put in
place in response. Over these two quarters:
• There were large falls in household consumption,
business and residential investment, trade (particularly
services), while government expenditure increased.
• By industry, accommodation and food services
production fell by 51%, transport by over 40%, while
mining, construction, administrative and support
services, arts and recreation and some manufacturing
sub-sectors declined by over 20%.
The New Zealand Activity Index indicates that the fall in
output occurred over March and April 2020 but that an
easing in containment measures between late April and
early June led to a rebound in activity. In August,
restrictions were tightened, particularly in Auckland, and
OPERATING AND FINANCIAL REVIEW (CONTINUED)
several economic indicators weakened subsequently, such
as electronic card transactions. These restrictions started to
be eased in late August and the country was back to the
lowest alert level by early October.
In March 2020, the RBNZ reduced the Official Cash Rate
(OCR) by 75 basis points to 0.25% and stated it would
remain at this level for at least 12 months. It also instituted
the Large Scale Asset Purchase Program of Government
bonds (LSAP). Since March the RBNZ has, amongst other
actions, expanded the scope and size of the LSAP and
introduced a Term Lending Facility for banks. The RBNZ is
considering further measures, including a Funding for
Lending Programme to lower bank funding costs and a
negative OCR.
In response to the pandemic, the New Zealand Government
provided significant fiscal support, including payments and
tax relief for households and businesses, health care and
infrastructure spending. The extent and duration of future
fiscal support, and developments in COVID-19 transmission
in the community, are two of the key risks to the outlook.
Border restrictions have disrupted the tourism industry. By
April 2020 the number of short-term visitor arrivals and
departures had collapsed. Since March 2020 there has also
been a substantial decline in net migration which will have
implications for housing and other sectors if sustained.
A strong rebound in GDP is expected in the September
quarter 2020. However, this will be partly due to pent-up
demand and as this and fiscal supports unwind, and the
impact of border restrictions becomes more evident, activity
is expected to fall back in the final quarter of calendar 2020.
Annual average GDP growth is expected to be -4.9% in
calendar year 2020, and 1.6% in calendar 2021. GDP is not
expected to return to its pre-COVID-19 peak until mid-
calendar-2022.
While the global economy has also been significantly
impacted by COVID-19, New Zealand's commodity prices,
with their large agriculture weighting, have not moved
significantly:
• In September 2020, commodity export prices in world
price terms were 3.0% lower than in September 2019,
and only 1.5% lower than in February 2020.
• This includes a fall in international dairy export prices of
8.4% since February 2020. Fonterra's 2019/20 farmgate
milk price was NZ$7.14 per kg milk solids while a possibly
lower, but still solid, result is expected (NZ$6.30-7.30) for
the 2020/21 season.
Housing market conditions initially dipped as COVID-19
containment measures were put in place but subsequently
rebounded strongly:
• The REINZ's House Price Index fell over April and May,
but then grew strongly through to September 2020 to be
11.1% higher than a year ago.
REPORT OF THE DIRECTORS
Labour market indicators have been resilient, but there has
been some deterioration:
• Between the March quarter 2020 and September quarter
2020, the unemployment rate increased from 4.2% to
5.3% while employment fell 1.1%.
• Total hours worked fell 10.2% in the June quarter 2020,
but recovered in the September quarter to be only 1.8%
below their March quarter level.
Overall system credit grew 3.1% over the year to September
2020, down from 5.6% annual growth in the same month a
year ago.
• This weakening in credit growth was due to falls in
business credit (including agriculture) following the
downturn in the economy (-1.1% over the year to
September 2020) and personal consumer credit (-11.7%).
• Annual housing credit growth has held up (6.8%).
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 that are outlined above.
Disclosure on Risk Factors
Risks specific to the Group
Set out below are the principal risks and uncertainties
associated with National Australia Bank Limited (the
Company) and its controlled entities (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 the 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.
Annual Financial Report 2020
21
REPORT OF THE DIRECTORS
OPERATING AND FINANCIAL REVIEW (CONTINUED)
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, ambition
and objectives.
The Group prioritises, and invests significant resources in,
the execution of initiatives that are aligned to its chosen
strategy, including transformation and change programs.
These programs focus on technology, digital and data
assets, 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, and new or existing risks may not be
appropriately controlled. Any failure by the Group to deliver
in accordance with its strategy or to deliver these strategic
programs effectively, may result in material losses to the
Group, or a failure to achieve anticipated benefits, and
ultimately, may materially and adversely impact the Group’s
operations and financial performance and position.
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, rapid
technology changes and environmental factors (such as
COVID-19) 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. This risk is heightened in the
current context where the Group must prioritise responses
to new regulation, identified weaknesses and initiatives to
support customers through the COVID-19 pandemic.
The Australian Federal 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. The Consumer Data Right is being introduced in
the banking sector in phases. It began to apply to credit and
debit cards, deposit accounts and transaction accounts on
1 July 2020. It will expand to a wider range of products,
including mortgages and personal loan data, from
1 November 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), which, similarly, is
expected to increase competition in the NZ banking
industry.
Ongoing competition for customers can lead to
compression in profit margins and loss of market share,
which may ultimately impact the Group’s financial
22
National Australia Bank
performance and position, profitability and returns to
investors.
The Group’s sale of its advice, platforms, superannuation
& investments and asset management businesses is
conditional and there are risks in executing the sale.
As announced on 31 August 2020, the Group has agreed to
sell its advice, platforms, superannuation & investments and
asset management businesses to IOOF Holdings Ltd (IOOF)
(the MLC Wealth Transaction). Completion of the MLC
Wealth Transaction is subject to a number of conditions,
including regulatory approvals and availability of IOOF
funding. If these conditions are not met, the transaction
may not complete and the business will remain with the
Group. Timing of completion will depend on a number of
factors, including receipt of regulatory approvals and
execution of business separation activities.
The Group will incur costs associated with completing the
MLC Wealth Transaction. If the MLC Wealth Transaction
does not complete for any reason, including a failure to
satisfy conditions, the Group will still incur costs that it is
unable to recover and such failure may adversely affect the
Group’s reputation, operations and financial results.
The Company has provided IOOF with indemnities relating
to certain pre-completion matters, including a remediation
program relating to workplace superannuation, breaches of
anti-money laundering laws and regulations, regulatory
fines and penalties and certain litigation and regulatory
investigations. The Company also provided covenants and
warranties in favour of IOOF. A breach or triggering of these
contractual protections may result in the Company being
liable to IOOF.
The Company will retain the companies that operate the
advice business, such that the Group will retain all liabilities
associated with the conduct of that business pre-
completion. The advice business is proposed to be
transferred by way of an asset sale, with aligned advisors
being offered to transfer to IOOF from completion. There is
a risk that not all advisors will transfer to IOOF, and the
Company will be liable for the costs of exiting any non-
transferring advisors.
From completion, the Company has agreed to provide IOOF
with certain transitional services and continuing access to
records, as well as support for data migration activities.
There is a risk that costs associated with separation
activities and the costs incurred by the Company in
satisfying its obligations under these agreements may be
higher than anticipated. The Company may also be liable to
IOOF if it fails to perform its obligations under these
agreements. If these 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.
On completion, the MLC Wealth Transaction will result in
the Group exiting a financial services market and
accordingly will decrease the size of the Group’s operations.
OPERATING AND FINANCIAL REVIEW (CONTINUED)
This will have a consequential impact on the Group’s
revenues and potentially its profitability and returns to
investors.
The agreed purchase price that IOOF has agreed to pay
comprises $1,240 million in cash proceeds and $200 million
in the form of a five-year structured subordinated note.
Under the terms of the note, the Group’s ability to collect
the $200 million due thereunder will be subject to credit
risks associated with IOOF, the issuer of the note, and the
related subordination terms of the note and there is no
guarantee that the Group receives the consideration due
thereunder.
In addition, the MLC Wealth Transaction, and the execution
of its separation, may create risks and uncertainty for the
Group and its customers, aligned advisers, employees,
suppliers and other counterparties.
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 the risk that the Group over-
values an acquisition or investment or under-values a
divestment, as well as 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 customers,
employees, suppliers, counterparties 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 a residual shareholding, 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, the Company’s life insurance
business (separate to the MLC Wealth Transaction described
in Section 1.3), to Nippon Life Insurance Company (Nippon
Life) in 2016. The Company gave certain covenants,
warranties and indemnities in favour of Nippon Life and
REPORT OF THE DIRECTORS
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
offer and promotion 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
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.
The economic impact of COVID-19 is extremely uncertain,
but it has increased credit risk across the Group’s
portfolio.
COVID-19 has created economic and financial disruptions
that have adversely affected, and will continue to adversely
affect, the Group’s business, financial condition, liquidity
and results of operations. The extent of these continuing
negative effects will depend on future developments, which
are highly uncertain and cannot be predicted. Increased
credit risk can result in both an increase in losses when
customers default on their loan obligations and higher
capital requirements through an increase in the probability
of default.
The global economy is predicted to contract in 2020, due in
large part to measures implemented to address COVID-19.
Various regions in several countries have been forced to
reintroduce measures to control fresh outbreaks,
highlighting the high degree of uncertainty to the outlook.
The functioning of financial markets in many countries has
also been impaired by increased volatility and negative
investor sentiment, adding to the risk of a larger and longer
economic downturn. This may create credit risk for the
Group, both in the short and long-term.
In Australia and globally, measures to control the spread of
COVID-19, including restrictions on public gatherings,
business closures and travel and trade restrictions have had,
Annual Financial Report 2020
23
REPORT OF THE DIRECTORS
OPERATING AND FINANCIAL REVIEW (CONTINUED)
and may continue to have, a substantial negative impact on
economic and business activity due to a range of factors
including reduced trade flows and lower commodity prices.
Certain sectors, including discretionary retail, hospitality,
commercial property and air travel, have experienced, or
are expected to experience, significant financial stress. This
includes a heightened risk of corporate and business
bankruptcies, a rise in unemployment and an increase in
household financial stress. This combination of factors has
introduced additional credit risk for the Group.
There is a continuing risk that the economic consequences
of COVID-19, including supply disruptions caused by global
and domestic containment efforts, may become more
severe and far-reaching across the economy, leading to a
more widespread downturn in business and economic
activity. This would likely result in a significant loss of
revenue for many businesses across a wide range of
industry sectors, in turn potentially leading to further
increased unemployment and customer defaults. The
Group’s commercial property, air travel, discretionary retail,
tourism and hospitality portfolios would be significantly
impacted in such a scenario, as would the Group’s exposure
to households, given the potential for higher
unemployment to coincide with lower house prices.
Some of the Group’s assets and liabilities comprise financial
instruments that are carried at fair value, with changes in
fair value recognised in the Group’s income statement.
Recent market declines and increased volatility could
negatively impact the value of such financial instruments
and cause the Group to incur losses.
Globally, governments (including Australia and NZ) have
introduced fiscal stimulus packages to counter the negative
impacts of the current economic downturn. The unwinding
of these stimulatory policies presents downside risk to
economies in the near-term, with the potential to
exacerbate existing negative effects on businesses and
households. In the longer term, governments may take
measures to address the additional debt burden generated
by these policies. The extent to which these packages
mitigate and / or defer the economic impact, including any
credit losses the Group may incur, is uncertain.
In response to COVID-19, the Group has established a range
of accommodations and measures designed to support its
personal and business customers. The decision by the
Group to provide customers impacted by the COVID-19
pandemic the option of suspending or deferring certain
loan repayments may lead to an increase in the level of
credit risk related losses. These accommodations and
measures, while supporting the Group’s customers, may
result in the Group assuming a greater level of risk than it
would have under ordinary circumstances. This in turn may
have a negative impact on the Group’s business, results of
operations, financial condition and prospects and may
negatively impact the Group’s net interest margin. As these
accommodations and measures are scaled back or
potentially removed, there may be a further increase in the
24
National Australia Bank
credit risks facing the Group, as well as a negative impact
on customer sentiment towards the Group and the banking
sector generally. In the longer term, asset values may start
to deteriorate if a large proportion of retail and business
customers liquidate their investments, either during, or
immediately after, the crisis or due to a decrease in demand
for these assets. In both scenarios loan-to-value ratios are
expected to be impacted.
The duration and magnitude of the COVID-19 pandemic and
its potential impacts on the economy remain unclear. Even
after the pandemic subsides, the Australian economy, as
well as most other major economies, may continue to
experience a recession and unemployment may rise further.
A prolonged recession in Australia and other major regions
has the potential to negatively impact debt servicing levels,
increase customer defaults and materially adversely impact
the Group’s financial performance and position, and its
profitability.
A decline in property market valuations 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. The social and
economic impacts of the spread of COVID-19 and the
measures in place to control it, have the potential to drive a
material decline in residential property prices due to,
among other things, increased unemployment in Australia
and NZ. The full negative impact of the COVID-19 pandemic
may be delayed, in part, by governmental support measures
and other actions that the Group and other financial
institutions have taken, for example permitting loan
payment deferrals in certain cases. In addition, there are a
number of other potential factors in the medium term that
may drive reductions in residential property prices. These
factors include regulatory changes which may impact the
availability of credit, reduced immigration and overseas
investment, changes to taxation policy and rising
unemployment. If these factors materialise, 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. This risk could be further
compounded by a more severe downturn.
Adverse business conditions in Australia and NZ,
particularly in the agriculture sector, may give rise to
increasing customer defaults.
The Group has a large market share among lenders to 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
OPERATING AND FINANCIAL REVIEW (CONTINUED)
of pathogens and pests, export and quarantine restrictions
and supply chain constraints, extreme weather events,
increasing weather volatility and longer-term changes in
climatic conditions arising from climate change, 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.
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
from:
• Extreme weather, increasing weather volatility and
longer-term changes in climatic conditions affecting
property and asset values or causing customer losses due
to damage, existing land use ceasing to be viable, and /
or interruptions to business operations and supply
chains.
• The effect of new laws, regulations and government
policies designed to mitigate climate change.
• The impact on certain customer segments as the
economy transitions to renewable and low-emissions
technology.
This may lead to 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 its funds
when loans default.
For example, parts of Australia are prone to, and have
recently experienced, physical climate events such as severe
drought conditions and bushfires, notably over summer
2019/2020. The impact of these can be widespread,
extending beyond primary producers to customers who are
suppliers to the agricultural sector, and to those who reside
in, and operate businesses within, impacted communities.
Extreme weather events and long-term changes in climate
across Australia may have similar impacts on other business
sectors. Decreasing investor appetite and customer demand
for carbon intensive products and services may give rise to
transition risks and negatively impact revenue and access to
capital for some businesses. These physical and transition
risk 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
REPORT OF THE DIRECTORS
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 currently located 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 market conditions and forecasts
most relevant 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,
including the Company's high-quality liquid asset
portfolios
• 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 negatively impacted by
climate change and major shock events, such as natural
disasters, epidemics and pandemics (such as the ongoing
COVID-19 pandemic), 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:
• Central banks, including the Reserve Bank of Australia
(RBA) and the Reserve Bank of New Zealand (RBNZ),
eased monetary policy and provided liquidity to markets
in response to COVID-19 related economic downturn,
with advanced economies essentially exhausting their
conventional policy measures (with the RBA cutting the
cash rate to 0.1% in November 2020). Any further policy
easing may involve additional asset purchases
(quantitative easing) or other unconventional policy
Annual Financial Report 2020
25
REPORT OF THE DIRECTORS
OPERATING AND FINANCIAL REVIEW (CONTINUED)
tools that may adversely affect the Group’s cost of funds,
the value of the Group’s lending and investments, and
margins. Policy easing would be expected to reduce
short-term downside risks to growth, but has the
potential to build 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
the rapid pace of Chinese economic growth. Following
the negative economic impact of COVID-19
countermeasures in the first quarter of 2020, China’s
economy is expected to record its weakest growth in
2020 since 1976. China’s high and growing debt burden
presents a risk to its medium-term growth prospects.
Political tensions between the Australian and Chinese
governments have increased in recent years. Due to its
export mix, Australia’s economy is exposed to any
sudden downturn in China’s domestic investment in
business, infrastructure or housing, as well as changes to
trade policy (as exhibited by recent trade restrictions on a
range of commodities including coal, barley, beef and
wine). This may 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.
• Phase One of the ‘Economic and Trade Agreement
Between the United States of America and the People’s
Republic of China’ (Phase One Agreement) was signed in
January 2020. Despite this, the bulk of the tariffs imposed
by both countries remain in place and continuing trade
and other tensions remain which present additional
uncertainty and pose risks to 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 East Asian economies are major
trading partners of 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 and an increase in anti-globalisation
sentiment. Protests in Hong Kong during 2019 and 2020
highlight increased global political tensions with the
Hong Kong Special Administrative Region and the
People’s Republic of China. As the UK and European
Union have yet to agree on the terms of their
relationship post the current transition period, the
prospect of an economically damaging ‘hard’ Brexit
remains a risk. In addition, there are a range of other
geopolitical risks, particularly given the ongoing
26
National Australia Bank
uncertainty around the Middle East, the Korean Peninsula
and the South China Sea.
• 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
volatility poses a significant source of credit risk to the
Group.
Market Risk
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. Since
March 2020, global financial markets have become more
volatile due to the impact of COVID-19. The full economic
impact of COVID-19 remains uncertain.
The Group is exposed to market risk.
Credit spread risk is the risk of the Group’s trading book
being exposed to movements in the value of securities and
derivatives as a result of changes in the perceived credit
quality of the underlying company or issuer. 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
customers) in fixed income securities. The Group’s trading
book is also exposed to credit spread risk through credit
valuation adjustments. A widening of credit spreads could
negatively impact the value of the Credit Valuation
Adjustment.
Interest rate risk is the risk to the Group’s financial
performance and capital position caused by changes in
interest rates. The Group’s trading book is exposed to
changes in the value of securities and derivatives as a result
of changes in interest rates. The Group’s trading book
accumulates interest rate risk when the Group provides
interest rate hedging solutions for customers, 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.
OPERATING AND FINANCIAL REVIEW (CONTINUED)
Balance sheet and off-balance sheet items can 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 the Group’s net
interest margin.
Foreign exchange and translation risk arise 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, including through the
repatriation of capital and dividends. The Group’s
businesses may therefore be affected by a change in
currency exchange rates, and movements in the mark-to-
market valuation of derivatives and hedging contracts.
The Group’s financial statements are prepared and
presented in Australian dollars, and any adverse
fluctuations in the Australian dollar against other currencies
in which the Group invests or transacts and generates
profits (or incurs losses) may adversely impact its financial
performance and position.
Funding, Liquidity and Capital 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 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
include the repayment of deposits on demand or at their
contractual maturity, the repayment of wholesale
borrowings and loan capital as they mature, 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
REPORT OF THE DIRECTORS
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 RBA 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.
The Group must comply with prudential requirements in
relation to capital across the jurisdictions in which it
operates. Compliance with these requirements 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.
In response to the impacts of COVID-19, the Australian
Prudential Regulation Authority (APRA) has outlined its
expectations for ADIs in relation to the payment of
dividends during this period of disruption. In its July 2020
guidance, APRA advised banks to maintain caution in
planning capital distributions. Specifically, APRA expects
that ADIs will retain at least half their earnings in 2020 and
actively use other capital management initiatives. In
addition, RBNZ has prohibited the payment of dividends on
ordinary shares by NZ-incorporated registered banks and
has stated that those banks should not redeem non-
Common Equity Tier 1 (CET1) capital instruments (other
than on a stated final maturity date), until the economic
outlook has sufficiently recovered, which prevents the
Company’s NZ subsidiary, Bank of New Zealand (BNZ), from
paying dividends, which has a negative impact on the
Group’s Level 1 CET1 capital ratio. 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, financial
performance and financial 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
Annual Financial Report 2020
27
REPORT OF THE DIRECTORS
OPERATING AND FINANCIAL REVIEW (CONTINUED)
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.
On 7 April 2020, Fitch Ratings (Fitch) downgraded the major
Australian banks, including the Company, from “AA-” to “A+”,
with a negative outlook. Fitch also made a corresponding
downgrade to the long-term and short-term issuer default
ratings of the major NZ banks, including BNZ. On 21 May
2020, Fitch revised the outlook of Australia’s long-term
issuer default rating to negative from stable. On 8 April
2020, S&P Global Ratings (S&P) revised its outlook for the
major Australian banks, including the Company, reflecting a
revision in the outlook for Australia from stable to negative.
It reaffirmed the long-term and short-term issuer credit
ratings of the Company at “AA-” and “A-1+” respectively. S&P
also made a corresponding revision to the outlook of the
major NZ banks, including BNZ. The Group faces the risk of
further revisions or downgrades should economic and
credit conditions continue to deteriorate.
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
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 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.
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.
There are reputational implications inherent in the Group
operations due to the range of customers, products and
services the Group provides and the multiple markets and
channels these products and services are delivered through.
The Group’s workforce has been and may continue to be
impacted by COVID-19. The Group takes all reasonable steps
to protect its colleagues and customers. However, there is
no certainty that all the precautions the Group has taken to
28
National Australia Bank
protect its colleagues and customers will be adequate or
appropriate. It is difficult to predict the extent to which each
colleague’s ability to provide customer support and service
and maintain their own health will be affected over an
extended period.
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, resilience and security of the
Group’s (and its third-party vendors’) information
technology systems and infrastructure are essential to the
effective operation of its business and consequently to its
financial performance and position. The reliability and
resilience of the Group’s technology may be impacted by
the complex technology environment, failure to keep
technology systems up-to-date, an inability to restore or
recover systems and data 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 changing operational scenarios.
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 Group’s 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, information 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.
Although the Group invests in protecting the confidentiality
and integrity of this information, the Group may not always
be able to anticipate a security threat, or be able to
implement effective information security policies,
procedures and controls to prevent or minimise the
resulting damage. The Group uses select external providers
(in Australia and overseas) to process and store confidential
data and to develop and provide its technology services,
including the increasing use of cloud infrastructure.
OPERATING AND FINANCIAL REVIEW (CONTINUED)
A breach of security at any of these external providers or
within the Group may result in operational disruption, theft
or loss of customer data, a breach of privacy laws,
regulatory enforcement actions, customer redress,
litigation, financial losses, or loss of market share, property
or information. This may be wholly or partially beyond the
control of the Group and may adversely impact its financial
performance and position.
In addition, any such event may give rise to increased
regulatory scrutiny or adversely affect the view of ratings
agencies. Social media and responses to the relevant event
may exacerbate the impact on the Group’s reputation.
Deficient policies, processes, controls, infrastructure and
models give rise to a significant risk to the Group’s
operations.
The Group’s business involves the execution of many
processes and transactions with varying degrees of
complexity. The Group is reliant on its policies, processes,
controls 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, controls 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.
Models are used extensively in the conduct of the Group’s
business, for example, in calculating capital requirements or
customer compensation payments 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 customers and 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 support 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
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, colleagues and Board members with a deep
REPORT OF THE DIRECTORS
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
biological hazards, climate change, natural disasters or acts
of terrorism.
External events include epidemics or pandemics, such as
the outbreak of COVID-19, which has interrupted the usual
operations of the Group, its customers and suppliers. This
disruption has resulted in the activation of the Group’s Crisis
Management Team and implementation of the Group’s
continuity plan to protect the health, safety and well-being
of its customers and colleagues. The steps taken include
alternate work locations and arrangements being
implemented for Group colleagues, a decreased reliance on
property infrastructure, and an increased reliance on mobile
technology and business process changes to support
customers, colleagues and suppliers and ensure continuity
of the Group’s business operations. These operational
changes could lead to direct financial loss or impact the
Group’s ability to operate effectively and efficiently. No
assurance can be given that the steps being taken will be
adequate nor can the Group predict the level of further
disruption which may occur.
The Group is monitoring the situation closely as the
domestic and global business environment changes and it is
unclear how this will evolve or for how long the Group will
continue to operate under its continuity plan. Other
epidemics or pandemics may arise in future which may
again activate a crisis response causing disruption to the
Group’s operations.
The Group has branches in regional areas in Australia that
are prone to seasonal natural disasters, including fires and
floods.
In addition, the Group has branches and office buildings in
NZ, which have experienced significant earthquakes and
Annual Financial Report 2020
29
REPORT OF THE DIRECTORS
OPERATING AND FINANCIAL REVIEW (CONTINUED)
aftershocks in recent years, and which may be exposed to
the risk of future earthquakes.
AML/CTF obligations and significant monetary penalties for
the Group.
Given the Group’s physical presence in major cities in
Australia, NZ and other countries where it has, or is
intending to establish, offshore operations, it may also be
exposed to the risk of a terrorist attack.
External events such as extreme weather, 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.
The environment the Group is operating in has become
more complex and more uncertain and could create
operational risks that are yet to be identified.
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.
The Group may be involved in a breach or alleged breach
of laws governing bribery, corruption and financial crime.
Supervision, regulation and enforcement of anti-bribery and
corruption, anti-money laundering, counter-terrorism
financing, and international sanctions laws (collectively
referred to as ‘AML/CTF’) has increased. In June 2018,
Australia’s financial intelligence agency, the Australian
Transaction Reports and Analysis Centre (AUSTRAC), reached
an agreement with another major Australian bank for a
$700 million penalty relating to serious breaches of
AML/CTF laws. In September 2020, AUSTRAC and a different
major Australian bank agreed to the Australian bank paying
a civil penalty of $1.3 billion in relation to proceedings
alleging significant breaches of AML/CTF laws.
The Group 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 and weaknesses and should
further breaches be identified, the Group would expect to
report those to regulators in accordance with its normal
processes. The potential outcome and total costs associated
with the investigations and remediation processes for
specific issues identified to date, and for any issues
identified in future, remain uncertain. A negative outcome
to any investigation or remediation process may adversely
impact the Group’s reputation, business operations,
financial position and results. Further, given the large
volume of transactions that the Group processes, the
undetected failure of internal AML/CTF controls, or the
ineffective implementation or remediation of compliance
issues, could result in a significant number of breaches of
30
National Australia Bank
Refer to Note 30 Contingent liabilities and credit
commitments of the financial statements under the heading
‘Regulatory activity, compliance investigations and associated
proceedings - Anti-Money Laundering (AML) and Counter-
Terrorist Financing (CTF) program uplift and compliance
issues’ for more information.
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 and 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. There is also a potential risk of
misinterpreting new or existing regulations. 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, controls 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 regulatory enforcement actions for
alleged instances of non-compliance with laws or regulatory
requirements. In some cases, class actions have been
brought in respect of the matters that these enforcement
actions relate to.
In particular, class actions have been commenced against
the Group in respect of two matters that were referred to
APRA by the Royal Commission, regarding the conduct of
the Group’s superannuation trustee, NULIS Nominees
(Australia) Ltd (NULIS). In October 2019, litigation funder
Omni Bridgeway (formerly IMF Bentham) and William
Roberts Lawyers commenced a class action against NULIS
alleging breaches of NULIS’s trustee duties relating to the
maintenance of grandfathered commissions following a
successor fund transfer in 2016. In January 2020, Maurice
Blackburn commenced a class action against NULIS and MLC
Nominees (MLCN) alleging breaches of trustee obligations
in connection with the speed of the transfer of members’
accrued default amounts to the MySuper product. The
potential outcome and total costs associated with these
matters remain uncertain.
OPERATING AND FINANCIAL REVIEW (CONTINUED)
The Company is also involved in class action proceedings in
the UK with respect to the sale of tailored business loans
through its former UK subsidiary, and it has been involved
in class action litigation in the US in respect of alleged
conduct relating to the Bank Bill Swap Reference Rate
(BBSW), alongside other major Australian and international
banks. In February 2020, all claims against the Company in
relation to the BBSW matter were dismissed but this
decision could potentially be appealed or reconsidered.
Refer to Note 30 Contingent liabilities and credit
commitments of the financial statements under the
heading ‘Legal proceedings’ 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
remediation and other regulatory matters), the
determination of income tax, the valuation of financial
assets and liabilities (including fair value and credit
impairment of loans and advances), the valuation of
goodwill and intangible assets, and the presentation of
discontinued operations. 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.
Following an investigation into payments of both current
and former Australian colleagues, a review has identified a
REPORT OF THE DIRECTORS
range of potential payroll under and over payments issues.
A remediation program has been established and provisions
have been taken but the final outcome and total costs
associated with this matter remain uncertain.
There are also a number of ongoing regulatory
investigations and court proceedings involving the Group.
These include matters relating to: the provision of financial
advice; the inappropriate charging of fees for services;
selling practices and advice in relation to consumer credit
insurance products. Where appropriate, provisions are held
for litigation matters, regulatory and internal investigations
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, civil or criminal
proceedings 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.
Certain of these regulatory investigations and proceedings
relate to matters examined or commented on by the Royal
Commission. In particular, ASIC commenced civil
proceedings against members of the Group in relation to
two issues that were examined by the Royal Commission.
The first concerned the Company’s ‘Introducer Program’, in
respect of which ASIC alleged that the Company engaged in
credit activities with unlicensed persons in contravention of
the NCCP Act. On 19 October 2020, the Federal Court
delivered its judgment in relation to this matter, imposing a
civil penalty of $15 million on the Company. The second
relates to alleged breaches in respect of ongoing service
arrangements and fee disclosure statements, with clients of
NAB Financial Planning between 2013 and 2019. A
Statement of Agreed Facts and Admissions was filed in
October 2020, with the Company agreeing certain
contraventions of the fee disclosure regime, some liability
for misleading or deceptive conduct and false or misleading
representations, as well as breaches of financial services
laws. The potential outcome and total costs associated with
this matter remains uncertain.
A negative outcome to regulatory 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 30 Contingent liabilities and credit commitments of the
financial statements for details in relation to certain legal
proceedings and contingent liabilities which may impact the
Group.
Annual Financial Report 2020
31
REPORT OF THE DIRECTORS
OPERATING AND FINANCIAL REVIEW (CONTINUED)
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.
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, providing or unduly influencing customers to
purchase or receive products or services that may not
meet their existing needs or that place the customer at
risk of future hardship.
• 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 and
compliance issues.
• Failure to resolve issues and remediate customers in a
timely manner.
• Failure to deliver on product and service commitments.
• Failure to remediate business processes and stop
reoccurrence in a timely manner.
In addition, events such as COVID-19, can result in rapid
changes to the internal and external business environment
and subsequent changes to business processes to support
customers. This may impact both the likelihood and the
consequence of unfair outcomes to customers, including
through decisions and actions where the trade-offs or tail
risks may not be immediately apparent or quantifiable. The
Group is making significant efforts to support its customers
in an appropriate way during the COVID-19 pandemic
including through regular customer communication and
redeployment of colleagues into customer-facing roles.
However, no assurance can be given that the steps being
taken will not have unintended consequences in the future
or that they will meet the future expectations of the Group’s
regulators. The Group cannot predict the level of further
disruption which may occur.
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, loss of customer
confidence, class actions and other litigation, settlements
and restitution to customers or communities.
• Increased supervision, oversight or enforcement by
regulators or other stakeholders.
• Unenforceability of contracts such as loans, guarantees
and other security documents.
32
National Australia Bank
• 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 level of regulatory
reviews and political scrutiny, including in Australia, NZ and
other countries where the Group has, or is intending to
establish, offshore operations. 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,
colleagues and information technology systems. This may
also impact the viability of the Group’s participation in
certain markets or require the divestment of a part of the
Group’s business.
The Royal Commission made a considerable number of
recommendations. The Australian Government has
committed to take action on all of the recommendations
and has announced further commitments to address issues
raised in the final report of the Royal Commission. Some
commitments have been actioned by the Australian
Government and regulators, and others are in progress or
subject to consultation. The Australian Government has also
committed to an accelerated timeframe for introducing the
legislative changes required to give effect to the
recommendations, although it has deferred the
implementation of these commitments for six months as a
result of the regulatory challenges created by COVID-19.
These legislative and regulatory changes are likely to impact
the operations of the Group as considerable resources will
be required to be redirected towards the timely
implementation of such changes. The challenges may be
exacerbated given the redirection of resources required to
address customer needs through the COVID-19 pandemic
and the possible detrimental impact on the Group’s ability
to embed regulatory change. The timeframe for
OPERATING AND FINANCIAL REVIEW (CONTINUED)
implementation combined with the complexities created by
the COVID-19 pandemic may increase the risk associated
with the timely implementation of these changes.
Further inquiries and regulatory reviews impacting the
financial services industry may be commissioned by the
Australian and New Zealand Governments, 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). This is expected to be satisfied primarily
through the issue of additional Tier 2 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 final revisions to the credit risk management
framework for ADIs (released in December 2019) 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 recent accounting standard
changes and guidance; although noting that APRA has
deferred the commencement date to 1 January 2022 in
response to COVID-19.
• The RBNZ released its capital requirements for NZ banks
in December 2019. The final capital requirements
include: an increase to RWA for internal ratings based
banks such as the Company’s subsidiary, BNZ, to
approximately 90% of what would be calculated under
the standardised approach; an increase in the CET1
capital requirement equal to 13.5% of RWA (including a
prudential capital buffer of 9% of RWA) for banks
deemed systemically important (which includes BNZ); an
increase in the Tier 1 capital requirement equal to 16% of
RWA for banks deemed systemically important; and an
increase in the Total Capital requirement equal to 18% of
RWA for banks deemed systemically important. Due to
significant uncertainties arising from the impacts of
COVID-19, the RBNZ has delayed the start of the new
capital requirements by 12 months – to 1 July 2021, after
which it is expected that the changes will be phased in
over a seven-year period. Some aspects of the framework
(including the detailed regulatory requirements to be
included in the capital standards) are still to be
confirmed in consultations expected to take place in
2021. It also remains unclear the extent to which APRA
will incorporate aspects of the RBNZ’s capital
requirements as part of its review of the Australian
capital framework. The ultimate impact on the Group will
depend on various factors, including BNZ’s balance sheet
REPORT OF THE DIRECTORS
size over the implementation period, and the potential
mitigating actions undertaken.
• The major Australian banks (including the Company)
have been subject to APRA’s ‘unquestionably strong’
target benchmark capital ratios since January 2020,
although noting the temporary suspension of these
requirements in response to COVID-19. APRA has recently
confirmed its intention to restart public consultations on
select policy reforms, including in relation to ADI capital
reform, although the implementation of revised
prudential standards in relation to the risk-weighting
framework and other capital requirements has been
suspended until at least 1 January 2023. Implementation
of these requirements may require the Group to hold
additional capital. In addition, regulators in a number of
countries in which the Company operates are
recommending limits on, or restrictions to, capital
distributions as a result of COVID-19.
• In 2018 and 2019, the NZ Financial Markets Authority and
RBNZ undertook 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 led
to the NZ Government introducing the Financial Markets
(Conduct of Institutions) Amendment Bill to the NZ
Parliament in December 2019 to create an oversight and
licensing regime for regulating conduct in the banking,
non-bank deposit taking and insurance sectors. The bill
was initially expected to be passed by the end of 2020,
but this timeframe may be delayed as a result of
COVID-19.
• The Australian Banking Executive Accountability Regime
(BEAR) applies to the Group. On 22 January 2020, the
Australian Government Treasury released its proposal
paper on a new Financial Accountability Regime (FAR).
This regime has been developed in response to a number
of Royal Commission recommendations and is intended
to extend and replace BEAR. The FAR legislation was
initially expected to be introduced by the end of 2020
(although implementation may be phased), and is likely
to include new prescribed responsibilities, additional
accountability obligations, and increased maximum civil
penalties for the Group and its accountable persons. The
timeframe for implementation of FAR may be delayed as
a result of COVID-19.
• The Australian Government directed the Australian
Competition and Consumer Commission (ACCC) to
undertake an inquiry into home loan pricing. The ACCC is
investigating a wide range of issues, including the rates
paid by new and existing customers, impediments to
customer switching, how the cost of financing for banks
has affected interest rate decisions and the interaction
between home loan pricing and rate-setting by the RBA.
An interim report on this topic was provided to the
Australian Government on 27 April 2020 and a final
report on this topic is due to the Australian Government
on 30 November 2020.
Annual Financial Report 2020
33
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 commitments to regulators and the public to change
the way it operates. In November 2019, the Group published
an update to the market on progress against actions related
to self-assessment on governance, accountability and
culture and recommendations arising from the Royal
Commission. The Group provides periodic updates to
regulators and the public on its progress in implementing
these actions, recommendations from the Royal
Commission or representations given to its regulators. The
impact of COVID-19 may result in delays to the Group’s
delivery on any of these commitments.
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 or voluntary commitments
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 colleagues 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 greater risk of
enforcement action 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)
• Other material regulatory changes include new
requirements for the design and distribution of financial
products, responsible lending reforms, and the
implementation of the Consumer Data Right (known as
‘Open Banking’). Open Banking’s regulatory timelines
require significant changes to the Group’s operations and
technology. There is a risk that the Group does not
achieve compliance with the set milestones for the
complete implementation of Open Banking. Open
Banking may also lead to cyber and fraud risks in the
Consumer Data Right ecosystem. Governance
mechanisms including accountabilities, controls and
frameworks are still evolving and, under the Open
Banking regime, customer data will be shared with a
broader range of stakeholders. The significant resources
and management time required to implement Open
Banking may also have a flow-on effect, impacting the
Group’s timely implementation of other regulatory
reforms.
• 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 supervisory
purposes; operational resilience; market abuse or
conduct related regulations; changes to financial
benchmarks; derivatives reform; replacement of the
Reserve Bank of New Zealand Act 1989 (NZ); payments;
data protection and privacy laws; data quality;
competition inquiries; financial crime legislation;
increasing modern slavery, climate and other
sustainability risk related regulatory and reporting
requirements, accounting and financial reporting
requirements; and tax reform.
• Additionally, continued regulator focus on COVID-19
related impacts (such as loan deferrals) has resulted in
temporary changes to a number of regulatory and
associated regulatory reporting requirements.
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. The challenges raised by COVID-19
have caused a number of regulators to postpone or
suspend planned policy and supervision initiatives, public
consultations and the implementation dates of a number of
regulatory reforms.
The impact of COVID-19 on the Group’s operations may
result in delays in its ability to implement regulatory
change. The extent of any delays will be dependent on how
regulators choose to adjust the prioritisation, timing and
deployment of their supervisory mandate or legislative
change.
Depending on the specific nature of the regulatory change
requirements and how and when they are implemented or
enforced, they may have an adverse impact on the Group’s
business, operations, structure, compliance costs or capital
requirements, and ultimately its reputation, and financial
performance and position.
34
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: 64
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.
REPORT OF THE DIRECTORS
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 held executive
roles at the Royal Bank of Scotland as CEO UK Retail from
2012 to 2013 and Group CEO from 2013 to 2019. 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.
Mr McEwan is a Director of The Financial Markets
Foundation for Children.
Mr David Armstrong
BBus, FCA, MAICD
Age: 62
Term of office: Non-executive director since August
2014. He is Chairman of the Board's Audit Committee and a
member of the Board's Risk & Compliance Committee.
Independent: Yes
Independent: Yes
Skills & Experience: Mr Chronican has more than 38 years of
experience in banking and finance in Australia and New
Zealand. Mr Chronican was responsible for the Retail and
Commercial business of the Australia and New Zealand
Banking Group Limited (ANZ) in Australia. Prior to joining
ANZ, Mr Chronican had a long career at Westpac Banking
Corporation, where he established his role in Australian
banking as 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 directorships and interests include The
Westmead Institute for Medical Research (Chairman) and
the National Foundation for Australia-China Relations
Advisory Board (Member).
Mr Ross McEwan CBE
BBus
Age: 63
Term of office: Group Chief Executive Officer and Managing
Director of National Australia Bank Limited since December
2019.
Independent: No
Skills & Experience Mr McEwan has more than 30 years of
experience in the finance, insurance and investment
Skills & Experience: Mr Armstrong has more than 30 years
of experience in professional services, including as a
partner at PricewaterhouseCoopers (PwC). Mr Armstrong
has significant knowledge and understanding of banking
and capital markets, real estate and infrastructure and is
well-versed in the reporting, regulatory and risk challenges
faced by the industry.
Mr Armstrong's other directorships and interests include
The George Institute for Global Health (Chairman), Opera
Australia Capital Fund Limited, Australian Museum
(President) and Lizard Island Reef Research Foundation.
Ms Kathryn Fagg AO
FTSE, BE(Hons),
MCom(Hons)
Age: 59
Term of office: Non-executive director since December 2019.
Member of the Board's Audit Committee and Risk &
Compliance Committees.
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,
Annual Financial Report 2020
35
REPORT OF THE DIRECTORS
DIRECTORS’ INFORMATION (CONTINUED)
governance and risk, operations, investments, decision-
making and corporate development.
Directorships of other listed entities:
Boral Limited (since September 2014, Chairman since July
2018)
Djerriwarrh Investments Limited (since May 2014)
Ms Fagg’s other directorships include Breast Cancer
Network Australia (Chairman), CSIRO (Deputy Chairman),
The Grattan Institute, The Myer Foundation and Male
Champions of Change.
Mr Peeyush Gupta AM
BA, MBA, AMP (Harvard),
FAICD
Age: 61
Term of office: Non-executive director since November
2014. Member of the Board's Risk & Compliance and the
People & Remuneration Committees. Director of certain
MLC 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,
government, not-for-profit, trustee and responsible entity
boards since the 1990s, including experience on audit, risk,
and remuneration committees.
Directorships of other 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: 59
Term of office: Non-executive director since December 2015.
Chairman of the Board's People & 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, providing advice and
other services to the financial services sector and ASX-listed
companies. Up to her retirement in 2015, Anne held senior
leadership roles as Partner and Deputy Chair at PwC where,
in addition to client advisory and audit roles, she had
responsibilities within the firm for governance, leadership
development, mentoring and remuneration of senior
executives and Partners.
Directorships of other 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: 59
Term of office(1): 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 other 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: 65
Term of office: Non-executive director since February 2016.
Member of the Board's 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
(1) On 6 October 2020, it was announced that Geraldine McBride will not be standing for re-election at the 2020 AGM.
36
National Australia Bank
DIRECTORS’ INFORMATION (CONTINUED)
including Auckland Council, Lion Nathan, Carter Holt
Harvey, Goodman Fielder, Sealord and Independent Liquor.
Directorships of other listed entities:
Genesis Energy Limited* (since June 2014)
Fletcher Building Limited* (since September 2018)
*Dual-listed on the New Zealand and Australian stock
exchanges
Mr McKay's other directorships include Eden Park Trust
(Chairman) and IAG (NZ) Holdings Limited.
Mr Simon McKeon AO
BCom, LLB, FAICD
Age: 64
Term of office: Non-executive director since February 2020.
Chairman of the Board’s Risk & Compliance Committee and
a member of the Board's Nomination & Governance
Committee.
Independent: Yes
Skills & Experience: Mr McKeon has more than 40 years of
experience in financial services, law, government and the
not for profit sector. He held a range of senior executive
roles with Macquarie Group, including as Executive
Chairman of its business in the State of Victoria. He
previously served as Chairman of AMP, MYOB and CSIRO
and was Founding President of the Federal Government’s
Australian Takeovers Panel.
Mr McKeon also served as Founding Chairman of MS
Research Australia and as Chairman of the Federal
Government’s Panel that completed a strategic review of
health and medical research in 2013. Mr McKeon is an
active philanthropist and has been a significant contributor
over many years to charitable, educational, public health
and other community-based organisations and causes. Mr
McKeon was Australian of the Year in 2011.
Directorships of other listed entities:
Rio Tinto Group (since January 2019)
Mr McKeon’s other directorships and interests include
Summer Housing (Chairman), South East Melbourne
(Chairman), Monash University (Chancellor), The Big Issue
(Member of the Advisory Board) and GFG Alliance Australia
(Member of the Advisory Board).
Ms Ann Sherry AO
BA, Grad Dip IR, FAICD,
FIPAA
Age: 66
Term of office: Non-executive director since November
2017. Chairman of the Board's Customer Committee and a
member of the Board's People & Remuneration Committee.
Ann is Co-Chair of NAB's Indigenous Advisory Group.
REPORT OF THE DIRECTORS
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. She 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 Banking Corporation (Westpac)
where she held executive roles including CEO, Westpac New
Zealand, CEO, Bank of Melbourne and Group Executive,
People & Performance.
Directorships of other listed entities:
Sydney Airport (since May 2014)
Enero Group Limited (Chairman since January 2020)
Ms Sherry’s other directorships and interests include,
UNICEF Australia (Chairman), Cape York Partnership,
Museum of Contemporary Art, Infrastructure Victoria, and
Australia NZ Leadership Forum (Co-Chairman).
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: 62
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.
Annual Financial Report 2020
37
REPORT OF THE DIRECTORS
DIRECTORS’ INFORMATION (CONTINUED)
Mr Yuen retired from the Board effective 18 December 2019.
• Any liability incurred by the person in the capacity as an
Mr Anthony Yuen B.Soc.Scs
Age: 70
Term of office: Non-executive director from March 2010 to
December 2019. Member of the Board's Audit and Risk &
Compliance Committees.
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
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.
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's Risk & Compliance Committee and
manages the Group’s Risk Management Committees and
has experience in a wide range of corporate, legal,
governance, risk 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.
Ms Kelly Patterson BA, LLB (Hons) joined the Group in 2015
and was appointed Company Secretary in April 2018. Ms
Patterson resigned as Company Secretary in January 2020.
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:
38
National Australia Bank
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
– 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)
Directors and Directors meeting
The NAB Board met 23 times during the year ended 30 September 2020.
The following table includes:
• The names of the Directors holding office at any time during, or since the end of the financial year.
• The number of scheduled and unscheduled Board and Committee meetings held during the financial year that each Director
was a member of the Board or relevant Committee and eligible to attend, and the number of meetings actually attended by
each Director.
All Directors may attend Committee meetings even if they are not a member of a relevant Committee. The table below excludes
the attendance of those Directors at Committee meetings where they were not a Committee member.
Some directors also attended special purpose ad hoc committee meetings during the year, which is not included in the table
below:
Board meetings
Committee meetings
Scheduled(1)
Unscheduled(2)
Audit(3)
Compliance(3)
Remuneration(3)
Customer(3)
Governance
Held Attended Held Attended Held Attended Held Attended Held Attended Held Attended Held Attended
Risk &
People &
Nomination &
Current Directors
Phil Chronican
Ross McEwan (joined
December 2019)
David Armstrong
Kathryn Fagg (joined
December 2019)
Peeyush Gupta
Anne Loveridge
Geraldine McBride
Doug McKay
Simon McKeon (joined
February 2020)
Ann Sherry
Former Directors
Ken Henry (resigned
November 2019)
Anthony Yuen (retired
December 2019)
11
8
11
8
11
11
11
11
7
11
3
4
11
12
8
11
8
11
11
11
11
7
11
3
4
12
12
12
12
12
12
12
11
12
-
-
12
12
11
12
12
12
11
12
11
12
-
-
-
-
7
1
-
-
7
7
-
-
-
2
-
-
7
1
-
-
7
7
-
-
-
2
-
-
7
6
7
-
-
-
5
-
-
2
-
-
7
6
7
-
-
-
5
-
-
2
-
-
-
-
10
10
-
-
-
-
-
-
-
10
10
-
-
-
10
10
-
-
-
-
-
-
-
-
-
-
10
10
-
10
-
-
-
-
-
-
-
-
10
10
-
10
-
-
5
-
-
-
1
5
-
1
4
-
-
-
5
-
-
-
1
5
-
1
4
-
-
-
(1) The number of meetings scheduled in the Board’s approved annual calendar. Of these scheduled meetings, three were short meetings specifically related to
financial reporting matters. This number includes several meetings held concurrently with Committees, which have not been counted separately for either the
Board or the respective Committee. This number includes Board workshops and continuing education sessions, which formed part of the overall scheduled
Board program of activities.
(2) The number of out-of-cycle meetings convened during the year for a special purpose that do not form part of the Board’s approved annual calendar. Of these
out-of-cycle meetings, the majority were scheduled for the Board to receive updates on the impact of COVID-19 on the Company, its customers and colleagues.
(3) The number of Committee meetings both scheduled in the Board’s approved annual calendar and convened out-of-cycle. This includes Committee workshops
and site visits. The People & Remuneration Committee held two out-of-cycle meetings during the year, which are included in the number of meetings shown
for that Committee. The Customer Committee held four out-of-cycle workshops during the year, which are included in the number of meetings shown for that
Committee.
Annual Financial Report 2020
39
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 1,776,614 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 2021 and 15 February 2028. 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 2020 to the date of this report, no fully paid 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.
40
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 30 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 19 October 2020, the Federal Court of Australia
delivered its judgement in proceedings brought by ASIC
against NAB in connection with the introducer payments
program, imposing a civil penalty of $15 million on NAB.
The financial impact has been reflected in the Group's
results for the 2020 financial year.
On 5 November 2020, with the prior consent of APRA, NAB
announced it would exercise its option to redeem the $1.72
billion NAB Convertible Preference Shares II (NAB CPS II) on
17 December 2020. Each NAB CPS II will be redeemed for
cash at its par value of $100.
There are no other items, transactions or events of a
material or unusual nature that have arisen in the period
between 30 September 2020 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
REPORT OF THE DIRECTORS
procedures which are in place to maintain the integrity of
the Group’s financial statements.
Further details on the role of the Board and its committees
can be found in NAB's 2020 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)
and the Streamlined Energy & Carbon Reporting (SECR)
requirements which are implemented through the
Companies (Directors’ Report) and Limited Liability
Partnerships (Energy and Carbon Report) Regulations 2018
(UK) as part of the legislative response to climate change in
Australia and the UK respectively. 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), therefore, all of
the Group's energy and greenhouse gas (GHG) emissions
reporting is aligned to this reporting period.
The Group’s Australian vehicle fleet and building related net
energy use reported under the NGER Act for the 2020
environmental reporting year was 569,933 gigajoules (GJ)
(2019: 576,376 GJ), which is approximately 92% of the
Group’s measured total net energy use. The associated total
GHG emissions from fuel combustion (Scope 1) and from
electricity use (Scope 2) were 89,402 tCO2-e (2019:
101,626 tCO2-e).
The Group's UK-based (London Branch) net energy use(1)
reported under the SECR for the 2020 environmental
reporting year was 1,248,734 Kilowatt hours (KWh) (2019:
1,642,177 KWh). The associated total GHG emissions from
fuel combustion (Scope 1) and from electricity use(2) (Scope
2) were 273 tCO2-e (2019: 378 tCO2-e). This equates to 236
KWh and 0.05 tCO2-e per metre squared of property space
occupied by the Group's London Branch. Further London
Branch and Group energy and GHG emissions data is
provided in Table 1 to satisfy SECR requirements.
Information on the Group’s environmental financing to
support the low-carbon economy, and our climate-related
governance risk management, strategy, and metrics and
targets, is set out in the following pages consistent with the
Financial Stability Board's Taskforce on Climate-Related
Financial Disclosures' (TCFD) recommendations.
(1) The Group's energy use and GHG emissions reported for SECR purposes are associated with building-related gas and electricity use only. The Group does not
have a vehicle fleet associated with its UK operations.
(2) 100% of NAB's UK-based (London Branch) electricity is renewable electricity.
Annual Financial Report 2020
41
REPORT OF THE DIRECTORS
OTHER MATTERS (CONTINUED)
During the 2020 environmental reporting year, the Group’s
total net GHG emissions (Scope 1, 2 and 3(1)) were 149,452
tCO2-e (2019: 168,175 tCO2-e), after accounting for use of
certified renewable energy in the UK and Australia.
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 one of the
most significant challenges impacting the prosperity of our
society and economy and it is a source of significant risk
and opportunity for the Group. Therefore, the Group is
aligning its business to help achieve the temperature goals
of the Paris Agreement: to keep global warming to less than
two degrees Celsius, striving for 1.5 degrees Celsius above
pre-industrial levels and supporting a just transition to a net
zero emissions economy by 2050. This includes working
with the Group's customers to align its lending portfolio to
net zero emissions by 2050.
Financial regulators have agreed that climate-related risks
are a potential source of systemic financial risk that need to
be addressed to ensure the future stability and resilience of
the financial system. This is leading to changes in
supervisory expectations of banks and to regulatory change.
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(4), and in doing so,
make a contribution to the environmental sustainability of
the communities in which it operates.
The Group is actively working to decarbonise its operations,
to support its customers through the low-carbon transition,
and to decarbonise the Group's lending portfolio in line
with the Paris Agreement temperature goals. The Group
considers an orderly approach to the low-carbon transition
is critical to ensure communities have access to secure,
reliable and affordable energy and to ensure this transition
is just.
The following is a summary of the Group’s approach to
climate change governance, strategy, risk management, and
metrics and targets consistent with the TCFD's
recommendations.
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 and targets. From 1 July 2006 to
30 June 2020, the Group identified a total of 1,288 energy
efficiency and renewable energy opportunities in Australia
alone. Initiatives implemented in 2020 are estimated to
deliver ongoing annual energy savings of 21,075 GJ and
annual estimated cost savings of $1.6 million. A further six
efficiency energy opportunities are in progress or approved
to proceed. In the UK, the Group's London Branch has
moved into a new office building which has BREEAM
Excellent accreditation(2). This building is significantly more
energy efficient and has contributed to a reduction in the
Group’s London Branch energy consumption and GHG
emissions.
Additional detail on the Group’s environmental and climate-
related performance is provided in our 2020 Sustainability
Report and 2020 Sustainability Data Pack available at https://
www.nab.com.au/about-us/social-impact/shareholders/
performance-and-reporting. Further information on the
methodologies used to calculate the emissions in Table 1 is
also available on the Group website(3).
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 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
appointed an appropriately qualified lead assessor to
conduct the required ESOS assessment of its London Branch
and submitted its notification of compliance to the UK
Environment Agency to fulfil its ESOS obligation in
December 2019.
As a lender, the Group may incur environmental liabilities in
circumstances where it takes possession of a borrower’s
(1) Scope 1 GHG emissions are direct emissions from sources that are owned or controlled by an organisation including on-site fossil fuel combustion and vehicle
fleet fuel consumption. Scope 2 emissions are indirect emissions from purchased electricity. Scope 3 emissions relate to all other indirect emissions that occur
outside the boundary of the organisation as a result of the activities of the organisation, including financed emissions.
(2) BREEAM is a sustainability assessment method for master planning projects, infrastructure and buildings. Further information is available at: https://
www.breeam.com/
(3) https://www.nab.com.au/about-us/social-impact/shareholders/performance-and-reporting
(4) Green growth describes a path of economic growth that uses natural resources in a sustainable manner.
42
National Australia Bank
OTHER MATTERS (CONTINUED)
Table 1: Key GHG emissions and energy use data (1 July-30 June)(1)
Energy from gas consumption (KWh)
Energy from vehicle fleet fuel use (KWh)
Energy from electricity consumption (KWh)
Total energy for SECR reporting (KWh) (tCO2-e)
GHG emissions from energy use (Scope 1 – Gas) (tCO2-e)
GHG emissions from vehicle fleet (Scope 1) (tCO2-e)
GHG emissions from energy use (Scope 2, location-based – electricity) (tCO2-e)
Total gross Scope 1 & 2 GHG emissions for SECR reporting (tCO2-e)
Total gross Scope 3 emissions (tCO2-e)
Intensity ratio: Energy (KWh) / $ Underlying profit(2)
Intensity ratio: GHG (tCO2-e) / $ Underlying profit(2)
Intensity ratio: Energy (KWh) / m2
Intensity ratio: GHG (tCO2-e) / m2
Intensity ratio: Energy (KWh) / FTE
Intensity ratio: GHG (tCO2-e) / FTE
Emissions from electricity use (Scope 2, market-based – electricity) (tCO2-e)
Total net Scope 1,2 and 3 GHG emissions (after accounting for UK and Australian
renewable energy)
Carbon Offsets Retired
Net carbon emissions (carbon neutral)
Methodology
REPORT OF THE DIRECTORS
NAB Group (excluding
London Branch
London Branch)
2020
2019
2020
2019
377,813
578,018
40,873,595
47,058,677
0
0
27,568,578
26,586,135
870,922
1,064,159
101,589,007
127,528,288
1,248,734
1,642,177
170,031,181
201,173,100
70
0
203
273
1,975
0.0004
106
0
272
378
1,430
0.01
7,701
6,885
79,482
87,184
59,676
0.02
8,733
8,483
90,162
98,895
60,463
0.02
0.000001
0.000003
0.00001
0.00001
236
0.05
4,024
0.88
0
2,253
2,253
0
401
0.09
5,620
1.29
0
1,524
1,524
0
246
0.13
4,919
2.52
71,913
147,199
280
0.14
5,992
2.95
87,098
166,651
147,199
166,651
0
0
- Refer to 'How we calculate our carbon emissions' on https://www.nab.com.au/about-us/social-impact/environment/climate-change.
- The Group reports its energy and GHG data based on operational control.
- Energy consumption data is captured through utility billing; meter reads or estimates.
- The Group has applied the latest emission factors available at the time of reporting to the current year. Refer to methodology documents on the
Group website at https://www.nab.com.au/about-us/social-impact/environment/climate-change for a full list of the emissions factor sources. Prior
year figures reflect the emissions reported in that year, unless otherwise stated. UK-based emissions were calculated using factors provided by the
UK Department for Business, Energy & Industrial Strategy.
- Intensity ratio calculations have been calculated using location-based emission factors.
- The financial intensity metrics in Table 1 use an activity data numerator which is reported for the Group’s environmental reporting year (1 July
2019 - 30 June 2020) and a financial metric denominator which is reported for the Group’s financial year (1 October 2019 - 30 September 2020).
This is to ensure that the Group uses metrics which are publicly available as much as possible and because of the difference in the Group's
environmental reporting and financial years.
(1) This data is an extract of the Group’s full energy and GHG emissions inventory data to satisfy SECR requirements. A full set of the Group’s assured energy use
and emissions data is available in the Group’s 2020 Sustainability Data Pack.
(2) The Group has used ‘Underlying profit’ as a financial metric (rather than other financial measures of profit or economic activity) for normalisation of its
environmental performance as this allows for meaningful comparison to prior years’ data and to financial intensity measures used in the Group's Sustainability
Data Pack and CDP disclosures due to the nature of its underlying business activities.
Governance
The Board retains ultimate oversight for Environmental,
Social and Governance (ESG) risks and issues, including
climate change.
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. It 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 & Compliance
Committee (BRCC) receives periodic reports on climate risk,
regulatory developments and other related matters that fall
under its charter, particularly matters such as emerging risk,
risk appetite, scenarios and stress testing.
In the 2020 financial year, the Board incorporated climate
change into its development agenda. This training covered
information about: (i) the global carbon budget; (ii) the role
of transition pathways in achieving the low-carbon
transition and Paris Agreement alignment; and (iii) the
changing regulatory and supervisory response to climate
change risk.
Risk Management
ESG risks, including climate change, are identified,
measured, monitored, reported and overseen in accordance
Annual Financial Report 2020
43
REPORT OF THE DIRECTORS
OTHER MATTERS (CONTINUED)
with the Group’s Risk Management Framework (as
described in the Group’s Risk Management Strategy).
During the 2020 financial year, climate risk was further
integrated into the Group's Risk Appetite Statement.
Sustainability Risk(1) was added as a material risk category
within the Risk Management Strategy, effective in the 2021
financial year.
Two key risk committees are involved in the oversight of
climate-related risk:
• the Group Non-Financial Risk Committee – which has
oversight of non-financial risks, including climate-related
risks, and the Group’s environmental performance
• the Group Credit and Market Risk Committee – which has
oversight of 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, BRCC
and the 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,
including climate-related commitments.
Updates on implementation of the Group's climate change
strategy are reported periodically by management to
executives and the Board.
In the 2020 financial year, the Group’s annual Risk
Awareness training included a climate risk module to help
colleagues understand:
• highlights from the latest climate science
• the goals of the Paris Agreement
• the key elements of the TCFD’s framework for managing
climate risk
• actions being taken by the Group to address climate
change.
The training also provided examples of climate-related
physical and transition risks to help colleagues understand
the impacts of climate change on our business, customers
and the communities in which the Group operates.
The Group’s phased review of credit risk policy settings for
carbon intensive, climate sensitive and low-carbon sectors
has been proceeding more slowly than originally planned
due to the increased regulatory requirements for COVID-
related stress testing and the need to divert resources into
customer facing areas to support customers during the
pandemic. The Group's phased review 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(2) and
physical risk(3); (ii) customer strategies and plans and their
alignment to the Paris Agreement temperature goals; (iii)
industry trends; and (iv) trends in Group exposures to these
sectors. To date, this review process has led to
implementation of the following credit risk policy settings.
The Group 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.
However, to facilitate an orderly transition to a low-carbon
economy the Group continues to support existing
customers across the mining and energy sectors.
The Group had intended to complete a review of the Oil
and Gas sector in the 2020 financial year. This work was
delayed due to COVID-19 and is now scheduled to be
completed in the 2021 financial year.
In the 2020 financial year, the Group continued to
collaborate and participate in climate-related risk activities
and projects to better understand, and implement,
methodologies to assess, and manage, climate risk,
including:
• Principles for Responsible Banking Collective Commitment
to Climate Action (CCCA) – The Group participated in
CCCA working groups. Through the CCCA, the Group has
committed to align its lending portfolio to reflect and
finance the low-carbon, climate-resilient economy
required to limit global warming to well-below two
degrees Celsius, striving for 1.5 degrees Celsius. Key
CCCA activities have involved sharing experiences and
methodologies used to date to assess climate impact on
lending portfolios and actions being taken to support
customers’ shift to a low-carbon, climate-resilient
economy. The Group also submitted its first annual
return to UNEP FI reporting on progress in meeting its
CCCA commitments. Further detail is available on page
29 of the Group’s 2020 Sustainability Report.
• Energy Transitions Hub (the Hub) – The Group continued
to work with the University of Melbourne with the goal
of developing a process to overlay physical climate risk
information on the Group’s lending portfolio for scenario
analysis. The pilot process was initially used in the 2019
financial year to examine the potential impact of climate
scenarios on the Group’s Australian retail mortgage
portfolio with a focus on the impact that cyclones may
have under different levels of warming. This work was
(1) Sustainability risk, which includes climate risk, is defined as the risk that ESG events or conditions negatively impact the risk and return profile, value or
reputation of the Group or its customers and suppliers.
(2) 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.
(3) 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.
44
National Australia Bank
OTHER MATTERS (CONTINUED)
delayed in the 2020 financial year, due to COVID-19, but
is expected to be completed in the 2021 financial year.
• Climate Measurement Standards Initiative (CMSI) – The
Group joined and supported this cross-sector industry
initiative which formed in the 2020 financial year. The
CMSI includes representatives from across the banking,
insurance and investment sectors alongside pre-eminent
Australian climate scientists working together under the
auspices of the National Environmental Science
Program’s Earth Systems and Climate Change (ESCC) Hub,
professional services firms and finance sector industry
bodies. The objectives of the CMSI are to provide open-
source voluntary guidelines for financial institutions
(banks, insurers and asset managers and owners) with
consistent scientific and technical guidance on how to
assess the physical risk of climate-related damage to
homes, buildings and other critical infrastructure arising
from extreme weather events – such as tropical cyclones,
bushfires and floods. The CMSI focused on supporting
implementation of the TCFD recommendations in
addition to better understanding the financial system’s
exposures to climate-related risks. Two key reports were
published in the 2020 financial year, including a finance
report and a science report which are available at:
https://www.cmsi.org.au/reports
• Climate-KIC Australia (Climate-KIC) – The Group has been
working with Climate-KIC and a number of other
organisations, including government agencies and
industry bodies on an Adaptation Finance Project. This
project is exploring how the financial sector can invest in
climate adaptation to deliver commercial returns and
greater climate resilience with a view to developing
insights into the creation of a scalable approach to
adaptation finance. In 2020, the project completed a
report that shares insights and makes recommendations
for current and future projects focused on addressing the
adaptation finance gap. This work has contributed to the
adaptation finance discourse in Australia – the report is
available at: https://climate-kic.org.au/our-projects/
adaptation-finance-project/
• Resilience Investment Vehicle (RIV) – The Group has been
working with IAG, CSIRO and a number of other
government agencies, industry groups and not-for-profits
on a RIV. This project is exploring how the financial
sector can invest in climate adaptation to deliver
commercial returns and greater climate resilience with a
view to developing insights on the creation of a scalable
approach to climate adaptation finance.
• Australian Industry Energy Transitions Initiative (AIETI) –
The Group joined this collaborative industry initiative
supported by ClimateWorks Australia and Climate-KIC in
the 2020 financial year. The AIETI aims to accelerate
informed action by Australian industry towards the
achievement of net zero emissions in hard-to-abate
sectors by 2050 while managing the transition to thrive
in a decarbonised global economy. The AIETI will focus
on five supply chains critical to achieving the Paris
Agreement temperature goals (‘well-below two degrees
REPORT OF THE DIRECTORS
Celsius and striving for 1.5 degrees Celsius’) given their
significance to global emissions and their relatively
higher abatement costs. The supply chains are:
– Iron and steel
– Aluminium
– Liquefied natural gas (LNG)
– Other metals (lithium, cobalt, etc)
– Chemicals, in particular plastics, fertilisers and
explosives.
• United Nations Environment Program Finance Initiative
(UNEP FI) Phase 2 pilot project – The Group worked with
38 other UNEP FI member banks on methodologies and
processes to implement the recommendations made by
the TCFD. The Phase 2 work has involved examining a
range of scenario tools to help increase the Group’s
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.
Work also included:
– A focus on examining the availability of climate-
relevant asset-level data to advance and refine the
Phase I methodologies for physical risk and
opportunity assessment.
– Piloting the use of correlation analysis to help banks
understand how climate-related hazards such as
floods, droughts and wildfires can impact bank
portfolios via property values, farm revenues, loan
delinquency rates, mortgage approval rates and other
indicators.
– Developing sectoral heat maps for high-level physical
and transition risk analysis (refer to case study:
Physical and transition risk heat mapping immediately
below) to provide an early indication of where higher
risks may lie within a lending portfolio.
– Development of a transition risk web tool by Oliver
Wyman and UNEP FI (available at: https://
www.climatetransitioncheck.com/#/home).
– Examining additional scenarios including a disorderly
transition.
– Exploring the latest regulatory developments.
In addition, participating banks, including NAB, explored
climate risk governance and disclosure best practices.
Further details of the Phase 2 project outputs can be found
at: https://www.unepfi.org/banking/tcfd/
Case study: Physical and transition risk heat mapping
Heat mapping can provide valuable high-level insights
about whole of portfolio exposure to climate risk. It can
quickly help identify where higher risk may lie within a
portfolio for deeper-dive analyses of risk by other
methodologies, which require application at a sectoral or
sub-sectoral level.
In the UNEP FI Pilot Phase 2 project, a collaborative exercise
was undertaken to produce high-level heat-maps for both
physical and transition risk. This supported discussion
between participating banks on the range of ways through
which climate risk can manifest.
Annual Financial Report 2020
45
REPORT OF THE DIRECTORS
OTHER MATTERS (CONTINUED)
For physical climate risk, the Phase 2 banks – including the
Group – discussed the interlinkages between vulnerability,
hazards and loan portfolio performance and developed a
shared view of the climate vulnerability of six sectors to
physical climate risk hazards.
The vulnerability rating was a function of three factors –
vulnerability, hazard and exposure. Vulnerability(1) and
exposure(2) vary significantly by sector and sub-sector and
the hazard(3) component is location-specific. The collective
physical risk heat mapping exercise was completed for six
sectors using eight vulnerability indicators as follows:
• reliance on natural resources
• reliance on secure energy supplies
• reliance on climate sensitive supplies
• reliance on secure transport routes
• reliance on efficient operation of assets and processes
• climate sensitivity of market demand
• potential for environmental and social impact
• reliance on labour health and productivity.
Heat mapping climate-related vulnerability can help capture
both direct and indirect physical impacts on banks' lending
portfolios from a changing climate, accounting for chronic
(incremental) changes as well as extreme events. The
hazard indicators were selected to provide a comprehensive
coverage of potential risk areas and to capture the extent of
the physical climate-related factors that might affect the
value chains of lending portfolios. Sub-sectors were
assigned vulnerability indicator scores of Low, Medium, or
High for all eight indicators, reflecting their relative
importance to the sub-sector. An example of a sector
analysed – power generation – is shown below.
Figure 1: Example of physical risk heat map – power
generation
Further details can be found in the Phase 2 Project Report,
Charting a New Climate(4), published by UNEP FI and
Acclimatise, in October 2020.
The Phase 2 UNEP FI project also created collective heat
maps for transition risk across sectors and sub-sectors. See
an example of a cross-sectoral heat map produced in Figure
2. An ambitious low-carbon transition scenario for meeting
the Paris Agreement goal of keeping warming well below
two degrees Celsius was selected for heat mapping so UNEP
FI and the participating banks could discuss the major
impacts of such a scenario on the global economy, given
that some sectors are likely to require material
transformation to remain relevant in a low-carbon future.
A broad set of sectors were explored to provide an
indication of the widespread effects (both primary and
secondary) that an aggressive transition is likely to have
across the economy (see Figure 2 below) considering four
key risk factors – direct and indirect emissions cost, low
carbon 'capex' and revenue. The outcome of the analysis
highlighted that in an aggressive low carbon transition
scenario even low-carbon emitting sectors may be affected
by the transition (e.g. through their supply chains,
technological shifts, or changes in market demands).
The collective heat map outcomes were also useful as a
feed into the transition risk loss methodology because they
provided climate risk sensitivities and ratings for each
sector/sub-sector analysed with the UNEP FI-Oliver Wyman
Transition Check Tool(5).
Figure 2: Sector level heat map – Absolute (sectors
compared to each other).
Source: Acclimatise’s HeatMapR analytics
(www.acclimatise.uk.com) in Charting a New Climate, UNEP
FI and Acclimatise, 2020.
Source: UNEP FI, (2020) Beyond the Horizon: New Tools and
Frameworks for transition risk assessments from UNEP FI’s
TCFD Banking Program (https://www.unepfi.org/
wordpress/wp-content/uploads/2020/10/Beyond-the-
Horizon.pdf)
(1) Vulnerability in the lending portfolio heat mapping exercise was defined as the propensity of an investment in a particular sector/sub-sector to be adversely
affected by climate variability and change (Definition from the IPCC Fifth Assessment Report).
(2) Exposure is defined as 'the presence of people, livelihoods, species or ecosystems, environmental functions, services, and resources, infrastructure, or economic,
social, or cultural assets in places and settings that could be adversely affected’ (Definition from the IPCC Fifth Assessment Report).
(3) Hazard is defined as 'climate-related physical events or trends, or their physical impacts’ that may cause ‘loss of life, injury, or other health impacts, as well as
damage and loss to property, infrastructure, livelihoods, service provision, ecosystems and environmental resources’ (Definition from the IPCC Fifth Assessment
Report).
(4) https://www.unepfi.org/publications/banking-publications/charting-a-new-climate/
(5) https://www.climatetransitioncheck.com/#/home
46
National Australia Bank
OTHER MATTERS (CONTINUED)
The heat mapping process was found to be useful for
management of climate risk in three key areas – risk
identification, strategic prioritisation of transition risk for
deeper analysis and for risk assessment when considering
sensitivities to various risk drivers.
Case study: Helping customers decarbonise
The Group is connected to all parts of the economy through
its lending and other banking activities and considers it has
an important role to play in financing the low-carbon
transition. Therefore, in the 2020 financial year, the Group
sought to calculate the Scope 3 emissions associated with
key segments of its lending portfolio – residential
mortgages, commercial real estate (office and retail),
agriculture, power generation and resources (including
coal, oil and gas). The objective was to better understand
what might be required to align the Group’s lending
portfolio to the temperature goals of the Paris Agreement
and a net zero emissions economy by 2050.
Estimations of financed emissions indicate the indirect
impact the Group could have on achieving environmental
outcomes in the real economy as a result of the Group’s
financing activities and highlights the crucial role financing
can play in achieving environmental outcomes.
This quantitative estimate of financed emissions is limited to
the Group’s Australian customers and is based on measured
and estimated emissions data. A description of the
methodology used for this estimate is available at: https://
www.nab.com.au/about-us/social-impact/environment/
climate-change.
Calculating Scope 3 emissions associated with its financing
activities has helped the Group to understand the relative
carbon intensity of key segments in its Australian lending
portfolio and establish a baseline from which the Group can
monitor the alignment of its portfolio over time to the
temperature goals of the Paris Agreement. This is the first
estimate the Group has made of financed emissions, in
addition to estimates of emissions associated with its
Australian project finance power generation portfolio. The
aggregated estimate for the five selected segments of the
Group’s Australian lending portfolio indicates that the
Group lends approximately $23,320 to these sectors in
Australia for every tonne of GHG emissions released to the
atmosphere by customers in these industry segments.
The data (see Figure 3) indicates that of the five segments
for which financed emissions have been estimated(1),
relative to Exposure at Default (EAD), power generation is
the most carbon intensive at ~$550/tCO2-e, followed by
resources (including coal, oil and gas) at ~$2,200/tCO2-e,
followed by agriculture at ~$6,800/tCO2-e, residential
mortgages at ~$46,000/tCO2-e and commercial real estate
(retail and office) at ~$189,600/tCO2-e. Of the absolute
emissions estimated for the five segments, 90.2% are
associated with an aggregate of residential mortgages
REPORT OF THE DIRECTORS
(45.8%); agriculture (23.9%) and power generation (20.5%).
The remaining (9.8%) are primarily associated with
resources (including coal, oil and gas) (9.6%) and
commercial real estate (office and retail) (0.2%). For the
20.5% of power generation-related emissions, coal and gas-
fired power generation accounts for 89% of estimated GHG
emissions attributable to the Group.
Figure 3: Dollars lent (EAD) per tonne of emissions (tCO2-e)
generated: Initial sector assessment
Further to developing the financed emissions estimate, the
Group commissioned ClimateWorks Australia to apply two
modelled scenarios from their Decarbonisation Futures
report(2) to the five selected segments of NAB’s Australian
lending portfolio. The selected scenarios included a two
degrees Celsius ('2C Innovate') and 1.5 degrees Celsius
('1.5C All-in') scenario. They provide two decarbonisation
pathways to achieve a net zero lending portfolio by 2050, in
alignment with the Paris Agreement. The Group’s next step
is to understand the suite of actions underlying these
scenarios that the Group’s customers may be able to
undertake to make the low-carbon transition.
Figure 4: Indicative Australian lending portfolio emissions
trajectories
The two low-carbon pathways illustrated by these scenario
trajectories (see Figure 4) represent aggregated emissions
(1) Key assumptions and information notes about the methodology used to estimate the financed emissions are available in the Group’s 2020 Sustainability Data
Pack. The lower the dollar ($) value per tCO2-e, the higher the carbon intensity. The financed emissions numbers are as at 31 August 2020.
(2) https://www.climateworksaustralia.org/wp-content/uploads/2020/04/Decarbonisation-Futures-March-2020-full-report-.pdf
Annual Financial Report 2020
47
REPORT OF THE DIRECTORS
OTHER MATTERS (CONTINUED)
trajectories for the five segments included in the financed
emissions estimate. Importantly, the Group recognises that
each individual lending portfolio segment is likely to follow
a different low-carbon transition pathway, as this is
dependent on the technology opportunities that customers
have available, to both reduce and remove or capture
carbon emissions.
As an outcome of the financed emissions and low-carbon
scenario work, the Group has committed to work closely
with 100 of its largest greenhouse gas emitting customers
to support them in developing or improving their low
carbon transition plans by 2023.
Climate Change Strategy
In the 2020 financial year, the Group refreshed its strategy. A
key pillar of the strategy is a long-term sustainable
approach consisting of:
• commercial responses to society's biggest challenges
• resilient and sustainable business practices
• innovating for the future.
The Group’s commitment to address climate change sits
within this context. The Group is focused on supporting the
low-carbon transition and working with communities to
ensure they are more resilient to climate change. Key
priorities are clean energy and environmental finance to
assist the low-carbon transition, a just transition and climate
adaptation to help the Group's customers to build resilience
to climate change. The Group is developing key metrics to
track its performance against each priority area and to
measure how the Group is contributing to addressing the
overall societal challenge.
The Group identifies and prioritises current and future
business opportunities, including those related to climate
change (for example, financing low-carbon technology like
renewable power generation or water security projects
which help deliver resilience to drought). 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
• supporting the Group's customers through the low-
carbon transition
• investing in organisational capability to identify and
respond to climate change risks and opportunities.
The Group is committed to playing an active role in
addressing climate change by providing 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(1) of: (i) $23.1 billion against the Group's
commitment to provide $35 billion to support green
infrastructure, capital markets and asset finance by 2025;
and (ii) $19.4 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. In the 2020 financial
year, BNZ also made a commitment to provide NZ$10
billion in sustainable financing by 2025(2).
• Delivering on the Group's commitment to source 100%
of its electricity from renewable electricity by 2025, using
on-site solar generation at the Group’s main data centre,
a power purchase agreement for Victorian retail sites,
and contracts for renewable energy certificates. The
Group has entered into a new contract for the supply of
additional Australian renewable energy certificates from
late 2020 until 2023 to help the Group meet its RE100(3)
commitment. This is expected to increase the Group’s
proportion of renewable energy to 20% in the 2021
environmental reporting year and to ~65% by the 2023
environmental reporting year. The proportion of
electricity sourced which was renewable electricity
increased from 3% in the 2019 environmental reporting
year to 7% in the 2020 environmental reporting year.
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 2020 financial year have included:
• Providing a further $800 million in financing for
renewable energy projects, taking the cumulative value
of financing provided for renewable energy projects
since 2003 to $10.2 billion.
• Participating in 12 public green, social and sustainability
bond deals, one sustainability linked US Private
Placement (USPP), two Climate Bond Certified green
loans, and two sustainability-linked loans including a
range of Australian and global firsts:
– Acting as a Joint Lead Manager on the Mitsubishi UFJ
Financial Group (MUFG Group) Total Loss Absorbing
Capital (TLAC) A$500 million Green Bond which is the
first Australian dollar TLAC format green bond, and
the first offshore Financial Institution green bond in
Australian dollars.
– Acting as a Lender and Joint Lead Sustainability
Structuring Arranger on the Coriance Sustainability-
linked Loan. Coriance is First State Infrastructure’s
French district heating company. Three key
sustainability performance indicators will be tracked
as part of the loan including CO2-e emissions per unit
(1) Represented as a cumulative amount of new environmental finance since 1 October 2015. Refer to the Group's 2020 Sustainability Data Pack for a further
breakdown of this number and reference to how the environmental financing commitment is calculated.
(2) BNZ’s sustainable financing commitment applies to the period from 1 October 2020 to 30 September 2025. The environmental financing component of BNZ's NZ
$10 billion sustainable financing commitment will contribute to the Group’s $70 billion environmental financing commitment.
(3) RE100 is a global corporate leadership initiative bringing together businesses committed to 100% renewable electricity.
48
National Australia Bank
OTHER MATTERS (CONTINUED)
sold, frequency of accidents, and the share of
renewable energies in Coriance’s production mix.
– Acting as a Joint Lead Agent & ESG Structuring Agent
on the Sydney Airport's A$100 million 20-year U.S.
private placement (USPP) ESG-linked tranche. This
sustainability-linked USPP is an Australian and world
first. It creates a link between the Airport’s
sustainability performance and funding costs, with a
potential margin benefit for improvement in
sustainability performance and a margin penalty for a
deterioration in sustainability performance.
– BNZ acted as a Joint Lead Manager on the Kāinga Ora
(Housing NZ) 15-year NZ$500 million WellBeing bond.
At the time of issuance, this was New Zealand’s
longest tenor and largest Sustainability Bond. Its
proceeds are earmarked for green buildings and
affordable housing.
– BNZ acted as a Joint Lead Manager on Auckland
Council’s 30-year NZ$500 million green bond. At the
time of issuance, this was the longest bond in the New
Zealand market and was also a record size and tenor
for the green bond category. Proceeds are earmarked
towards projects which benefit the environment, such
as efficient buildings, waste management, and low
carbon transport.
– BNZ was also a Joint Lead Manager on Mercury
Energy’s inaugural green bond in 2020, which raised
NZ$200 million primarily earmarked for financing the
construction of the Turitea wind farm.
• BNZ joined a collaborative initiative coordinated by the
Sustainable Business Network in New Zealand and
involving government agencies and corporates to
develop a climate action tool kit for SMEs(1). The climate
action toolkit will support BNZ to meet its target to have
50% of BNZ SME customers measuring and reporting on
their emissions footprint by 2025.
Metrics and targets
Tracking the Group's portfolio alignment
In addition to the Group’s environmental financing
commitment, the Group is monitoring its exposure to
carbon intensive and low-carbon sectors to track
decarbonisation in its lending portfolio in line with portfolio
transition commitments. Some of this data is reported to
investors in half year and full year financial results
presentations, as well as in the Group's annual Sustainability
Report.
In the 2019 financial year, the Group announced two
portfolio transition commitments:
• 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.
• Capping thermal coal mining exposures at 2019 levels
and reducing thermal coal mining financing by 50% by
REPORT OF THE DIRECTORS
2028, intended to be effectively zero by 2035, apart from
residual performance guarantees to rehabilitate existing
coal assets. The Group now expects its thermal coal
mining exposure to reduce by 50% by 2026 (from 2019
financial year levels), and to be effectively zero by 2030.
In the 2020 financial year, the Group decreased its
thermal coal mining exposure by 11.4%.
As at 30 September 2020, the Group's exposures (as EAD) to
key low-carbon and carbon intensive sub-sectors were as
follows:
• renewable energy represented 71.5% of the Group’s
power generation portfolio (up from 69.4% at
30 September 2019)
• coal-fired power generation represented 1.1% of the
Group’s power generation portfolio (down from 1.7% at
30 September 2019)
• thermal coal mining exposure decreased from $0.76
billion at 30 September 2019 to $0.67 billion at
30 September 2020 and
• oil and gas exposure decreased from $3.73 billion at
30 September 2019 to $2.74 billion(2) at 30 September
2020.
Operational decarbonisation
In the 2020 financial year, the Group reached the end of its
5-year 2020 environmental performance targets and made
progress towards its 2025 science-based emissions
reduction target. The Group’s performance against its
energy and science-based emissions reduction targets was
as follows:
• a 5% reduction in Group energy use by 30 June 2020 (the
Group achieved a 15% reduction in energy against a
2016 baseline)
• a 51% science-based emissions reduction target by 2025
(the Group achieved a 41% reduction in the Scope 1 and
2 GHG emissions included in its science-based target as
at 30 June 2020 against a 2016 baseline).
As all of the Group's 2020 environmental performance
targets came to an end and were met in the 2020
environmental reporting year, the Group set new 5-year
environmental performance targets through to the end of
June 2025. These targets included a new energy reduction
target to reduce Group-wide energy consumption by 30%.
Further information about the Group’s environmental
performance, 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 2020 Annual Review and 2020 Sustainability Report
available online at www.nab.com.au/annualreports.
Detailed GHG and environmental performance data is also
available in the Group's 2020 Sustainability Data Pack.
(1) https://sustainable.org.nz/climate-action-20-25/
(2) A significant contributor to the reduction since 30 September 2019 is AUD currency appreciation of USD denominated exposures and lower mark-to-market
positions of treasury related products in the Oil and Gas extraction sector.
Annual Financial Report 2020
49
REPORT OF THE DIRECTORS
OTHER MATTERS (CONTINUED)
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 2018 (Cth) came into effect and NAB is
reporting subject to this Act for the first time in 2020.
The Group has prepared a Modern Slavery Act statement
which sets out actions taken by the Group during the 2020
financial year to ensure that its business operations, and its
supply chain, are free from slavery and human trafficking.
This statement is available online at www.nab.com.au/
modernslaverystatement in accordance with both the UK
Modern Slavery Act and the Modern Slavery Act 2018 (Cth).
50
National Australia Bank
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 2020 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 2020. The fees paid or due and payable to
EY for these services during the year to 30 September 2020 are as follows:
Total Audit services
Comfort letters
Regulatory
Non-regulatory
Total Audit-related services
Taxation-related services
Non-audit services
Total audit services, audit-related, taxation-related and non-audit services
Services for non-consolidated trusts of which a Group entity is a trustee, manager or responsible entity and non-consolidated
Group superannuation funds
Total remuneration paid to the external auditor
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 2020 amount to $23.6 million.
ASIC disclosures
Group
2020
$’000
17,134
793
5,243
362
6,398
60
32
23,624
3,274
26,898
The Joint Parliamentary Committee inquiry into the Regulation of Auditing in Australia highlighted the disparity and lack of
comparability of the external auditor fee remuneration disclosure for ASX Listed Corporates. ASIC are proposing four categories
to define external auditor services as the basis of the proposed future disclosure requirements as set out below:
Consolidated and non-consolidated entities
Audit services for the statutory financial report of the parent and any of its' controlled entities
Assurance services that are required by legislation to be provided by the external auditor
Other assurance and agreed-upon-procedures services under other legislation or contractual arrangements where there is
discretion as to whether the service is provided by the external auditor or another Professional Accounting firm
Comfort letters
Regulatory
Non-regulatory
Non-consolidated
Other services
Total remuneration paid to the external auditor
Group
2020
$'000
17,134
299
793
4,905
317
2,754
696
26,898
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 2020 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 2020 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 2020 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.
Annual Financial Report 2020
51
REPORT OF THE DIRECTORS
AUDITOR’S INDEPENDENCE DECLARATION
52
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/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 2020, 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 LowePartner11 November 2020 DIRECTORS’ SIGNATURES
This report of directors signed in accordance with a resolution of the directors:
REPORT OF THE DIRECTORS
Philip Chronican
Chairman
11 November 2020
Ross McEwan
Group Chief Executive Officer
11 November 2020
Annual Financial Report 2020
53
REPORT OF THE DIRECTORS
REMUNERATION REPORT
Letter from the People & Remuneration Committee Chairman, Anne Loveridge
Dear Shareholder,
The Group has maintained a clear focus over the past year
in supporting our customers, colleagues and the
community while taking decisive action to strengthen our
business and ensure NAB remains a safe bank for the years
ahead. Bushfires, drought and a global pandemic only
strengthened our resolve to meet and exceed expectations
as a financial services company and one of Australia’s
largest economic contributors.
During 2020, the structure of our business has been
reorganised and our leadership strengthened. NAB
welcomed our new Group Chief Executive Officer (Group
CEO), Ross McEwan, who has led the refresh of our long-
term strategy and implemented a new operating model to
execute with excellence. We have renewed the Executive
Leadership Team through the appointment of four new
Group Executives and a change in position for one other.
You can read more about the Executive Leadership Team in
Section 1.
The Group CEO and Executive Leadership Team have
demonstrated exemplary leadership in supporting our
customers, communities and colleagues through the
unprecedented challenges during 2020. As a Board, we are
confident that we are well positioned to lead through this
volatile environment. The Executive Leadership Team
remains focused on the execution of our strategy, serving
our customers well and building a responsible, secure
business that will generate sustainable growth and returns
to our shareholders.
Remuneration in 2020
The Executive Leadership Team and the Board took early
and decisive action on remuneration outcomes for 2020 to
reflect the challenges faced by our customers, shareholders
and the community. Remuneration outcomes were reduced
through:
• A 20% reduction in non-executive director base fees for
the period 1 April 2020 to 30 September 2020.
• A 20% reduction in fixed remuneration volunteered by
the Group CEO for the period 1 April 2020 to
30 September 2020.
• The decision that the Group CEO and other Executives
would not be awarded any Annual Variable Reward
for 2020.
There were no changes to the Executive remuneration
framework for 2020. Similarly, there were no increases to
non-executive director fees or Executive fixed remuneration
for 2020, other than for Executives who had their
accountabilities increased. Details of all remuneration
matters for the Executive Leadership Team are provided in
the Remuneration report.
54
National Australia Bank
Remuneration in 2021
A modest range of changes within the Group's
remuneration framework will be applied in 2021 to:
• ensure performance measures align to the refreshed
strategy
• simplify the calculation of annual variable reward
• enhance governance through clearer application of
accountability and remuneration consequences.
The Board will continue to explore potential improvements
to the remuneration framework to ensure Executive
remuneration is aligned with our refreshed strategy,
changes in regulatory requirements and takes shareholder
outcomes into consideration. We will balance these
requirements within an effective remuneration framework
that appropriately rewards our Executive Leadership Team.
As a Board, we are proud of the way the NAB team has
responded to such a confronting year by adopting new
ways of working, enabling more than 90% of colleagues to
work from home and maintaining resilience in technology
and operations for our customers. I extend my thanks to all
colleagues who have remained focused on serving our
customers throughout 2020.
On behalf of your Board’s People & Remuneration
Committee, I would like to invite you to read the full
Remuneration report in detail which will be presented to
shareholders for adoption at our 2020 Annual General
Meeting.
Anne Loveridge
People & Remuneration Committee Chairman
11 November 2020
Contents
Section 1 - Summary
Section 2 - Executive remuneration framework
Section 3 - Remuneration governance
Section 4 - Remuneration outcomes
Section 5 - Executive statutory remuneration
disclosures
Section 6 - Non-executive director remuneration
Section 7 - Loans, other transactions and other
interests
55
59
64
67
71
78
81
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
Section 1 - Summary
1.1 Key Management Personnel in 2020
The list of NAB's Key Management Personnel (KMP) is assessed each year and comprises 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. There were several changes to KMP during 2020 arising from
the change in the organisational structure of the business and strengthening of the Executive Leadership Team. KMP during 2020
were:
Name
Non-executive directors
Position
Philip Chronican(1)
David Armstrong
Kathryn Fagg
Peeyush Gupta
Anne Loveridge
Geraldine McBride(2)
Douglas McKay
Simon McKeon
Ann Sherry
Former non-executive directors
Ken Henry
Anthony Yuen
Group CEO
Ross McEwan
Executives
Sharon Cook(3)
Shaun Dooley
Susan Ferrier(3)
David Gall(3)
Nathan Goonan
Andrew Irvine
Gary Lennon(4)
Angela Mentis(5)
Rachel Slade(6)
Patrick Wright(3)
Former Executives
Mike Baird(7)
Anthony Healy(8)
Chairman / Interim Group Chief Executive Officer and Chairman-elect
Director
Director (from 16 December 2019)
Director
Director
Director
Director
Director (from 3 February 2020)
Director
Chairman (to 14 November 2019)
Director (to 18 December 2019)
Group Executive, Legal and Commercial Services
Group Chief Risk Officer
Group Executive, People and Culture
Group Executive, Corporate and Institutional Banking
Group Executive, Strategy and Innovation (from 1 June 2020)
Group Executive, Business and Private Banking (from 1 September 2020)
Group Chief Financial Officer
Managing Director and CEO of Bank of New Zealand
Group Executive, Personal Banking
Group Executive, Technology and Enterprise Operations
Chief Customer Officer - Consumer Banking (to 15 April 2020)
Chief Customer Officer - Business and Private Banking (to 30 April 2020)
Group Chief Executive Officer and Managing Director (from 2 December 2019)
Part year
Term as KMP
Full year
Full year
Part year
Full year
Full year
Full year
Full year
Part year
Full year
Part year
Part year
Full year
Full year
Full year
Full year
Part year
Part year
Full year
Full year
Full year
Full year
Part year
Part year
Part year
Part year
Executives acting on an interim basis
Michael Saadie(3)(9)
Anthony Waldron(9)
Acting Group Executive, Business and Private Banking (from 1 May to 31 August 2020)
Acting Chief Customer Officer - Consumer Banking (from 16 April to 31 May 2020)
(1) Philip Chronican was appointed as the interim Group Chief Executive Officer on 1 March 2019 and held that position until 14 November 2019. Effective
15 November 2019 he transitioned to Chairman of the Board.
(2) On 6 October 2020, it was announced that Ms Geraldine McBride will not be standing for re-election at NAB's 2020 Annual General Meeting.
(3) The positions held by Sharon Cook, Susan Ferrier, David Gall, Patrick Wright and Michael Saadie had different titles during 2020.
(4) Gary Lennon was Group Chief Financial Officer excluding the period from 15 November to 1 December 2019 when he was the acting Group Chief Executive
Officer.
(5) All matters relating to the remuneration of Angela Mentis 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.
(6) Rachel Slade held the KMP position of Chief Customer Experience Officer until 31 May 2020.
(7) Mike Baird ceased to be a KMP on 15 April 2020 and an employee of NAB and the Group on 31 May 2020.
(8) Anthony Healy ceased to be a KMP and an employee of NAB and the Group on 30 April 2020.
(9) Michael Saadie and Anthony Waldron returned to their permanent role at the end of the acting period.
Annual Financial Report 2020
55
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
1.2 Summary of key outcomes
Overall remuneration outcomes
In April 2020, the Board took early and decisive action to strengthen our business and support customers through COVID-19. We anticipated
COVID-19 would have a significant impact on customers and acted quickly to provide immediate and responsible support. The Board recognised
the uncertain economic outlook arising from COVID-19 and bolstered NAB's capital base and reduced the 2020 interim and final dividends.
As a responsible business, we also recognised the importance of our remuneration principles (see Section 2.1) and ensuring clear alignment
between remuneration outcomes and customer, shareholder and community experiences by reducing Executive and Board remuneration. In April
2020, remuneration outcomes were reduced by:
• A 20% reduction in non-executive director base fees for the period 1 April 2020 to 30 September 2020.
• A 20% reduction in fixed remuneration volunteered by the Group CEO for the period 1 April 2020 to 30 September 2020.
• The decision that the Group CEO and other Executives would not be awarded any Annual Variable Reward for 2020.
Fixed remuneration (FR)
• No FR increases were received by Executives, except for Rachel Slade on appointment to the Group Executive, Personal Banking role on 1 June
2020. The increase reflected the expanded responsibilities of the position and appropriate pay relativities. Rachel Slade was the Chief
Customer Experience Officer prior to this appointment.
Annual Variable Reward (VR) outcomes
Three-year overview of Executive VR Outcomes
The Group CEO and other Executives have not received any Annual VR
for 2020. The Executives' aggregate maximum Annual VR opportunity
was $15 million ($10 million at target opportunity). This is the second
year of no Annual VR for Executives.
Position
Group CEO
Other
Executives
% Maximum Annual VR
2020
0%
0%
2019
0%
0%
2018*
12%
0% - 70%
See Section 4.1 for details on the Group's actual performance for 2020
and Section 2.3 for details on how the Annual Variable Reward Plan
works.
Long-term variable reward outcomes
* The amount shown has been adjusted for deferred variable reward
amounts that were later forfeited by Executives on leaving the Group in
accordance with the terms of the award or by the Board exercising its
discretion to forfeit deferred variable reward.
Long Term Incentive (LTI) awards granted in December 2014 and December 2015 vested in 2020. The outcome of these awards reflects the
Group's Total Shareholder Return (TSR) performance over defined periods between November 2014 to November 2019 relative to certain peer
groups.
Performance period
Number of Executives with vested award
% of award vested
% of award lapsed
2014 LTI
5 years
5
34.5%
65.5%
2015 LTI
4 years
3
37.6%
62.4%
See Section 4.4 for further details on these awards and other vested and unvested long-term variable rewards.
A 2020 long-term variable reward, that will be subject to testing in December 2024, will be granted to Executives to align their interests with the
interests of shareholders over the long term. See Section 2.4 for more information on this award.
Board fees
• The Board Chairman and each of the non-executive directors took a 20% reduction in their base fees from 1 April 2020 to 30 September 2020.
• No increase to non-executive director Board or Committee fees.
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 position on an interim basis (Michael Saadie and Anthony Waldron).
The Group Executive, Legal and Commercial Services, Group Chief Risk Officer, Group Executive, People
and Culture, and Group Executive, Strategy and Innovation.
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.
56
National Australia Bank
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
1.3 Executive appointments
The following table outlines the remuneration arrangements for Executive appointments made during 2020. Further details are
provided in Section 5.1.
Executive
Appointment arrangement
Ross McEwan, Group
• Annual FR of $2.5 million with an Annual VR target of 100% of FR and Long Term Variable Reward (LTVR) of 130%
CEO
of FR.
• Ross' FR was reduced by 20% for the period 1 April 2020 to 30 September 2020.
• Relocation benefits provided to support moving to Melbourne.
Susan Ferrier, Group
• Annual FR of $900,000 with an Annual VR target of 70% of FR and LTVR of 100% of FR.
Executive, People and
Culture
Nathan Goonan, Group
• Annual FR of $900,000 with an Annual VR target of 70% of FR and LTVR of 100% of FR.
Executive, Strategy and
• Nathan was an internal appointment. His prior role was Executive General Manager, Group Strategy and
Innovation
Development.
Andrew Irvine, Group
• Annual FR of $1.2 million with an Annual VR target of 100% of FR and LTVR of 130% of FR.
Executive, Business and
• A commencement award was provided to compensate for the loss of deferred benefits and current year variable
Private Banking
reward on leaving his former employer. The commencement award is subject to Andrew's continued employment,
malus and clawback provisions. The award consists of $630,000 provided in cash, payable in December 2020 and
$2.06 million in restricted shares, scheduled to vest between December 2020 and December 2024.
• Relocation benefits provided to support moving to Melbourne.
Rachel Slade, Group
• Annual FR of $1.2 million with an Annual VR target of 100% of FR and LTVR of 130% of FR.
Executive, Personal
• Rachel was an internal appointment. Her prior role was Chief Customer Experience Officer.
Banking
1.4 Executive exit arrangements
The following table outlines the exit arrangements for Executives who ceased employment with the Group during 2020. Further
details are provided in Section 5.1.
Executive
Exit arrangement
Mike Baird (ceased as an
• A payment in lieu of notice in accordance with his employment contract.
Executive on 15 April
• Unvested 2018 deferred VR was retained in accordance with the terms and conditions of the award and remains
2020 and as an
restricted until November 2022 and subject to the relevant performance hurdles.
employee on 31 May
• Unvested 2017 and 2019 long-term awards were partially retained in accordance with the terms and conditions of
2020)
the relevant awards and remain subject to the relevant performance hurdles and restriction periods.
• Payments in respect of statutory entitlements, career transition services and in recognition of Mr Baird's
contribution to the Group. Half of the payment recognising his contribution to the Group was paid on separation
(and is subject to clawback), with the remaining half deferred and scheduled to be paid incrementally in the period
from November 2021 to 2024. The deferred component is subject to malus and clawback.
• Termination benefits provided were in compliance with the termination benefits regime in the Corporations Act
2001 (Cth).
Anthony Healy (ceased
• A payment in lieu of notice in accordance with his employment contract.
as an Executive and an
• Unvested 2018 deferred VR was retained in accordance with the terms and conditions of the award and remains
employee on 30 April
restricted until November 2022 and subject to the relevant performance hurdles.
2020)
• Unvested 2016, 2017 and 2019 long-term awards were partially retained in accordance with the terms and
conditions of the relevant awards and remain subject to the relevant performance hurdles and restriction periods.
• Forfeiture of NZ General employee shares in accordance with the terms and conditions of the award.
• Payments in respect of statutory entitlements, career transition services and in recognition of Mr Healy's
contribution to the Group. Half of the payment recognising his contribution to the Group was paid on separation
(and is subject to clawback), with the remaining half deferred and scheduled to be paid incrementally in the period
from November 2021 to 2024. The deferred component is subject to malus and clawback.
• Termination benefits provided were in compliance with the termination benefits regime in the Corporations Act
2001 (Cth).
Annual Financial Report 2020
57
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
1.5 Realised remuneration
The table below is a voluntary non-statutory disclosure that shows the realised remuneration each Executive received for the
period in 2020 during which they were an Executive. The amounts shown include fixed remuneration, previous years' deferred
variable reward which vested in 2020, and other equity and cash based awards that vested in 2020. 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 from the statutory remuneration table (in Section 5.1) which
shows the expense for vested and unvested awards in accordance with accounting standards.
2020
Prior years
Fixed
(1) Annual
Total 2020
Vested / paid
(2)
Total realised
Equity
(3)
remuneration
VR cash
remuneration
remuneration
remuneration
forfeited /
Name
Group CEO
$
$
$
Ross McEwan (for part year)
2020
1,837,165
Executives
Sharon Cook
Shaun Dooley
Susan Ferrier
David Gall
Nathan Goonan (for part year)
Andrew Irvine (for part year)
Gary Lennon
Angela Mentis
Rachel Slade
Patrick Wright
2020
2019
2020
2019
2020
2020
2019
2020
2020
2020
2019
2020
2019
2020
2019
2020
2019
903,449
900,606
1,003,831
997,622
903,449
1,204,597
1,200,731
303,448
101,149
1,106,235
1,100,606
1,366,499
1,365,468
1,033,334
885,472
1,505,746
1,499,999
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,837,165
903,449
900,606
1,003,831
997,622
903,449
1,204,597
1,200,731
303,448
101,149
1,106,235
1,100,606
1,366,499
1,365,468
1,033,334
885,472
1,505,746
1,499,999
$
-
58,340
46,288
236,545
121,838
-
884,267
363,262
-
-
360,575
447,893
1,454,442
612,255
113,940
314,766
739,962
928,188
$
1,837,165
961,789
946,894
1,240,376
1,119,460
903,449
2,088,864
1,563,993
303,448
101,149
1,466,810
1,548,499
2,820,941
1,977,723
1,147,274
1,200,238
2,245,708
2,428,187
lapsed
$
-
-
(255,509)
(224,607)
(366,894)
-
(1,490,936)
(850,400)
-
-
(249,597)
(620,135)
(1,822,197)
(238,773)
-
-
-
-
(1)
Includes cash salary and superannuation consistent with the statutory remuneration table in Section 5.1, and excludes accrued annual leave entitlements. The
2019 fixed remuneration comparative amounts have been restated as described in Section 5.1.
(2) Amounts related to prior year vested equity or cash based remuneration. This includes deferred Short Term Incentive (STI) shares and performance rights, LTI
performance rights, commencement awards, shares received under the General Employee Share Offer and dividends paid during 2020 in relation to any
deferred share awards. Details of the vested equity awards are provided in Section 5.2.
(3) Awards or remuneration lapsed or forfeited during 2020. Details of the awards are provided in Section 5.2.
58
National Australia Bank
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
Section 2 - Executive remuneration framework
2.1 Framework
Group strategy
During 2020, the Group introduced a refreshed strategy and made clear why we are here - to serve our customers well and help
our communities prosper. The Group will achieve this by investing in customers and colleagues and being known for:
• Relationship-led: building on market-leading expertise, data and insights.
• Easy: a simpler, more seamless and digitally enabled bank that gets things done faster.
• Safe: protecting customers and colleagues through financial and operational resilience.
• Long-term: delivering sustainable outcomes for our customers, colleagues and communities.
Executive remuneration framework
The Executive remuneration framework has been developed and is applied based on guiding principles to ensure remuneration
outcomes align with delivery of the Group's strategy over time.
Annual Financial Report 2020
59
RISKReflect risk, reputation, conduct and values outcomes!CUSTOMERSReinforce ourcommitment tocustomers COLLEAGUESAttract and retain the best peopleSHAREHOLDERSAlign reward with sustainable shareholder valueSTRATEGYDrive delivery of long-term performanceREMUNERATION PRINCIPLESFIXED REMUNERATIONSet to attract and retainHOW THE REMUNERATION FRAMEWORK SUPPORTS OUR STRATEGYANNUAL VARIABLE REWARD LONG TERM VARIABLE REWARDSet to attract and retainEarned for delivery of annual goals that drive the Group’s strategyBoard discretion applies for qualitative matters including risk, reputation, conduct and values to ensure sustainable performance (including for malus and clawback)Align remuneration with long-term shareholder outcomes• FR is comprised of base salary and superannuation• Paid regularly during the financial year• 50% cash• 50% deferred performance rights (12.5% scheduled to vest 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 period• 100% performance rights• Subject to four year performance hurdle• No dividend equivalent payment for any vested performance rightsWHYWHAT• Set at a market competitive level for role and experience• Reviewed annually against the ASX20, the other major Australian banks and other financial services companies• Quantum ranges (% of FR):• Outcomes vary depending on Group1 and individual performance (balanced scorecard including risk goals), values and behavioursHOWMaximum award value (% of FR)2:• Granted subject to minimum individual performance requirements being met• Subject to NAB’s TSR result against a financial services peer group3FIXED REMUNERATIONANNUAL VR (CASH)ANNUAL VR (DEFERRED RIGHTS)LONG TERM VARIABLE REWARDYEAR 4YEARS 1-4PERFORMANCE YEAR (YEAR 0)AT RISK 1 The outcome for the Managing Director and CEO BNZ will vary depending on overall BNZ performance.2 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.3 For the 2020 LTVR the financial services peer group is 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 Corporation.0% - 150%for GroupCEO0% - 105%for ControlRoles0% - 150%for all otherExecutives130%for GroupCEO100%for ControlRoles130%for all otherExecutives REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
Remuneration mix
The following diagram shows the Group CEO and other Executives remuneration mix at maximum opportunity. At maximum
opportunity, the framework delivers approximately three-quarters of total remuneration as variable, at risk remuneration for the
Group CEO and other Executives (excluding Control Roles). For Control Roles a lower proportion of remuneration, two-thirds of
total remuneration at maximum opportunity, is set to support the independence required of these roles and, in conjunction with
the performance measures set, mitigate the potential for conflicts of interest. The actual remuneration mix for each Executive is
subject to Group and individual performance each year.
2.2 Long-term alignment of remuneration
A proportion of remuneration is deferred in the form of equity for up to four years from the end of the current performance year.
This encourages 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 claw back 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. See Section 3.5 for more detail.
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National Australia Bank
GROUP CEOCONTROL ROLESOTHER EXECUTIVESFIXED REMUNERATION26%20%20%34%33%17%17%33%26%20%20%34%ANNUAL VR CASHANNUAL VR DEFERRED RIGHTSLVTR RIGHTS020406080100ELIGIBLE 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% REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
2.3 Annual Variable Reward
The table below explains the key features of the 2020 and 2021 Annual VR plan for the Group CEO and other Executives.
Feature
Purpose
Description
To reward Executives for delivery of annual goals that drive long-term sustainable performance.
The plan provides an appropriate level of remuneration that varies based on the Board’s determination of the Executive's
performance in the year measured against agreed targets for financial and non-financial measures that deliver strategic
objectives. The plan is not formulaic, judgement is applied through qualitative assessment of risk, reputation, sustainability and
environment, conduct and values, the quality of Group and individual performance and any other matters determined by the
Board.
Annual VR
The Annual VR opportunity for Executives is expressed as a percentage of FR and is set by the Board based on the
Opportunity
recommendation of the People & Remuneration Committee, having regard to a range of factors including the scope and
accountabilities of the Executive's role, and market competitiveness. The Annual VR opportunity ranges from:
Position
Group CEO
Control Roles
All other Executives
Annual VR opportunity
(% of FR)
0% to 150%
0% to 105%
0% to 150%
Group
performance
Group performance is assessed using the Group Performance Scorecard (known as the One NAB Score) comprising financial
and non-financial measures linked to the Group’s key strategic priorities, which is overlaid by a qualitative assessment to
support any adjustment of the outcome. The qualitative assessment is integral to the outcome and may result in the outcome
being adjusted upwards or downwards (including to zero), for risk, reputation, How We Work, quality of performance or any
other matters as determined by the Board.
For 2020, the Group Performance Scorecard measures were: Return on Total Allocated Equity (ROTAE) (50%), Group cash
earnings (25%), Strategic NPS (12.5%) and Transformation (12.5%). Further information on the Group Performance Scorecard
outcome is provided in Section 4.1.
For 2021, the Board has rebalanced the quantitative components of the Group Performance Scorecard to better accommodate
the refreshed Group strategy, market practice within the financial services sector and expected regulatory changes. Financial
performance measures within the Group Performance Scorecard will comprise 50% of the assessment with the remaining 50%
covering Customers, Colleagues and Safe Growth measures. The qualitative overlay will continue to be an integral part of the
assessment of Group performance.
Individual
Executive
The Group Performance Scorecard informs the critical priorities for the performance period. Key elements of the Group
Performance Scorecard are cascaded to Executives in combination with appropriate business unit outcomes.
performance
Each Executive had a balanced scorecard for 2020 comprised of five equally weighted goals: Customers, Risk and Controls,
Colleagues and Culture, Strategy Execution and Financial. The weighting of measures within each goal was set for each
Executive to reflect the responsibilities of their role. The Board assessed each Executive’s performance against their balanced
scorecard. The Board also considered the Executive's conduct and the extent to which they had demonstrated NAB’s values. The
Group CEO's performance measures and outcome are detailed in Section 4.2.
In assessing performance for each Executive, the People & Remuneration Committee seeks input from the Group CEO, Group
CRO (on risk management), Group CFO (on financial performance) and Group Executive, People and Culture (on colleague and
culture matters) together with appropriate input from Internal Audit. Relevant Board Committees then review the performance
information submitted to the Board to inform their decisions on each Executive's overall performance outcome.
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2021 GROUP PERFORMANCE SCORECARDQUANTITATIVE INPUTQUALITATIVE ASSESSMENT+Financial50%RiskRegulatory, breach management, risk management, losses associated with operational events and remediation costsQuality of PerformanceConsideration of financial, sustainability and environmental matters, progress made against strategyCustomers15%Colleagues15%Safe Growth20% REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
Feature
Description
Calculation
The Group Variable Reward Plan (GVRP) is the variable reward plan that covers the Group CEO, other Executives and the
and provision
majority of Group employees. The Board determines the appropriate funding for the GVRP informed by an assessment of the
of Annual VR
Group Performance Scorecard and qualitative overlay.
Each Executive's Annual VR outcome is determined based on the combination of Group and Individual performance. The
People & Remuneration Committee recommend the Annual VR outcome to the Board for approval. Annual VR will vary in line
with performance, available GVRP funding and remains discretionary. Any amount may be awarded from zero up to the
maximum VR opportunity.
Individual Annual VR awards for Executives (excluding the Managing Director and CEO of BNZ(1)) are calculated as follows
(adjusted by the Group Performance Scorecard assessment):
Board
The Board has extensive discretion with respect to the GVRP, including in connection with Annual VR for Executives, and other
discretion
deferred awards. The Board has discretion to (among other things):
• Determine the amount of any VR award (which could range from zero up to the maximum VR opportunity).
• Vary the GVRP terms and conditions, including the performance measures and their respective weightings within each goal
category.
• Forfeit some or all of the Annual VR deferred performance rights at any time before they vest.
• Claw back awards after they have been paid or vested (to the extent legally permissible).
More details on Annual VR deferred performance rights terms and conditions are described in Sections 3.5.
Award
Annual VR is delivered as a combination of cash and deferred performance rights.
delivery and
deferral
Deferral proportions and vesting profiles are structured so that, in combination with any LTVR award, the proportion of variable
pay that is deferred is no less than that required by regulation.
Deferred performance rights are granted by the Board at its discretion, subject to the relevant plan rules as amended from time
to time.
The number of deferred performance rights granted is based on NAB’s weighted average share price over the last five trading
days of the financial year.
A dividend equivalent payment for any vested deferred performance rights is paid at the end of each deferral period.
The cash components of any Annual VR are paid following the performance year to which they relate, normally in December.
Deferred performance rights are structured so that no performance rights vest faster than permitted by regulations. Vesting of
deferred performance rights is subject to the terms and conditions of the grant including malus and clawback provisions.
Currently, any deferred performance rights granted to Executives are scheduled to vest pro-rata over four years from grant.
(1) All matters relating to the remuneration of Angela Mentis, Managing Director and CEO of BNZ, including scorecard goals and performance assessment, 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. The BNZ Board
determined that for 2020, Angela Mentis' Annual VR would have a higher weighting towards overall BNZ performance and be calculated as (50% One NAB
Score + 50% BNZ performance) x Individual Score x Target Opportunity. BNZ performance is assessed based on Customer 25%; Financial 50% and External
Market Share 25%. The assessed overall BNZ performance for 2020 was 25%.
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2021 INDIVIDUAL VARIABLE REWARD OUTCOMEINDIVIDUAL BALANCED SCORECARD1+xIndividual Scorecards provide a metricated and balanced approach to assessing performance, based on 5 key pillars:Financial – 20%Customers – 20%Colleagues (Leadership & Culture) – 20%Strategic Ambition – 20%Safe Growth – 20%INDIVIDUAL MODIFIERHow We Work(individual conduct and values)Individual ContributionTARGET OPPORTUNITYFixed Remuneration x Annual VR target %1 For 2021 the Group CEO’s scorecard is aligned to the Group Performance Scorecard. REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
2.4 Long Term Variable Reward
The key features of the LTVR award to be awarded in respect of 2020 are:
Feature
Purpose
Participants
Award value
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.
Group CEO and other Executives.
The LTVR award values are:
• Group CEO - 130% of FR
• Control Roles - 100% of FR
• Other Executives - 130% of FR.
The LTVR will be granted to each 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 2020 and determined that all eligible Executives would receive their 2020 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 performance right entitles the Executive to receive one NAB share at the end of the
four year performance period, subject to the performance hurdle being satisfied.
Allocation approach
A face value allocation approach is used.
The number of performance rights to be granted is calculated by dividing the LTVR award value by NAB's
weighted average share price over the last five trading days of the financial year.
Grant date
Performance period
Performance hurdle
The weighted average share price used for 2020 is $17.99.
The award is scheduled to be granted in February 2021.
Four years from 15 November 2020 to 15 November 2024.
Total Shareholder Return (TSR): 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 price of those shares over the 30 trading days up to and
including the relevant date.
Vesting schedule
NAB's TSR is measured against the TSR Peer Group to determine the level of vesting:
NAB's relative TSR outcome
Below the 50th percentile
At the 50th percentile
Level of vesting
0%
50%
Between the 50th and 75th percentiles
Pro-rata vesting from 50% to 100%
At or above 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,
Testing
No retesting
Dividends
Westpac Banking Corporation.
TSR outcomes are calculated by an independent provider.
The award is not retested. Any performance rights that have not vested after the end of performance period will
lapse in December 2024.
No dividends paid.
Board discretion
The Board may adjust the value of the LTVR award down, or to zero, 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 or lapsing the performance rights at any time before they vest
• through clawback of vested performance rights.
More details on LTVR performance rights terms and conditions are described in Section 3.5.
Refer to Section 4.4 for details of previous LTI awards that were tested during 2020.
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REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
Section 3 - Remuneration governance
3.1 The role of the People & Remuneration Committee
The People & Remuneration Committee’s name was changed during 2020 (formerly the Remuneration Committee) to reflect its
expanded role in relation to the review and oversight of people related risks, culture, inclusion and diversity, talent and
succession matters in addition to remuneration matters. This expanded role further emphasises the committee’s focus on
customers and colleagues ensuring the Group's policies and practices are effective and fulfil the regulatory and compliance
requirements of the jurisdictions in which the Group operates.
In carrying out its duties, the People & Remuneration Committee seeks input from risk and financial control teams and engages
external advisors who are independent of management. Members of the People & Remuneration Committee are independent
non-executive directors. Further detail about the People & Remuneration Committee and its responsibilities is provided in our
Corporate Governance Statement available at http://www.nab.com.au/about-us/ corporate-governance.
3.2 Performance, risk and remuneration
The People & Remuneration Committee oversees the Group Performance Scorecard by establishing robust performance measures
and targets that support performance and conduct aligned to NAB's Code of Conduct and makes recommendations to the Board
in relation to the performance and remuneration outcomes for the Group CEO, other Executives, other Accountable Persons and
other persons as determined by the Board.
In making recommendations to the Board, the People & Remuneration Committee receives input from the Risk & Compliance
Committee, Audit Committee and the Customer Committee. This input provides oversight of matters that may be relevant in the
determination of performance and remuneration outcomes including any prior year malus or clawback adjustments.
Risk is the responsibility of all employees of the Group. A sound risk culture is where the mindset, decisions and behaviour of
employees are aligned to the Group's ambition and contribute to sustainable outcomes for customers, shareholders and external
stakeholders. The Board and Executive Leadership Team influence culture by focusing on leadership behaviour, systems and
colleagues, reinforced through performance and remuneration outcomes. Regular reporting is provided to the Board on culture
and the impact this may have on risk management outcomes.
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National Australia Bank
The People & Remuneration Committee may engage external advisors to assist them with data and market insights.Reviews and approves remuneration related recommendations from the People & Remuneration Committee.People & Remuneration CommitteeOversees the Group’s remuneration policies and practices.Input to setting measures and targets and assessing performance. Refer any relevant matter which may impact remuneration outcomes.Risk & Compliance CommitteeAudit CommitteeCustomer CommitteeProvides data and recommendations on performance, financial health, customer, risk and audit matters which may affect remuneration. The Group CRO and Executive Internal Audit regularly attend relevant committee meetings. EXTERNALADVISORS THE REMUNERATION GOVERNANCE FRAMEWORKSHAREHOLDERSBOARDNAB BOARDMANAGEMENT REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
The following components of the Group's remuneration framework support the alignment of remuneration outcomes with risk:
Component
Description
Risk
• All employees, including Executives have a scorecard inclusive of a mandatory risk goal.
assessment
• Divisional CROs provide active oversight, challenge and independent input to the performance review process.
• The Group CRO prepares a detailed assessment of the risk outcomes for the Group CEO and each of the other Executives. The
Risk & Compliance Committee assesses the Group CRO's risk outcomes. These assessments are used by the Board in
determining individual Executive variable reward outcomes.
• Executives and employees receive higher variable reward if they are driving improvements in the management of risk and
compliance.
• If risk is not appropriately managed, the individual's variable reward will be reduced and other consequences may be applied.
Risk
• On recommendation from the People & Remuneration Committee, the Board may adjust the 'in-year' funding level of variable
adjustment
reward outcomes or reduce variable reward for individuals to align with risk outcomes.
Malus and
• Malus and clawback may be used to reduce variable reward to align with risk outcomes.
Clawback
• Malus (or forfeiture / lapsing of unvested awards) applies to all employees.
• Clawback applies to paid and vested variable reward provided to Executives since July 2018. The Board may apply clawback to
the Group CEO, other Executives, other Accountable Persons, some UK employees and other employees in certain
circumstances.
3.3 Remuneration effectiveness
As part of its role, the People & Remuneration Committee reviews the policy and frameworks that establish remuneration
opportunities for the Group CEO, other Executives, other Accountable Persons and other persons as determined by the Board.
The People & Remuneration Committee reviews the frameworks to ensure they support the Group’s strategy and risk appetite
with focus on how behaviour and conduct is incorporated to meet the expectations and requirements of customers,
shareholders and regulators.
The People & Remuneration Committee seeks to ensure responsible remuneration outcomes that are reasonable, fair, and
consistent with governance, legal and regulatory requirements. The Group's frameworks are designed to attract and retain
employees and balance the interests of customers, shareholders and the community. The People & Remuneration Committee is
committed to ensuring the Group's remuneration practices are fair, simple and transparent.
The Chairman of the Board and the Chairman of the People & Remuneration Committee engage throughout the year with key
investors and regulators to seek feedback and consider opportunities to enhance the effectiveness of the Group’s remuneration
frameworks. The objective is to ensure NAB continues to foster an alignment of interests for Executives with the generation of
long-term, sustainable shareholder value. This approach ensures key investor and regulator views are considered in the design of
the Group’s remuneration frameworks and in determining remuneration outcomes. Active listening to and engaging with
investors, regulators and colleagues as well as considering broader community expectations, ensures an appropriate breadth of
views are considered in remuneration decision-making.
3.4 Employee conduct and risk management
Through the People & Remuneration Committee, the Board maintains oversight of the Employee Conduct Management
framework that together with setting clear accountabilities and effective consequence management reinforce expectations
supporting an appropriate risk culture.
In 2020, NAB's Code of Conduct and Employee Conduct Management framework were refreshed to enhance transparency,
proportionality and fairness of consequence outcomes. Through 2020, Speak Up training initiatives were implemented to
enhance a culture where all colleagues can safely raise matters of concern. Consequence is informed by the severity of the
matter, including an assessment of intention or repetitive conduct.
The scope of consequences includes any combination of coaching, counselling, formal warnings, termination of employment,
impacts to "in-year" performance assessment and remuneration outcomes, and the application of malus or clawback depending
of the severity of the matter. In assessing conduct and consequence, each division maintains a Professional Standards Forum
which makes recommendations to the Executive Remuneration Committee (chaired by the Group Executive, People & Culture and
whose members include the Group CRO and the Group Executive, Legal and Commercial Services). The Executive Remuneration
Committee oversees the effectiveness of the framework, reviews material events, accountability and the application of suitable
consequences. The People & Remuneration Committee and the Board oversee consequences for the Group CEO and other
Executives.
Through a continuing focus on risk management, 3,223 employees (2019: 3,321) were recognised for their positive contribution
to risk culture while 1,988 employees (2019: 1,706) were identified as not having met risk expectations and accountabilities.
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REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
In 2020, there were 1,105 Code of Conduct breaches identified that resulted in formal consequences (compared with 1,278 in
2019). Formal consequences included:
• 225 employees leaving NAB (2019: 292)
• 880 employees receiving coaching or other remedial actions, including the loss of variable reward (2019: 986).
In addition, equity forfeitures of $1.12 million (2019: $3.69 million), occurred as a result of Code of Conduct breaches and
revisiting previous variable reward decisions. No forfeitures applied to Executives in 2020.
3.5 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.
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 claw back 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.
The Board may exercise those discretions in relation to any employee across the Group, by division, by role or individual,
depending on circumstances.
Forfeiture or
Unvested Rewards will be forfeited or lapsed if the:
lapsing
• employee resigns
• Board determines that some, or all, of the unvested Rewards be forfeited on cessation of employment with the Group
• Board determines that the unvested Rewards should be forfeited due to conduct standards not being met, including as
set out in NAB's Code of Conduct
• Board determines that the unvested Rewards will be forfeited following the occurrence of a ‘Malus Event’(2) and / or
• Board exercises its discretion as described above.
Clawback
Clawback (recovery of paid and vested Rewards) applies to paid and vested Rewards provided to Executives since July 2018.
The Board may apply clawback to the Group CEO, other Executives, other Accountable Persons, some UK employees and
Executive
mandatory
shareholding
requirement
other employees in certain circumstances.
Executives are required to accumulate and retain NAB equity(3) over a five year period from commencement as KMP to an
amount equal to:
• two times fixed remuneration for the Group CEO
• one times fixed remuneration for other Executives.
Additionally, the Group CEO must hold at least 2,000 NAB ordinary shares within six months of appointment.
Details of Executive shareholdings are found in Section 5.5.
(Details of non-executive director mandatory shareholding requirements are found in Section 6.3 and non-executive
director shareholdings in Section 6.4).
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 reward granted in previous years.
(2) Examples include where the Executive has failed to comply with their accountability obligations under the Banking Executive Accountability Regime in the
Banking Act 1959 (Cth), 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 performance rights.
(3)
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REMUNERATION REPORT (CONTINUED)
Section 4 - Remuneration outcomes
4.1 Group performance
The Board assesses Group performance over the financial year considering key performance measures and other discretionary
factors (see Section 2.3).
The following table shows the key performance measures and outcomes used to support the Board in assessing Group
performance for 2020:
Performance measure
Outcome
Result
ROTAE (risk-adjusted financial measure)(1)
Not met
• 5.8% against plan of 11.6%
Cash earnings (financial measure)(1)
Not met
• $3.1 billion against plan of $6.4 billion
Net Promoter Score (non-financial measure)
Above target • Strategic NPS(2) score of -11 is above the target score of -14 (August 2019 to
August 2020)
Transformation (financial and non-financial
Partially met • Key Transformation milestones for 2020 as assessed by the Board
measures)
Includes items related to MLC Wealth that form part of discontinued operations. Refer to Note 37 Discontinued operations for further information.
(1)
(2) Strategic NPS: Sourced from DBM Atlas, measured on a six month rolling average. Definition was updated in August 2019 to give all customers within the
Business and Consumer segments equal voice. The overall Strategic NPS result combines the Consumer and Business segment results using a 50% weighting for
each. This has replaced "NPS priority segments" as previously reported by NAB, which was a simple average of four customer segments (Home Owners,
Investors, Small Business and Medium Business).
The Board considered the strong progress throughout 2020 demonstrated the Group's commitment to serve customers well and
help communities prosper. The creation of a refreshed strategy, and operating model, enhancing the Group's risk environment,
prudent capital management and the focus on developing the capability of colleagues will ensure the Group remains safe and
well positioned to grow in the long-term.
Historical Group performance
The table below shows the Group's annual financial performance over the last five years and its impact on shareholder value,
taking into account dividend payments, share price changes, and other capital adjustments during the period.
Financial performance measure
Basic earnings per share (cents)
Cash earnings ($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
2020
112.7(1)
3,710(1)
$1.13
$29.70
$17.75
(36.4%)
2019
208.2(1)
5,853(1)
$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%
(1)
Information is presented on a continuing operations basis, unless otherwise stated. 2019 has been restated for the presentation of MLC Wealth as a
discontinued operation. No other comparative periods have been restated.
The table below summarises the variable reward outcomes for the Group CEO and other Executives over the last five years,
including vesting of LTVR awards relating to prior periods.
Group CEO Annual VR (% of max. Annual VR)(1)
Average other Executives Annual VR (% of max. Annual VR)(1)
LTVR award - four year performance period (% of total award vested)(2)
LTVR award - five year performance period (% of total award vested)(3)
NAB's four year Total Shareholder Return(4)
NAB's five year Total Shareholder Return(4)
2020
0%
0%
37.6%
34.5%
23.1%
22.0%
2019
0%
0%
0%
0%
6.4%
6.4%
2018
12%
30%
0%
65%
22.6%
80.9%
2017
36%
49%
0%
n/a
46.1%
n/a
2016
242.4
6,483
$1.98
$29.98
$27.87
(0.7%)
2016
69%
54%
n/a
n/a
n/a
n/a
(1) The maximum Annual VR opportunity has changed over time, consistent with the relevant Annual VR plan.
(2) The amount shown for 2020 is the portion of the total 2015 LTI award that vested, measured over a four year performance period, against relevant peer groups.
(3) The amount shown for 2020 is the percentage of the total 2014 LTI award that vested. The amount shown for 2018 is the portion of the total 2012 award that
vested. Both awards were measured over a five year performance period against relevant peer groups.
(4) Measured over the performance period of the relevant LTVR award.
Annual Financial Report 2020
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REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
4.2 Executives' performance
The table below shows the key 2020 performance measures for the Group CEO and the Board's assessment of the Group CEO's
performance against those measures. The Board considered that the Group CEO and other Executives maintained a clear focus
on delivering for customers throughout the volatility and challenges presented in 2020, including:
• Exemplary industry leadership at a national and local level in support of customers and communities in response to COVID-19.
• Rapid action to ensure the Group remains well capitalised to manage through the volatile environment.
• Creation of a refreshed strategy providing clear direction and purpose for all colleagues across the Group.
• Reaching an agreement to sell 100% of MLC Wealth to IOOF Holdings Limited, which will enable focus on execution in NAB's
core banking businesses and further strengthen the Group's capital position.
• Enhancing the Group's risk, compliance and control environment.
• Investing in colleagues through the introduction of market leading programs for bankers and leaders designed to benefit
customers, communities and shareholders into the long term.
Performance
measure
Customers
Objective
Commentary
Deliver a great customer
• Strategic NPS of -11 was eight points stronger than 2019, and 3 points above target of -14
• Strategic NPS
experience and grow
(August 2019 to August 2020).
• Operational NPS(1)
• Complaint
management
customer advocacy
• Majority of key Operational NPS were above target.
• Continued progress against remediation plan and outstanding issues, including the
settlement of a number of long standing customer complaints.
Risk and Controls
Lead and deliver on strong
• Actively managed the impact of COVID-19 on customers, colleagues and the Group's risk
• Better customer
risk and controls outcomes
profile.
outcomes
• Management of
non-financial
risks
• Risk culture
• The Group operated within agreed Risk Appetite settings and improved risk culture.
• Uplift in the control environment for new processes and obligations across Home and
Business Lending, Cyber-Security, Data and People with over 1,000 new controls
implemented or documented.
• Invested in modernising technology infrastructure resulting in 33% reduction in critical
and high incidents, meaning fewer interruptions to customers’ banking needs.
• Launched a new Governance, Risk and Compliance system to support the ownership and
management of the Group's obligations, risk and controls environment.
Colleagues and
Improve engagement,
• The Group's overall colleague engagement score of 76(2) was 5 points above the 2020
Culture
build great inclusive
internal target of 71.
• Colleague
leaders who inspire and
• Representation of women in leadership roles increased. However, the outcome fell short
engagement
grow talent that changes
of the 2020 target.
• Gender diversity
the future of financial
• Implemented Career Qualified in Banking program, a multi year investment in banker
services
skills, learning and career pathways and a new Group-wide leadership program.
• Setting the right foundations for realising the Group's desired culture through establishing
a simple and impactful strategy to serve customers well and help communities prosper.
Strategy Execution
Deliver new enterprise
• Successfully led the refreshed Group Strategy and implemented a new operating model.
• Strategy
business strategy
• Mixed performance across key operational metrics related to prior transformation
milestones and
outcomes
programs.
• Delayed productivity initiatives in 2020 given bushfires in Australia and the onset of
COVID-19.
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REMUNERATION REPORT (CONTINUED)
Performance
measure
Financial(3)
Objective
Commentary
Deliver attractive returns
• Cash earnings decreased by $1,999 million or 39.2%. Cash earnings excluding large
• Cash earnings
and the financial plan
notable items decreased by $1,899 million or 29.0%.
REPORT OF THE DIRECTORS
• ROTAE
• Balance sheet
strength
• Return on equity declined 110 basis points to 5.8%.
• Operating expenses increased by $1,249 million or 13.9%. Excluding an increase of $890
million in large notable items, operating expenses increased by $359 million or 4.4%. This
was primarily due to higher restructuring-related costs, and increased colleague costs
including annual salary increases and annual leave costs.
• The Group's Common Equity Tier 1 (CET1) ratio as at 30 September 2020 was 11.47%. 98
basis points was added to the CET1 ratio through:
– A fully underwritten Institutional Share Placement raising $3.0 billion.
– A non-underwritten Share Purchase Plan raising $1.25 billion.
• The Group has maintained strong liquidity through 2020. The Net Stable Funding Ratio
was 127% and the quarterly average Liquidity Coverage Ratio was 139%, both above the
APRA regulatory requirement of 100%.
(1) Operational NPS captures feedback from NAB customers based on their relationship with NAB, or after selected episodes or interactions.
(2) 2020 Employee Engagement Survey conducted by Glint, score based on July 2020 survey. 2020 methodology differs from prior years.
(3) Cash earnings, return on equity and operating expenses include items related to MLC Wealth that form part of discontinued operations. Refer to Note 37
Discontinued operations for further information.
The Executives' scorecards have relevant divisional or functional and individual measures aligned with the Group CEO's
performance measures outlined above.
4.3 In-year variable reward outcomes
Group CEO and other Executives
Recognising the challenges faced by customers, shareholders and the community due to COVID-19, the Group CEO and
Executives have not been awarded any Annual VR for 2020.
The Board determined that all eligible Executives would receive their 2020 LTVR grant in full. The actual value of the 2020 LTVR
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. Further detail on the 2020 LTVR is available in Section 2.4.
Other employees
While performance against financial targets was not achieved in 2020, the Board is mindful of the need to continue to attract and
retain employees at all levels and has been conscious to reward employees who have supported customers and communities
impacted by COVID-19 and bushfires, and the progress the Group has made against its customer and transformation goals. The
Board determined an annual variable reward pool for the majority of employees of 25% of target.
4.4 Prior year long-term incentive outcomes
(a) Testing of 2014 and 2015 LTI awards
The table below shows the performance of the Group against the LTI performance hurdles for the 2014 and 2015 LTI awards
which were tested during 2020. Both awards had two TSR performance hurdles. Vesting for both hurdles were 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 2014 LTI award, measured over a five-year performance period, were partially achieved with
34.5% of the total 2014 LTI performance rights vesting during 2020. NAB's TSR over the performance period was 22.0%. The first
test of this award in 2019 resulted in no vesting. There is no further testing of this award and all unvested performance rights
were lapsed.
The performance hurdles for the 2015 LTI award, measured over a four-year performance period, were partially achieved
resulting in 37.6% of the total 2015 LTI performance rights vesting. NAB's TSR over the performance period was 23.1%. This was
the only test of this award and all unvested performance rights were lapsed.
Annual Financial Report 2020
69
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
Details of the LTI awards granted in respect of previous years, including 2014 and 2015, 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.
LTI
% of
Percentile
% of rights
% of rights
% of rights
Award
Performance hurdle
Performance period
award
ranking
vested
lapsed
remaining
2014
2014
2015
2015
TSR relative to S&P/ASX50 (50%)(1)(2)
10/11/2014 to 10/11/2019
TSR relative to Top Financial Services (50%)(3)
10/11/2014 to 10/11/2019
TSR relative to S&P/ASX50 (50%)(2)(4)
9/11/2015 to 10/11/2019
TSR relative to Top Financial Services (50%)(3)
9/11/2015 to 10/11/2019
46
54
41
59
22nd
57th
23rd
57th
-
64
-
64
100
36
100
36
-
-
-
-
(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 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.
(2) The 30 trading day volume weighted average price up to and including 8 November 2019 has been used to determine the TSR for NAB and peer group
companies since 9 November 2019 and 10 November 2019 were not trading days.
(3) 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.
(4) 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 2015. The following companies were de-listed during the performance period and have been excluded from the performance
hurdle test: Asciano and Westfield. Under the terms of the award, there is no substitution for de-listed companies.
(b) Overview of unvested long-term awards
The 2016 long-term incentive award is scheduled to be tested in November 2020. Any vesting of that award is subject to the
Group’s total shareholder return performance over the period November 2016 to November 2020 relative to a financial services
peer group, and the Group’s return on equity (ROE) performance over the 2017 to 2020 financial years, relative to the
performance of the other major Australian banks.
The following is a summary of the unvested long-term awards held by the Executives.
Award
Grant date
Performance period
Vesting date Performance hurdles
2016 LTI
14/12/2016
• 2017 to 2020 financial years 20/12/2020
• NAB's cash ROE growth against Australia and New Zealand Banking
Group Limited, Commonwealth Bank of Australia, Westpac Banking
Corporation
2017 LTI
19/12/2017
• 2018 to 2021 financial years 20/12/2021
• NAB's cash ROE growth against Australia and New Zealand Banking
• 9/11/2016 to 9/11/2020
• NAB's TSR performance against a financial services peer group
Group Limited, Commonwealth Bank of Australia, Westpac Banking
Corporation
2019 LTVR 26/02/2020
• 15/11/2019 to 15/11/2023
22/12/2023
• NAB's TSR performance against a financial services peer group
• 14/11/2017 to 14/11/2021
• NAB's TSR performance against a financial services peer group
For further detail on these awards refer to NAB's previous remuneration reports which are available at www.nab.com.au/about-
us/shareholder-centre/financial-disclosuresandreporting/annual-reports-and-presentations.
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REPORT OF THE DIRECTORS
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.
Short-term benefits
Annual VR
Post-employment
benefits
Equity-based benefits
Other long-
term
Other
Cash salary(1)
cash(2) Non-monetary(3)
Superannuation(4)
benefits(5)
Shares(6)
Rights(7)
remuneration(8)
Name
Group CEO
$
$
$
$
$
Ross McEwan (for part year)
2020
1,865,204
Executives
Sharon Cook
Shaun Dooley
Susan Ferrier
David Gall
Nathan Goonan (for part year)
Andrew Irvine (for part year)
Gary Lennon
Angela Mentis
Rachel Slade
Patrick Wright
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National Australia Bank
2020
2019
2020
2019
2020
2020
2019
2020
2020
2020
2019
2020
2019
2020
2019
2020
2019
886,553
907,563
991,429
982,414
897,838
1,182,823
1,181,995
306,719
102,876
1,086,448
1,100,855
1,304,386
1,302,491
1,022,185
859,165
1,556,040
1,433,786
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
269,141
22,852
7,664
-
-
583
-
4,433
2,840
4,090
-
14,042
583
-
246,600
309,404
583
-
130,201
166,271
20,344
20,629
20,065
22,871
22,852
21,774
23,334
5,994
5,994
19,787
20,824
33,573
32,544
20,344
22,859
18,672
20,236
6,083
4,989
35,752
35,190
4,152
21,221
21,206
4,188
361
19,481
19,474
32,361
32,389
9,697
5,928
10,139
8,315
$
-
53,238
144
6,270
56,520
-
-
$
255,279
127,349
290,857
179,572
349,837
82,347
400,689
(89,228)
713,495
5,874
81,397
203,525
61,454
287
167,791
-
419,383
739,710
513,167
167,281
1,066,590
64,660
121,729
314,257
313,397
220,320
372,581
299,613
726,474
$
-
-
-
-
-
-
-
-
-
210,000
-
-
-
-
-
-
7,835
36,369
Total(9)
$
2,420,140
1,093,567
1,224,182
1,233,671
1,446,832
1,011,622
1,629,347
1,854,892
404,172
536,798
1,607,136
1,881,150
2,297,878
2,910,699
1,337,789
1,382,262
2,336,757
2,704,848
REMUNERATION REPORT (CONTINUED)
REPORT OF THE DIRECTORS
Short-term benefits
Annual VR
Post-employment
benefits
Equity-based benefits
Other long-
term
Other
Cash salary(1)
cash(2) Non-monetary(3)
Superannuation(4)
benefits(5)
Shares(6)
Rights(7)
remuneration(8)
$
$
$
$
$
Name
Former Executives
Mike Baird (for part year)(10)
Anthony Healy (for part year)(11)
Lorraine Murphy (for part year)
Andrew Thorburn (for part year)
Executives acting on an interim basis
Greg Braddy (for part year)
Julie Rynski (for part year)
Michael Saadie (for part year)
Anthony Waldron (for part year)
Total Executives
Total Executives
2020
2019
2020
2019
2019
2019
2019
2019
2020
2020
2020
2019
$
677,791
1,113,484
702,254
1,205,438
405,935
808,553
105,368
359,309
290,316
105,454
12,978,316
11,766,356
$
-
-
-
-
-
-
29,774
106,438
55,703
13,480
69,183
136,212
$
2,730
-
12,399
(8,650)
-
40,647
-
6,482
2,863
-
686,998
518,244
Total(9)
$
1,927,581
1,702,217
2,219,123
2,282,117
782,000
13,514
22,148
13,514
22,148
14,529
6,835
5,133
11,472
5,994
1,868
247,141
245,562
4,388
6,652
12,348
6,652
3,096
261,467
(142,010)
1,109,701
220
559,713
-
304,461
4,446
1,169,701
28,578
1,027,951
345,031
(401,227)
-
414,636
16,771
(244,313)
(6,955,235)
1,345,594
(4,981,148)
1,940
1,967
4,552
1,236
13,347
25,810
19,239
5,394
28,743
89,553
60,365
18,825
-
-
-
-
184,305
601,031
439,032
146,257
173,623
164,569
1,467,630
2,520,742
738,803
(1,390,958)
2,497,237
1,796,599
20,640,870
13,975,387
(1)
Includes cash allowances, motor vehicle benefits, parking and short-term compensated absences, such as annual leave entitlements accrued. Any related fringe benefits tax is included. The 2019 comparative amount has been adjusted to
reflect a change in the definition of non-monetary benefits and for Shaun Dooley to remove an amount of $27,614 related to his 2018 cash variable reward prior to his appointment as KMP. Salary sacrifice benefits such as motor vehicle
benefits and parking are now included in cash salary.
(2) The VR cash received in respect of 2020 is scheduled to be paid on 23 December 2020 in Australia.
(3)
Includes relocation costs considered to provide a benefit to the individual (including temporary accommodation, furniture rental, utility costs, dependant travel costs, insurance, stamp duty, associated fringe benefit tax and other
benefits). For international assignees this may also include the provision of health fund benefits and tax advisory services. The 2019 comparative amount has been restated to reflect a change in the definition of non-monetary benefits.
Salary sacrifice benefits such as motor vehicle benefits and parking are now included in cash salary.
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.
Includes long service leave entitlements accrued based on an actuarial calculation.
(4)
(5)
(6) 2020 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 December 2016, December 2017, December 2018, December 2019 and scheduled to be granted in December 2020.
(b) Commencement shares allocated to Rachel Slade in February 2017 with 9% vesting in October 2019. The shares were subject to performance and service hurdles. The remaining shares vested in October 2017 (33%), July 2017 (34%)
and October 2018 (24%).
(c) Commencement shares scheduled to be allocated to Andrew Irvine in November 2020 subject to performance and service hurdles. The restricted shares are scheduled to vest 21% in December 2020, 21% December in 2021, 24% in
December 2022, 31% in December 2023 and the remaining 3% in December 2024. The shares are subject to continued employment, malus and clawback provisions.
(d) 2018 deferred STI shares granted in February 2019 to Shaun Dooley for performance in his previous role. The shares were restricted for approximately 1 year and were 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. 2019 VR deferred shares granted in February 2020 to Nathan Goonan, Michael
Saadie and Anthony Waldron for performance in their previous roles. The shares are restricted for approximately 3 years, subject to performance and service conditions.
(7) 2020 expense based on the grant date fair value, amortised on a straight line basis over the vesting period for:
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REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
(a) 2017 deferred STI performance rights granted in December 2017. The performance rights were granted with half of each grant restricted for approximately 1 year and the remaining half for approximately 2 years. 2017 deferred STI
performance rights granted in February 2018 to Michael Saadie for performance in his previous UK role. The performance rights were granted with 20% restricted for approximately 3 years, 20% restricted for approximately 4 years, 20%
restricted for approximately 5 years, 20% restricted for approximately 6 years and 20% restricted for approximately 7 years.
(b) 2015, 2016 and 2017 LTI performance rights granted in December 2015, December 2016 and December 2017 respectively under the Group’s previous LTI program.
(c) 2019 LTVR performance rights granted in February 2020 and 2020 LTVR performance rights scheduled to be granted in February 2021 as described in Section 2.4.
(d) Transformation performance rights granted to Shaun Dooley, Nathan Goonan, Rachel Slade, Michael Saadie and Anthony Waldron in February 2018 for performance in their prior roles. The performance rights are restricted for 3 years
and subject to performance and service hurdles.
(e) The 2019 comparative amount has been adjusted for Shaun Dooley, Greg Braddy and Julie Rynski to include an amount related to awards granted prior to their appointment as KMP.
Includes remuneration on cessation of employment, remuneration on commencement or exchange rate movements. For Andrew Irvine, the amount shown is a portion of his commencement award scheduled to be paid in cash in
December 2020. In accordance with accounting standards this amount has been expensed in 2020. Andrew received a commencement award to compensate for the loss of deferred benefits and current year variable reward on leaving his
former employer. The award consists of $630,000 cash to be paid in December 2020 and $2.06 million in restricted shares (see 6(c) above). For Patrick Wright, the amount reflects exchange rate movements related to his commencement
award as disclosed in NAB's 2017 Remuneration report. For Mike Baird and Anthony Healy, the amounts reflect payments provided on separation (see 10 and 11 below).
(8)
(9) The percentage of 2020 total remuneration related to performance-based remuneration was: Ross McEwan 11%, Sharon Cook 17%, Shaun Dooley 15%, Susan Ferrier 8%, David Gall 25%, Nathan Goonan 22%, Andrew Irvine 77%, Gary
Lennon 30%, Angela Mentis 30%, Rachel Slade 21%, Patrick Wright 26%, Mike Baird 6%, Anthony Healy 14%, Michael Saadie 31%, Anthony Waldron 26%.
(10) On cessation of employment, Mike Baird received a termination payment of 26 weeks base salary (in accordance with his contract), and payments in respect of transition support services and in recognition of his contribution to the
Group. Mr Baird retained 2018 VR deferred shares and partially retained 2017 LTI and 2019 LTVR performance rights. 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. The remainder of 2017 LTI and 2019 LTVR performance rights were lapsed and the associated expense reversed. Further detail on the equity awards is provided in Section 5.2. In accordance
with accounting standards the cash payments received for career transition services and contribution to the Group have been fully expensed in 2020 (see Section 1.4).
(11) On cessation of employment, Anthony Healy received a termination payment of 26 weeks base salary (in accordance with his contract), and payments in respect of transition support services and in recognition of his contribution to the
Group. Mr Healy retained 2018 VR deferred shares and partially retained 2016 LTI, 2017 LTI and 2019 LTVR performance rights. 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. The remainder of the 2016 LTI, 2017 LTI and 2019 LTVR performance rights and the General Employee Offer Shares held by Mr Healy were lapsed and the associated expense reversed.
Further detail on the equity awards is provided in Section 5.2. In accordance with accounting standards the cash payments received for career transition services and contribution to the Group have been fully expensed in 2020 (see
Section 1.4).
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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 2020. A performance
right is a right to receive one NAB share subject to the satisfaction of the relevant performance and service 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 2020. 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 2020, 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.
Granted(1) Grant date
lapsed(2) Vested(3) Granted
lapsed(4)
Vested
Forfeited /
Forfeited /
No.
No.
No.
Name
Executives
Sharon Cook
Shaun Dooley
David Gall
Nathan Goonan
Deferred STI rights
LTVR rights
LTI rights
1,708 19/12/2017
30,150 26/02/2020
-
-
-
303,611
13,777 10/12/2014
(9,024)
4,753
General employee shares
34 14/12/2016
1,708
34
4,121
-
-
-
STI deferred shares
LTVR rights
LTI rights
LTI rights
LTVR rights
General employee shares
General employee shares
STI deferred shares
VR deferred shares
4,121 27/02/2019
33,500 26/02/2020
52,261 26/02/2020
34 14/12/2016
39 11/12/2019
3,749 27/02/2019
2,604 26/02/2020
-
-
-
-
-
12,312 10/12/2014
(8,065)
4,247
83,116
9/12/2015
(51,836)
31,280
-
-
(200,738)
55,381
(1,290,198)
256,809
Gary Lennon
LTI rights
15,309 10/12/2014
(10,028)
Angela Mentis
Deferred STI rights
LTVR rights
LTI rights
LTI rights
7,825 19/12/2017
47,906 26/02/2020
-
-
12,847 10/12/2014
(8,415)
4,432
103,895
9/12/2015
(64,795)
39,100
Rachel Slade
Commencement shares
3,536 22/02/2017
Deferred STI rights
LTVR rights
12,151 19/12/2017
52,261 26/02/2020
Patrick Wright
Deferred STI rights
LTVR rights
Former Executives
Mike Baird
Anthony Healy
LTVR rights
Deferred STI rights
LTI rights
LTVR rights
LTI rights
LTI rights
-
-
-
-
-
-
-
(25,212)
(46,817)
39,195 26/02/2020
10,172 19/12/2017
65,326 26/02/2020
4,193 19/12/2017
63,695 19/12/2017
52,261 26/02/2020
61,052 10/12/2014
(39,993)
21,059
92,724
9/12/2015
(57,828)
34,896
4,193
-
-
526,268
(833,811)
General employee shares
34 14/12/2016
-
LTI rights
57,421 14/12/2016
(8,373)
General employee shares
30 13/12/2017
(30)
34
-
-
Deferred STI rights
LTI rights
LTVR rights
10,712 19/12/2017
53,710 19/12/2017
52,261 26/02/2020
-
10,712
(21,260)
(46,817)
-
-
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National Australia Bank
-
337,345
-
34
-
3,749
526,268
-
990
-
-
70,855
5,281
7,825
-
-
-
482,413
12,151
-
526,268
3,536
-
-
394,694
10,172
-
-
657,833
$
-
-
$
45,125
-
(224,607)
61,979
-
-
-
992
101,253
-
-
-
-
-
-
-
992
-
92,113
-
(249,597)
68,864
-
-
206,737
-
(209,449)
57,793
(1,612,748)
321,011
-
-
-
-
-
-
-
(449,026)
321,029
-
111,030
-
268,744
-
110,779
-
-
(995,426)
274,609
(1,439,339)
286,496
-
992
(142,006)
(499)
-
-
-
283,011
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(360,570)
526,268
(794,016)
-
-
REMUNERATION REPORT (CONTINUED)
REPORT OF THE DIRECTORS
Granted(1) Grant date
lapsed(2) Vested(3) Granted
lapsed(4)
Vested
Forfeited /
Forfeited /
Name
Executives acting on an interim basis
No.
No.
No.
Michael Saadie
General employee shares
34 14/12/2016
STI deferred shares
STI deferred shares
3,558 22/02/2017
4,885 27/02/2019
General employee shares
39 11/12/2019
VR deferred shares
4,411 26/02/2020
-
-
-
-
-
Anthony Waldron
LTI rights
8,994 10/12/2014
(5,891)
3,103
General employee shares
34 14/12/2016
STI deferred shares
3,022 27/02/2019
General employee shares
39 11/12/2019
VR deferred shares
3,676 26/02/2020
-
-
-
-
$
-
-
-
-
-
-
34
3,558
4,885
34
3,022
-
-
990
120,023
-
-
990
100,024
$
-
-
-
-
-
$
992
93,362
120,024
-
-
(146,627)
40,463
-
-
-
-
992
74,251
-
-
(1) The following securities have been granted during 2020:
a) General Employee Share Offer granted to Nathan Goonan, Michael Saadie and Anthony Waldron in December 2019.
b) Variable reward deferred shares, allocated in February 2020 (in respect of 2019) to Nathan Goonan, Michael Saadie and Anthony Waldron. The shares are
restricted until November 2022 and subject to performance and service hurdles.
c) LTVR performance rights allocated in February 2020 (in respect of 2019). The total fair value of the award at allocation is shown. The allocation fair value is
shown in Section 5.3. The number of performance rights allocated to each Executive was calculated using the weighted average share price over the five
trading days up to 30 September 2019 inclusive, being $29.85. The performance rights are restricted until December 2023 and subject to service and
performance hurdles.
(2) The following securities have lapsed during 2020:
a) LTI performance rights allocated in December 2014 were partially lapsed in December 2019 for Shaun Dooley, David Gall, Gary Lennon, Angela Mentis,
Anthony Healy and Anthony Waldron. Further details are provided in Section 4.4.
b) LTI performance rights allocated in December 2015 were partially lapsed in December 2019 for David Gall, Angela Mentis and Anthony Healy. Further details
are provided in Section 4.4.
c) Mike Baird's 2017 LTI performance rights and 2019 LTVR performance rights were partially lapsed in May 2020 on his cessation of employment.
d) Anthony Healy’s unvested General Employee Shares granted in December 2017 were fully lapsed and his 2016 and 2017 LTI performance rights and 2019
LTVR performance rights were partially lapsed in April 2020 on his cessation of employment.
(3) The following securities have vested during 2020:
a) General Employee Share Offer granted to Shaun Dooley, Nathan Goonan, Anthony Healy and Anthony Waldron in December 2016, fully vested in December
2019. Also granted to Michael Saadie in December 2016 while employed by NAB in the UK, fully vested in June 2020.
b) 2017 Tranche 2 deferred STI performance rights allocated in December 2017 to Sharon Cook, Gary Lennon, Angela Mentis, Patrick Wright, Mike Baird and
Anthony Healy fully vested in November 2019.
c) Tranche 3 deferred STI shares granted in February 2017 (in respect of 2016) to Michael Saadie fully vested, 0.3% in November 2019 to cover UK tax liability
and 99.7% in May 2020.
d) Deferred STI shares granted in February 2019 (in respect of 2018) to Shaun Dooley, Nathan Goonan, Michael Saadie and Anthony Waldron, fully vested in
November 2019.
e) LTI performance rights allocated in December 2014 partially vested in December 2019 for Shaun Dooley, David Gall, Gary Lennon, Angela Mentis, Anthony
Waldron and Anthony Healy. Further details are provided in Section 4.4.
f) LTI performance rights allocated in December 2015 partially vested in December 2019 for David Gall, Angela Mentis and Anthony Healy. Further details are
provided in Section 4.4.
g) Commencement shares granted to Rachel Slade in February 2017 with the final 9% vested in October 2019.
(4) Calculated using NAB's closing share price on the forfeiture / lapsing date.
Annual Financial Report 2020
75
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
5.3 Determining the value of equity remuneration
The fair value of shares and performance rights is set out below for grants by NAB provided to Executives (including Executives
acting on an interim basis) during 2020. 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, 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 is recognised
fully in the year the shares are granted as they are not subject to forfeiture.
No performance options have been granted during the year. Shares and performance rights granted during 2020 were granted at
no cost to the Executive and have a zero exercise price.
Shares
Performance rights
Fair
Restriction period
Grant
Fair
Exercise period
Exercise period
Grant date
value
end
share price(1)
value
from
to(2)
Type of allocation
$
$
$
General Employee Share Offer
11 December 2019
25.38 11 December 2022
Deferred Variable Reward
26 February 2020
27.21 15 November 2022
Long Term Variable Reward(3)
26 February 2020
26.24 10.07 22 December 2023
15 March 2024
(1) The Grant share price is NAB's closing share price at the date of valuation (being the grant date of the relevant award). The Grant share price was used to
determine the fair value.
(2) The end of the exercise period for each performance rights allocation is also the expiry date.
(3) The number of LTVR performance rights allocated to each eligible Group Executive was calculated using the weighted average share price over the five trading
days up to 30 September 2019, inclusive, being $29.85. Further detail on the LTVR performance rights is available in NAB's 2019 Remuneration Report.
5.4 Performance rights holdings
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. a right requiring payment of a subscription price on vesting) are
currently held by the Executives (including Executives acting on an interim basis). 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 2020,
no performance rights held by the Executives (including Executives acting on an interim basis) were: (i) vested and exercisable;
nor (ii) vested but not exercisable.
Name
Executives
Sharon Cook
Shaun Dooley
David Gall
Nathan Goonan
Gary Lennon
Angela Mentis
Rachel Slade
Patrick Wright
Former Executives
Mike Baird
Anthony Healy
Executives acting on an interim basis
Michael Saadie
Anthony Waldron
Balance at
Granted during
Forfeited /
beginning of
year as
Exercised
lapsed or expired
Balance at end
year(1)
remuneration
during year
during year
No.
No.
No.
31,433
31,025
189,429
17,248
133,337
249,711
17,248
79,175
67,888
275,619
25,347
17,248
30,150
33,500
52,261
-
47,906
52,261
39,195
65,326
52,261
52,261
-
-
(1,708)
(4,753)
(35,527)
-
(13,106)
(55,683)
-
(10,172)
(4,193)
(66,667)
-
-
No.
-
(9,024)
(59,901)
-
(10,028)
(73,210)
-
-
(72,029)
(174,271)
-
-
of year(2)
No.
59,875
50,748
146,262
17,248
158,109
173,079
56,443
134,329
43,927
86,942
25,347
17,248
(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 2020, the balance is at the date they became KMP.
(2) For Executives (including Executives acting on an interim basis) who ceased being KMP during 2020, the balance is as at the date they ceased being KMP.
76
National Australia Bank
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:
Balance at
Granted
Received during
beginning of
during year as
year on exercise of
Other changes
Balance at end
year(1)
remuneration
performance rights
during year
No.
of year(2)
No.
Name
Group CEO
Ross McEwan
Executives
Sharon Cook
Shaun Dooley
David Gall
Nathan Goonan
Gary Lennon
Angela Mentis
Rachel Slade
Patrick Wright
Former Executives
Mike Baird
Anthony Healy
Executives acting on an interim basis
Michael Saadie
Anthony Waldron
No.
-
13,446
57,551
79,937
2,806
106,548
138,413
39,811
69,646
21,422
110,221
8,133
45,070
No.
-
-
-
-
-
-
-
-
-
-
-
-
-
No.
-
1,708
4,753
35,527
-
13,106
55,683
-
10,172
4,193
66,667
-
-
53,897
53,897
(1,708)
176
(21,114)
784
559
(40,000)
-
-
-
(28)
(3,620)
-
13,446
62,480
94,350
3,590
120,213
154,096
39,811
79,818
25,615
176,860
4,513
45,070
(1) Balance may include shares held prior to individuals becoming KMP. For Executives (including Executives acting on an interim basis) who became KMP during
2020, the balance is at the date they became KMP.
(2) For Executives (including Executives acting on an interim basis) who ceased being KMP during 2020, the balance is as at the date they ceased being KMP.
5.6 Executive contract terms
All Executives, including the Group CEO, 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.
• Currently one week for Susan Ferrier and Andrew Irvine, three weeks for Sharon Cook, Rachel Slade and Patrick
Wright, giving notice. This will increase based on years of service up to four weeks after five years service. Four
weeks for all other current Executives.
• 26 weeks for NAB giving notice to any of the Executives.
VR arrangements on
• Executives who resign or are dismissed do not receive any annual or long-term variable reward.
separation
See Section 3.5 for further details.
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.
Annual Financial Report 2020
77
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 $4.5 million per annum was approved by shareholders at NAB's 2008 Annual
General Meeting. The total Board and Committee fees, including superannuation, paid to non-executive directors in 2020 is
within the approved aggregate fee pool. Philip Chronican received a Special Duties fee in his capacity as the interim Group CEO
(an executive director role).
2020 decisions and outcomes
• The Board recognised the challenges faced by customers, shareholders and the community due to COVID-19. The Board
Chairman and non-executive directors have taken a 20% reduction in their base fees from 1 April 2020 to 30 September 2020.
• Non-executive director fees are generally reviewed annually, including against fee levels paid to board members of other
major Australian corporations. As a result of the 2020 fee review, the Board determined not to increase non-executive director
Board or Committee fees.
The following table shows the 2020 base fee for the Chairman and non-executive directors of the Board (excluding the 20%
reduction for the period from 1 April 2020 to 30 September 2020), along with the fees paid to members on the Board
committees.
Board(1)
Audit Committee
Risk & Compliance Committee(2)
People & Remuneration Committee(3)
Customer Committee
Nomination & Governance Committee
Chairman ($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
(1) The Board Chairman fee and non-executive director base fee were reduced by 20% from 1 April 2020 to 30 September 2020.
(2) The Risk Committee became the Risk & Compliance Committee in August 2020.
(3) The Remuneration Committee became the People & Remuneration Committee in August 2020 to reflect the expanded remit of the Committee.
78
National Australia Bank
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
6.2 Statutory remuneration
The 2020 fees paid to the non-executive directors are set out below. The fees take into account the 20% reduction to the
chairman fee and non-executive director base fee from 1 April 2020 to 30 September 2020 and changes in the directors' duties
and responsibilities during the year, including the Special Duties fee paid to Philip Chronican while interim Group CEO (an
executive director role). The 2019 fees paid included a reduction equivalent to 20% of 2018 non-executive director base fees
received.
Short-term benefits
Post-employment benefits
Cash salary and fees(1)
Special duties
Superannuation(2)
Name
Non-executive directors
Philip Chronican (Chairman)(3)
David Armstrong
Kathryn Fagg (for part year)(4)
Peeyush Gupta(5)
Anne Loveridge
Geraldine McBride
Douglas McKay(6)
Simon McKeon (for part year)(7)
Ann Sherry
Former non-executive directors
Ken Henry (for part year)(8)
Anthony Yuen (for part year)(9)
Total
Total
2020
2019
2020
2019
2020
2020
2019
2020
2019
2020
2019
2020
2019
2020
2020
2019
2020
2019
2020
2019
2020
2019
$
595,226
174,704
304,325
275,851
176,907
506,426
508,056
261,349
229,928
238,740
209,493
492,782
464,593
149,553
253,325
229,006
91,932
769,351
62,280
241,133
3,132,845
3,102,115
$
224,764
991,906
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
224,764
991,906
$
21,176
20,649
21,175
20,649
16,381
21,176
20,649
10,651
19,072
20,760
18,674
20,882
19,975
14,114
21,176
20,464
5,251
20,649
873
5,367
173,615
166,148
Total
$
841,166
1,187,259
325,500
296,500
193,288
527,602
528,705
272,000
249,000
259,500
228,167
513,664
484,568
163,667
274,501
249,470
97,183
790,000
63,153
246,500
3,531,224
4,260,169
(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.
(2) Reflects compulsory company contributions to superannuation.
(3) Philip Chronican received a Special Duties fee in his capacity as the interim Group CEO (an executive director role), which he held from 1 March 2019 until
14 November 2019. The Special Duties fee includes a non-monetary benefits amount of $5,919 (related to the use of accommodation and other benefits)
provided while he was the interim Group CEO. He transitioned to Chairman of the Board from 15 November 2019.
(4) Kathryn Fagg commenced as a non-executive director on 16 December 2019.
(5) Peeyush Gupta received fees of $253,185 in his capacity as a non-executive director on the board of a number of Group subsidiaries, including as a non-
executive director of BNZ Life. The director fees relating to BNZ Life were paid in NZD.
(6) Douglas McKay has forgone 20% of his director fees in his capacity as Chairman of Bank of New Zealand from 1 May 2020 to 30 September 2020. His
remuneration received includes director fees of $247,497 in his capacity as Chairman of Bank of New Zealand, which was paid in NZD.
(7) Simon McKeon commenced as a non-executive director on 3 February 2020.
(8) Ken Henry resigned as a director and Chairman of the Board on 14 November 2019.
(9) Anthony Yuen retired from the Board following NAB's Annual General Meeting on 18 December 2019.
Annual Financial Report 2020
79
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
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 each year until the minimum holding
requirement is met.
The value of a directors’ shareholding is based on the share price at the time shares were acquired. All current non-executive
directors' shareholding requirements have been met.
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
Philip Chronican (Chairman)
David Armstrong
Kathryn Fagg
Peeyush Gupta
Anne Loveridge
Geraldine McBride
Douglas McKay
Simon McKeon
Ann Sherry
Former non-executive directors
Ken Henry
Anthony Yuen
Balance at
beginning of
year(1)
No.
40,000
18,163
-
7,480
10,000
7,703
10,000
-
7,456
10,360
12,464
Other changes
Balance at end
Acquired
during year
No.
2,120
947
8,700
2,091
2,120
-
1,972
12,120
5,242
-
-
No.
-
-
-
-
-
-
-
-
-
-
-
of year(2)
No.
42,120
19,110
8,700
9,571
12,120
7,703
11,972
12,120
12,698
10,360
12,464
(1) Balance may include shares held prior to individuals becoming KMP.
(2) For non-executive directors who ceased being KMP during 2020, the balance is as at the date they ceased being KMP.
80
National Australia Bank
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
Section 7 - Loans, other transactions and other interests
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
year
$
Normal
9,015,405
Employee
934,351
Normal
16,518,996
charged(1)
charged(1)
Write-off(1)
end of year
$
145,759
59,295
447,552
$
-
-
-
$
-
-
-
$
6,920,255
4,341,262
18,522,115
(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 20 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. The balance at the beginning of the year for Douglas McKay and Sharon Cook has been restated to include the value of related party
loans.
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
Kathryn Fagg
Douglas McKay(3)
Group CEO
Ross McEwan
Executives
Sharon Cook(3)
Susan Ferrier
David Gall
Gary Lennon
Angela Mentis
Patrick Wright
Former Executives
Mike Baird
Anthony Healy
year
$
348,397
1,450,400
2,216,477
26,543
5,942
83,852
-
18,599
1,134,060
2,819,502
5,280,676
905,696
681,362
3,421,673
3,977,848
3,812,702
29,188
99,110
86,614
51,722
15,661
89,238
78,240
64,708
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
-
1,444,679
4,360
1,078,592
1,388,818
1,638,112
1,830,899
1,500,006
1,102,482
3,095,097
4,699,033
3,122,483
442,183
3,320,357
1,130,486
481,064
2,368,726
3,146,028
53,223
41,587
3,903,300
3,732,129
3,224,859
24,957
383,758
386,622
Executives acting on an interim basis
Anthony Waldron
386,622
977
(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 2020. All other items in this table relate to the KMP and their related parties.
(3) The balance at the beginning of the year for Douglas McKay and Sharon Cook has been restated to include the value of related party loans.
Annual Financial Report 2020
81
REPORT OF THE DIRECTORS
REMUNERATION REPORT (CONTINUED)
7.2 Other transactions
From time to time various KMP and their related parties will hold investments in funds that are either managed, related to or
controlled by the Group. All such transactions with KMP and their related parties are made on terms equivalent to those that
prevail in arm's length transactions.
All other transactions that have occurred with KMP are made on terms equivalent to those that prevail in arm's length
transactions. These transactions generally involve the provision of financial and investment services including services to eligible
international assignees ensuring they are neither financially advantaged nor disadvantaged by their relocation. All such
transactions that have occurred with KMP and their related parties have been trivial or domestic in nature. In this context,
transactions are trivial in nature when they are considered of little or no interest to the users of the Remuneration report in
making and evaluating decisions about the allocation of scarce resources. Transactions are domestic in nature when they relate
to personal household activities.
7.3 Other equity instrument holdings
Holdings and transactions involving equity instruments (held directly or indirectly), other than NAB shares and equity-based
compensation, with each KMP or their related parties and NAB and the Group are set out below:
Name
Equity instrument
Non-executive directors
Philip Chronican
David Armstrong
Executives
Susan Ferrier
David Gall
National Income Securities
NAB Convertible Preference Shares II
NAB Convertible Preference Shares II
NAB Convertible Preference Shares II
7.4 Other relevant interests
Balance at
beginning of
Changes
Balance at end
year
No.
982
900
104
700
during year
No.
-
(900)
-
-
of year
No.
982
-
104
700
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 as at 30 September 2020 were:
Name
Nature of product
Non-executive directors
Peeyush Gupta
Peeyush Gupta
Peeyush Gupta
Ann Sherry
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
Relevant interest (Units)
600,000
700,000
578,438
1,500
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.
82
National Australia Bank
CORPORATE GOVERNANCE
GOVERNANCE
NAB continually strives to improve its governance, accountability and risk management practices.
As a fundamental element of NAB's culture and business practices, the Corporate Governance Framework guides effective
decision making in all areas of the Group through:
• Strategic and operational planning.
• Culture, purpose, values and conduct.
• Risk management and compliance.
• Customer outcomes.
• Financial management.
• External reporting.
• People and remuneration.
NAB follows the 3rd edition ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations and
made changes during the year to comply with the 4th edition. The reporting on the 4th edition will be made in 2021.
NAB’s 2020 Corporate Governance Statement and Appendix 4G are published separately in the corporate governance section of
the NAB website at www.nab.com.au/about-us/corporate-governance.
Board COVID-19 response
The Board has been fully engaged in NAB’s response to COVID-19, including regular briefings on issues such as customer support
and workplace changes to protect the health of colleagues and customers.
The Board increased its frequency of meetings during 2020 to monitor the impacts of COVID-19 and met virtually from April
onwards.
Board responsibilities
The Board’s responsibilities include:
• Representing shareholders and serving the interests of NAB by overseeing and evaluating it's strategies, policies and
performance.
• Approving NAB’s purpose, values and Code of Conduct that underpin the desired culture within the Group, including a strong
focus on sound risk management and customer outcomes.
• Approving the Group’s strategic and financial plan, risk appetite statement, capital management strategy and funding strategy.
• Having due regard to the Group’s relationships with stakeholders and the communities and environments in which the Group
operates and in a manner that promotes fair customer outcomes and financial market integrity.
The Corporate Governance Statement includes the number of meetings held by the Board and its Committees in 2020. Directors’
meeting attendance information is included in the Report of the Directors within this Annual Financial Report.
Annual Financial Report 2020
83
CORPORATE GOVERNANCE
GOVERNANCE (CONTINUED)
Board renewal in 2020
During the year, there was a transition in Chairman and Group CEO as well as other Board renewal. The changes have delivered
collective benefit in the form of fresh thinking, diversity and stability.
Mr Philip Chronican, a non-executive director since 2016, commenced as Chairman on 15 November 2019.
Mr Ross McEwan commenced as Group CEO and Managing Director on 2 December 2019.
Ms Kathryn Fagg was appointed as a non-executive director by the Board in December and was elected by shareholders at NAB’s
2019 Annual General Meeting (AGM).
Mr Simon McKeon commenced as a non-executive director on 3 February 2020 and will stand for election at NAB’s 2020 AGM on
18 December 2020. As outlined in the AGM Notice of Meeting, the Board recommends that shareholders vote in favour of
Simon’s election.
Three directors will also stand for re-election at the 2020 AGM – Mr David Armstrong, Mr Peeyush Gupta and Ms Ann Sherry. In
the AGM Notice of Meeting, the Board also recommends that shareholders vote in favour of their re-election.
On 6 October 2020, it was announced that Ms Geraldine McBride will not be standing for re-election at the NAB's 2020 AGM.
Geraldine has been a non-executive director since March 2014.
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). The 2020 AGM will be conducted as a virtual meeting in light of circumstances relating to COVID-19.
Shareholders will be invited to submit questions in advance of the 2020 AGM to help the Board understand and address areas of
interest or concern.
Key focus areas for the Board during 2020 were:
• Providing directional guidance to management on the refresh of NAB's purpose, values and strategy.
• Monitoring management’s execution of business plans to achieve the Group’s strategic objectives.
• Oversight of management’s response to COVID-19 including crisis management, management of health, safety and wellbeing
of NAB’s customers, colleagues and the communities in which NAB operates, and operational and credit risk.
• Governance improvements, including the Board’s oversight of non-financial risk, Board discretion on executive variable
remuneration and progress against the findings in NAB’s 2018 self-assessment on governance, culture and accountability.
During the year, the Board expanded the remit of its Remuneration Committee to include oversight of a broader range of people
matters. It is now called the People & Remuneration Committee. In addition, the Board increased the emphasis of the Risk
Committee on oversight of compliance risk. It is now called the Risk & Compliance Committee. Further information on these
changes are provided in the Corporate Governance Statement.
84
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
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
86
87
88
89
91
93
93
98
99
101
102
103
106
109
110
113
114
115
115
116
116
117
119
120
121
128
136
149
154
OTHER ASSETS AND LIABILITIES
Note 22 Goodwill and other intangible assets
Note 23 Other assets
Note 24
Provisions
Note 25 Other liabilities
Note 26
Leases
CAPITAL MANAGEMENT
Note 27 Contributed equity
Note 28
Reserves
Note 29 Dividends and distributions
UNRECOGNISED ITEMS
Note 30 Contingent liabilities and credit commitments
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
155
155
157
158
159
160
162
162
164
165
167
167
174
174
178
180
182
186
187
190
193
Annual Financial Report 2020
85
FINANCIAL STATEMENTS
INCOME STATEMENTS
For the year ended 30 September
Interest income
Effective interest income
Fair value through profit or loss
Interest expense
Net interest income
Other income
Operating expenses
Credit impairment charge
Profit before income tax
Income tax expense
Net profit / (loss) for the year from continuing operations
Net loss after tax for the year from discontinued operations
Net profit / (loss) for the year
Profit attributable to non-controlling interests
Net profit / (loss) attributable to owners of NAB
Earnings per share
Basic
Diluted
Basic from continuing operations
Diluted from continuing operations
Group(1)
Company
Note
2020(2)
$m
2019
$m
2020(2)
$m
20,921
2,190
26,500
2,694
20,514
2,017
2019
$m
25,042
2,408
(9,234)
(15,639)
(12,389)
(17,333)
10,142
3,992
(11,314)
(2,462)
358
(885)
(527)
-
(527)
-
(527)
10,117
3,006
(7,760)
(811)
4,552
(1,273)
3,279
-
3,279
-
3,279
3
4
5
17
6
37
7
7
7
7
13,877
3,384
(9,346)
(2,752)
5,163
(1,665)
3,498
(935)
2,563
4
2,559
cents
82.1
80.5
112.7
108.6
13,555
3,980
(8,263)
(927)
8,345
(2,440)
5,905
(1,104)
4,801
3
4,798
cents
168.6
164.4
208.2
201.0
(1)
Information is presented on a continuing operations basis, unless otherwise stated. 2019 has been restated for the presentation of MLC Wealth as a
discontinued operation.
(2) Current year amounts reflect the adoption of AASB 16 Leases on 1 October 2019. As permitted by AASB 16 comparative information has not been restated. For
details on the adoption of AASB 16 refer to Note 1 Basis of preparation.
86
National Australia Bank
STATEMENTS OF COMPREHENSIVE INCOME
For the year ended 30 September
Note
Net profit / (loss) 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
Equity instruments at fair value through other comprehensive income reserve:
Revaluation gains / (losses)
Tax on items transferred directly to equity
Total items that will not be reclassified to profit or loss
Items that will be reclassified subsequently to profit or loss
Cash flow hedge reserve:
Gains 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
Gains / (losses) from sale transferred to the income statement
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
Other comprehensive income for the year from discontinued operations, net
of income tax
Total comprehensive income for the year
Attributable to non-controlling interests
Total comprehensive income attributable to owners of NAB
37
37
FINANCIAL STATEMENTS
Group(1)
Company
2020(2)
$m
3,498
2019
$m
5,905
2020(2)
$m
(527)
2019
$m
3,279
1
1
-
-
(118)
(1)
(1)
32
(87)
121
(234)
(37)
(22)
40
3
29
(100)
(187)
3,311
(935)
(2)
2,374
4
2,370
167
(2)
15
(50)
131
284
(260)
104
8
37
(2)
(37)
134
265
6,170
(1,104)
(41)
5,025
3
5,022
(56)
149
-
-
14
(42)
161
(171)
(7)
(22)
40
3
(8)
(4)
(46)
(573)
-
-
(573)
-
(573)
-
6
(37)
118
354
(208)
13
-
37
(2)
(57)
137
255
3,534
-
-
3,534
-
3,534
(1)
Information is presented on a continuing operations basis, unless otherwise stated. 2019 has been restated for the presentation of MLC Wealth as a
discontinued operation.
(2) Current year amounts reflect the adoption of AASB 16 Leases on 1 October 2019. As permitted by AASB 16 comparative information has not been restated. For
details on the adoption of AASB 16 refer to Note 1 Basis of preparation.
Annual Financial Report 2020
87
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
Due from controlled entities
Deferred tax assets
Property, plant and equipment
Investments in controlled entities
Goodwill and other intangible assets
Other assets
Assets held for sale
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
Deferred tax liabilities
Other liabilities
Liabilities directly associated with assets held for sale
Total liabilities
Net assets
Equity
Contributed equity
Reserves
Retained profits
Total equity (parent entity interest)
Non-controlling interest in controlled entities
Total equity
Note
Group
2020(1)
$m
8
8
9
10
11
18
12
6
22
23
37
8
9
16
18
13
24
14
15
6
25
37
27
28
2019
$m
55,457
32,130
96,828
40,205
7,110
4,689
Company
2020(1)
$m
63,555
48,895
86,250
40,324
3,885
2,888
2019
$m
54,811
29,049
89,552
40,166
6,229
4,059
64,388
52,351
95,851
40,355
3,860
3,830
582,485
587,749
501,342
506,527
1,477
2,490
1,477
2,490
-
3,647
2,374
-
3,809
10,659
1,479
-
177,802
114,786
2,670
1,117
-
5,576
11,103
-
2,895
1,486
3,806
1,757
8,867
1,837
2,021
374
7,979
2,306
8,817
-
866,565
847,124
947,066
869,166
50,556
30,021
29,971
2,255
34,273
34,318
33,283
4,037
47,628
33,450
8,911
1,721
32,552
37,945
8,550
2,939
546,176
522,085
484,338
463,026
192
3,820
-
468
3,507
-
126,384
143,258
6,191
25
9,460
221
6,482
-
9,809
-
805,272
791,520
61,293
55,604
150
3,628
177,422
120,297
6,191
-
8,688
-
892,424
54,642
45,476
38,707
44,690
99
15,717
61,292
1
306
16,583
55,596
8
34
9,918
54,642
-
362
3,207
116,033
137,599
6,482
-
8,582
-
817,277
51,889
37,921
113
13,855
51,889
-
61,293
55,604
54,642
51,889
(1) Current year amounts reflect the adoption of AASB 16 Leases on 1 October 2019. As permitted by AASB 16 comparative information has not been restated. For
details on the adoption of AASB 16 refer to Note 1 Basis of preparation.
88
National Australia Bank
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
Cash flows from operating activities before changes in operating assets and liabilities
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
Net cash provided by / (used in) operating activities
36
Cash flows from investing activities
Movement in debt instruments
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
FINANCIAL STATEMENTS
Group
Company
Note
2020(2)
$m
2019
$m
2020(2)
$m
2019
$m
23,160
29,471
22,557
27,694
(10,151)
(15,992)
(13,159)
(17,639)
43
28
1,329
1,370
(2,114)
(1,608)
(1,341)
(1,222)
3,301
(7,304)
(2,580)
4,355
3,984
(7,739)
(2,251)
5,893
(9,943)
(3,860)
2,861
2,053
1,014
834
(566)
(4,613)
3,201
(18,993)
1,294
(794)
985
(5,462)
(1,975)
2,934
(9,943)
(1,405)
2,181
2,485
1,014
766
1,736
(5,799)
(1,515)
4,625
(566)
(4,421)
2,512
(14,117)
1,294
(240)
25,890
16,275
22,977
12,485
66
(4,007)
1,179
1,566
838
(3,252)
431
1,737
11,006
(1,161)
10,971
(1,241)
3,623
29,537
33,892
7,129
4,517
10,410
2,558
29,190
32,124
6,449
4,323
8,948
(21,066)
(22,567)
(21,037)
(22,542)
21,411
25,947
21,374
25,859
(10)
255
-
238
-
-
-
(138)
(972)
73
-
-
25
67
(1,135)
21
(1,486)
(1,227)
(29)
-
(138)
(721)
7
1,593
-
27
(839)
(1)
(702)
2,613
(2,030)
3,108
(1) The cash flow statements include net cash inflows / (outflows) from operating, investing and financing activities on discontinued operations. Refer to Note 37
Discontinued operations for further information.
(2) Current year amounts reflect the adoption of AASB 16 Leases on 1 October 2019. As permitted by AASB 16 comparative information has not been restated. For
details on the adoption of AASB 16 refer to Note 1 Basis of preparation.
Annual Financial Report 2020
89
FINANCIAL STATEMENTS
CASH FLOW STATEMENTS (CONTINUED)
For the year ended 30 September(1)
Cash flows from financing activities
Group
Company
2020
$m
2019
$m
2020
$m
2019
$m
Repayments of bonds‚ notes and subordinated debt
(34,524)
(31,001)
(29,800)
(26,430)
Proceeds from issue of bonds‚ notes and subordinated debt‚ net of costs
14,996
27,159
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)
Repayments of lease liabilities
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
4,904
-
1,098
(649)
1,000
(722)
1,858
(799)
(2,323)
(3,266)
(322)
-
12,939
4,904
-
1,098
(649)
(2,319)
(278)
21,542
1,000
-
1,858
(799)
(3,242)
-
(16,820)
(5,771)
(14,105)
(6,071)
16,370
47,026
(1,355)
62,041
7,252
37,946
1,828
47,026
15,989
44,164
(1,347)
58,806
5,985
36,368
1,811
44,164
(1) The cash flow statements include net cash inflows / (outflows) from operating, investing and financing activities on discontinued operations. Refer to Note 37
Discontinued operations for further information.
90
National Australia Bank
STATEMENTS OF CHANGES IN EQUITY
FINANCIAL STATEMENTS
Group(3)
Year to 30 September 2019
Balance at 1 October 2018
Net profit for the year from continuing operations
Net profit / (loss) for the year from discontinued operations
Other comprehensive income for the year from continuing operations
Other comprehensive income for the year from discontinued
operations
Total comprehensive income for the year
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Issue of ordinary shares
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(4)
Movement of non-controlling interest in controlled entities
Balance at 30 September 2019
Restatement for adoption of AASB 16 Leases
Restated Balance at 30 September 2019(5)
Year to 30 September 2020
Net profit for the year from continuing operations
Net profit / (loss) for the year from discontinued operations
Other comprehensive income for the year from continuing operations
Other comprehensive income for the year from discontinued
operations
Total comprehensive income for the year
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Issue of ordinary shares
Conversion of convertible notes
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(4)
Movement of non-controlling interest in controlled entities
Contributed
Retained
Non-
controlling
interest in
controlled
Total
equity(1) Reserves(2)
profits
$m
$m
$m
Total
$m
entities
equity
$m
$m
35,982
46
16,673
52,701
11
52,712
-
-
-
-
-
-
-
5,905
5,905
(1,107)
(1,107)
154
111
265
(40)
114
(1)
(41)
4,908
5,022
-
3
-
-
3
-
-
-
-
-
5,905
(1,104)
265
(41)
5,025
2,803
750
-
-
105
8
-
8
-
4
-
-
4
-
-
-
-
-
(4)
-
(7)
1
55,604
(83)
55,521
3,498
(935)
(187)
(2)
2,374
5,880
750
-
-
74
(3,260)
(39)
(7)
61,293
-
-
99
-
-
2,803
750
-
-
105
(4,983)
(4,983)
(4)
(4,987)
(83)
(31)
(83)
(719)
-
-
(83)
(719)
-
-
(2)
(2)
2,803
750
-
147
-
-
-
(975)
-
38,707
-
38,707
-
-
-
-
-
5,880
750
-
139
-
-
-
-
-
-
(99)
(147)
105
-
-
287
-
306
-
306
-
-
(104)
16,583
55,596
(83)
(83)
16,500
55,513
3,498
3,498
(939)
(83)
(939)
(187)
1
(3)
(2)
(103)
2,473
2,370
-
-
(39)
(139)
74
-
-
-
-
-
39
-
-
5,880
750
-
-
74
(3,256)
(3,256)
(39)
(39)
-
-
Balance at 30 September 2020
45,476
99
15,717
61,292
(1) Refer to Note 27 Contributed equity for further details.
(2) Refer to Note 28 Reserves for further details.
(3)
Information is presented on a continuing operations basis, unless otherwise stated. 2019 has been restated for the presentation of MLC Wealth as a
discontinued operation.
(4) Changes in ownership interests in controlled entities that do not result in a loss of control.
(5) The Group adopted AASB 16 Leases on 1 October 2019. As permitted by AASB 16, the Group recognised the cumulative effect of initially applying the standard
as an adjustment to opening retained profits at 1 October 2019. Comparative information has not been restated. For details on the adoption of AASB 16 refer
to Note 1 Basis of preparation.
Annual Financial Report 2020
91
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN EQUITY (CONTINUED)
Contributed
Retained
equity(1) Reserves(2)
profits
Company
Year to 30 September 2019
Balance at 1 October 2018
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
Restatement for adoption of AASB 16 Leases
Restated Balance at 30 September 2019(3)
Year to 30 September 2020
Net loss 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 convertible notes
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 2020
$m
34,221
-
-
-
2,803
750
-
147
-
-
-
37,921
-
37,921
-
-
-
5,880
750
-
139
-
-
-
44,690
$m
108
-
151
151
-
-
(104)
(147)
105
-
-
113
-
113
-
(7)
(7)
-
-
(7)
(139)
74
-
-
34
Total
equity
$m
$m
15,413
49,742
3,279
104
3,383
-
-
104
-
-
3,279
255
3,534
2,803
750
-
-
105
(4,983)
(4,983)
(62)
(62)
13,855
51,889
(83)
(83)
13,772
51,806
(527)
(39)
(566)
(527)
(46)
(573)
-
-
7
-
-
5,880
750
-
-
74
(3,256)
(3,256)
(39)
(39)
9,918
54,642
(1) Refer to Note 27 Contributed equity for further details.
(2) Refer to Note 28 Reserves for further details.
(3) The Company adopted AASB 16 Leases on 1 October 2019. As permitted by AASB 16, the Company recognised the cumulative effect of initially applying the
standard as an adjustment to opening retained profits at 1 October 2019. Comparative information has not been restated. For details on the adoption of AASB
16 refer to Note 1 Basis of preparation.
92
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
INTRODUCTION
NOTE 1
BASIS OF PREPARATION
These are the financial statements of National Australia Bank Limited (Company) together with its controlled entities (Group) for
the year ended 30 September 2020. 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 11 November 2020. 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) and accounting standards and interpretations issued by the Australian Accounting Standards Board
(AASB). Compliance with standards and interpretations issued by the AASB ensures that this financial report complies with
International Financial Reporting Standards (IFRS) as 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.
Unless otherwise stated, comparative information has been restated for any changes to presentation made in the current year.
Discontinued operations are excluded from the results of continuing operations and are presented as a single amount in the
Group's income statement and statement of comprehensive income with comparative information restated accordingly. Balance
sheets are not required to be 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 profit or loss or other
comprehensive income.
• financial assets and liabilities that are otherwise measured on an amortised cost basis but adjusted for changes in fair value
attributable to the risk being hedged in qualifying fair value hedge relationships.
Annual Financial Report 2020
93
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 BASIS OF PREPARATION (CONTINUED)
Change in accounting policies
The Group adopted the following new accounting standards and interpretations effective from 1 October 2019:
• AASB 16 Leases
• AASB 2019-3 Amendments to Australian Accounting Standards - Interest Rate Benchmark Reform
• AASB Interpretation 23 Uncertainty over Income Tax Treatments.
AASB 16 Leases
AASB 16 significantly changes accounting for lessees, requiring recognition of all leases (subject to certain exceptions) on balance
sheet in a manner comparable to how finance leases were previously accounted for under AASB 117 Leases, including related
interpretations. Lessor accounting remains largely unchanged compared to AASB 117.
The Group adopted AASB 16 using the modified retrospective transition option, and as a result, comparative information from
prior periods has not been restated.
On transition, AASB 16 requires the lease liability to be measured based on the future lease payments and permits two options
for the measurement of the right-of-use asset. The right-of-use asset may either be measured with reference to the value of the
lease liability or retrospectively (independently from the lease liability). The standard allows for these measurement options to
be applied on a lease-by-lease basis.
The impact of the adoption of AASB 16 was disclosed in the Group's 2019 Annual Financial Report. In making these disclosures,
the right-of-use assets were measured with reference to the value of the lease liability.
Subsequently, the Group determined that retrospective measurement of the right-of-use asset provides a more accurate
reflection of the remaining utility of the assets. Consequently, the Group has recalculated the right-of-use assets for its most
significant building leases using the retrospective measurement option.
The impact of adopting AASB 16 as at 1 October 2019 is as follows:
Opening retained profits at 1 October 2019
Right-of-use assets
Net deferred tax asset
Lease liabilities
Make-good provisions
Net impact on retained profits
Adjusted retained profits at 1 October 2019
The following table reconciles the operating lease commitments disclosed under AASB 117 as at 30 September 2019 to the
opening lease liabilities recognised under AASB 16 as at 1 October 2019.
Operating lease commitments at 30 September 2019
Less leases committed but not yet commenced
Less short-term and low value leases
Add reassessments under AASB 16
Effect of discounting at a weighted average incremental borrowing rate of 2.2%
Opening lease liabilities at 1 October 2019
On transition the Group, as lessee, applied the following practical expedients as permitted by AASB 16:
• Relied on previous assessments of contracts that were identified as leases under AASB 117.
• Applied a single discount rate to a portfolio of leases with reasonably similar characteristics.
• Relied on previous assessments in relation to whether leases are onerous.
• Accounted for leases for which the lease term ends within 12 months of 1 October 2019 as short-term leases.
• Excluded initial direct costs from the measurement of right-of-use assets.
• Used hindsight to determine the lease term.
$m
16,583
1,393
35
(1,425)
(86)
(83)
16,500
$m
2,888
(1,308)
(65)
2
(92)
1,425
94
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 BASIS OF PREPARATION (CONTINUED)
Interest Rate Benchmark Reform
The Group has early adopted AASB 2019-3 Amendments to Australian Accounting Standards – Interest Rate Benchmark Reform
released by the AASB in October 2019. AASB 2019-3 amends AASB 7 Financial Instruments: Disclosures and AASB 9 Financial
Instruments, modifying some specific hedge accounting requirements to provide relief from the potential effects of the
uncertainty caused by interest rate benchmark reform (IBOR reform).
In accordance with the transitional provisions, the amendments have been applied retrospectively to hedging relationships that
existed at the start of the reporting period and that were designated thereafter. The standard did not have a significant impact
on the Group as it enables the Group to continue applying its existing hedge accounting. Additional information about the
Group's exposure to IBOR reform is presented in Note 18 Hedge accounting.
AASB Interpretation 23 Uncertainty over Income Tax Treatments
AASB Interpretation 23 clarifies the application of the recognition and measurement criteria in AASB 112 Income Taxes where
there is uncertainty over income tax treatments. The interpretation requires an assessment of each uncertain tax position and
consideration of whether it is probable that a taxation authority will accept the entity’s position. Where it is not probable that
the taxation authority will accept the position, the effect of the uncertainty is reflected in determining the relevant taxable profit
or loss, tax bases, unused tax losses and unused tax credits or tax rates. The amount will be determined as either the single most
likely amount or the sum of the probability weighted amounts in a range of possible outcomes, whichever better predicts the
resolution of the uncertainty. Judgements will be reassessed as and when new facts and circumstances are presented.
The Group’s existing income tax recognition and measurement accounting policies, and related judgements, were materially
aligned with the requirements of the interpretation. Consequently, no transition adjustment to retained earnings was required.
There were no other substantial amendments to accounting standards or interpretations adopted during the period that have a
material impact on the Group.
Critical accounting judgements and estimates
In the process of applying the Group’s accounting policies, management have made a number of judgements and assumptions
and applied estimates of future events. Some of these areas include:
• impairment charges on loans and advances
• fair value of financial assets and liabilities
• impairment assessment of goodwill and other intangible assets
• determination of income tax
• presentation of MLC Wealth as a discontinued operation
• provisions for customer-related remediation and other regulatory matters.
COVID-19
COVID-19 is a respiratory illness caused by the novel coronavirus and was declared a worldwide pandemic by the World Health
Organisation in March 2020. COVID-19 and related measures to slow the spread of the virus, have since had a significant impact
on the Australian and global economy, supply chains and financial markets.
The Group has considered the impact of COVID-19 and related market volatility in preparing these financial statements. While the
methodologies and assumptions applied in the measurement of various items within the financial statements remain unchanged
from those applied in the 2019 financial statements, the impact of COVID-19 has resulted in the application of further judgement
and the incorporation of estimates and assumptions specific to the impact of COVID-19. Principally this has resulted in updates to
the Group’s economic assumptions used in determining expected credit losses (ECL) and the impairment assessment for other
non-financial assets.
The Group’s risk and capital management framework continues to be applied and the Group continues to monitor the impact of
COVID-19 on the Group’s risk and capital profile. Non-financial risks emerging from global movement restrictions, and remote
working by staff, counterparties, clients and suppliers, are being identified, assessed, managed and governed through timely
application of the Group’s Risk Management Framework.
Annual Financial Report 2020
95
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 BASIS OF PREPARATION (CONTINUED)
Management's consideration of the potential impacts of COVID-19 on specific financial statement line items is detailed below:
Financial statement line item
Potential impacts of COVID-19
Note
Trading instruments
Given market volatility during the year, the Group reviewed the
Note 20 Fair value of
appropriateness of the inputs to its valuations, which included the use of
financial instruments
correlations, price volatilities, funding costs and bid offer, counterparty
and own credit spreads. The impact of changes in valuation inputs has also
been considered in terms of the classification of exposures in the fair value
hierarchy and transfers within the fair value hierarchy.
Hedging derivatives and hedge accounting
An assessment was conducted as to whether the forecast cash flows in
Note 18 Hedge
cash flow hedge relationships remain highly probable at the reporting
accounting
date. Based on available facts as at 30 September 2020, the modelling of
the hedged future cash flows were determined to remain highly probable
and hence hedge accounting has continued to be applied.
Loans and advances
The Group has introduced a number of support measures for customers
Note 17 Provision for
impacted by COVID-19, including the deferral of payments for retail and
credit impairment on
small business customers for an initial period of six months. The terms and
loans at amortised
conditions related to the deferrals were considered to be non-substantial
modifications and accounted for as a continuation of the existing loan
cost
agreements. No material modification gains or losses have been
recognised in respect of loans on deferral.
Provision for the credit impairment on loans
In determining the appropriate level of expected credit losses (ECLs) the
Note 17 Provision for
at amortised cost
Group considered the macro-economic outlook, customer credit quality,
credit impairment on
the type of collateral held, exposure at default, and the effect of payment
loans at amortised
deferral options as at the reporting date.
cost
The ECL methodology, significant increase in credit risk (SICR) thresholds,
and definition of default remain consistent with those used as at
30 September 2019.
The model inputs, including forward-looking information, scenarios and
associated weightings, were revised to reflect the current outlook. Noting
the wide range of possible scenarios and macroeconomic outcomes, and
the relative uncertainty of how the social and economic consequences of
COVID-19 will materialise, these scenarios represent reasonable and
supportable forward-looking views as at the reporting date.
Investments in associates
The Group considered the impact of COVID-19 in determining the
Note 5 Operating
appropriate value in use of its investments in associates.
expenses
Investments in controlled entities
The Company considered the impact of COVID-19 in reviewing the carrying
Note 31 Interest in
Property, plant and equipment
The Group considered the impact of COVID-19, including plans to
Note 5 Operating
amount of investments in subsidiaries.
subsidiaries and other
entities
consolidate the Group's Melbourne office space enabled by changes in
expenses
ways of working, on the carrying amount of property, plant and
equipment.
Goodwill
The Group has tested goodwill for impairment. The assessment
Note 22 Goodwill and
incorporated a consideration of the potential impacts of COVID-19. Given
other intangible assets
the range of possible scenarios and outcomes, the Group has provided
information about the breakeven growth rates and discount rates for cash-
generating units (CGUs) which have material goodwill balances allocated
to them.
Due to other banks
On 19 March 2020, the Reserve Bank of Australia (RBA) announced a Term
Note 8 Cash and
Funding Facility (TFF) to support lending to Australian businesses. The TFF
balances with other
is a collateralised three year facility which currently bears interest at
banks
0.25%. As at 30 September 2020 the carrying value of the TFF was $14,270
million which has been included in Amounts due to other banks.
96
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 BASIS OF PREPARATION (CONTINUED)
Management's consideration of the potential impacts of COVID-19 on specific financial statement line items is detailed below:
Financial statement line item
Potential impacts of COVID-19
Note
Earnings per share
COVID-19 has resulted in significant market volatility in the Group's share
Note 7 Earnings per
price. This volatility has resulted in the NAB Convertible Preference Shares
share
II (NAB CPS II) not meeting the criteria for mandatory conversion into
ordinary shares as at 30 September 2020. The NAB CPS II have therefore
been excluded from the calculation of diluted earnings per share for the
year ended 30 September 2020.
Given the dynamic and evolving nature of COVID-19 and limited recent experience of the economic and financial impacts of such
a pandemic, the actual outcomes for the Group in future may differ from assumptions that have been applied in the
measurement of the Group’s assets and liabilities.
Future accounting developments
The following issued, but not yet effective, amendment to accounting standards has not been applied in preparing these
financial statements.
In September 2020, the AASB issued AASB 2020-8 Amendments to Australian Accounting Standards - Interest Rate Benchmark
Reform - Phase 2 to address the financial reporting impacts related to market-wide benchmark interest rate reform. The
amendments include a practical expedient for modifications of financial assets and financial liabilities, relief from discontinuing
hedge accounting, and allow alternative benchmark rates to be deemed to be separately identifiable risk components for hedge
accounting purposes. There are also additional disclosure requirements. The amendments apply to annual periods beginning on
or after 1 January 2021. The Group is assessing the impact of these amendments.
Annual Financial Report 2020
97
NOTES TO THE FINANCIAL STATEMENTS
FINANCIAL PERFORMANCE
OVERVIEW
In the 2019 Annual Financial Report, the Group’s segment information was presented based on the following segments:
• Business and Private Banking
• Consumer Banking and Wealth
• Corporate and Institutional Banking
• New Zealand Banking
• Corporate Functions and Other (including eliminations).
On 27 April 2020, the Group announced a new operational structure to support the Group’s refreshed strategy including the
operational separation of UBank. In accordance with AASB 8 Operating Segments, the Group's operating segments are separately
reported only if they meet certain quantitative thresholds or if the Group elects to report them separately. Based on these
criteria, UBank has been included in the Corporate Functions and Other segment. This change in the presentation of segment
information is in addition to the presentation of MLC Wealth as a separate operating segment following the significant progress
made on the operational separation of MLC Wealth and subsequent presentation as a discontinued operation.
For the year ended September 2020, the Group's segment information is therefore presented based on the following reportable
segments:
• Business and Private Banking
• Personal Banking
• Corporate and Institutional Banking
• New Zealand Banking
• Corporate Functions and Other, including UBank and Group eliminations
• MLC Wealth (presented as a discontinued operation).
Refer to The Group's Business section in the Report of the Directors for a description of the operating activities of each business
unit.
The new operational structure has also resulted in changes to the allocation of income and costs within the reportable segments.
These changes have not impacted the Group’s net profit or balance sheet but have resulted in reallocations of net profit and
balance sheet items between the reportable segments. Prior year segment information has been restated to reflect the change in
operating segments and cost allocation.
The Group evaluates performance on the basis of cash earnings as it better reflects what is considered to be the underlying
performance of the Group. Cash earnings is a non-IFRS key financial performance measure used by the Group, the investment
community and the Group's major Australian bank peers with similar business portfolios.
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 for the year
ended 30 September 2020 has been adjusted for distributions, fair value and hedge ineffectiveness and the amortisation and
impairment of acquired intangible assets. 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.
98
National Australia Bank
NOTE 2
SEGMENT INFORMATION
Reportable segment information
Net interest income(3)
Other income(3)(4)
Net operating income
Operating expenses(3)(4)
Underlying profit / (loss)
Credit impairment charge
Cash earnings / (loss) before tax and
distributions
Income tax (expense) / benefit
Cash earnings / (loss) before
distributions
Distributions
Cash earnings / (loss)
Fair value and hedge ineffectiveness
Other non-cash earnings items
Net profit / (loss) for the year from
Business and
Private
Banking
$m
Personal
Banking
$m
2020(1)
Corporate and
Institutional
Banking
$m
New
Zealand
Banking
$m
5,400
878
6,278
(2,404)
3,874
(322)
3,552
(1,063)
2,489
-
2,489
(9)
-
4,017
514
4,531
(2,292)
2,239
(256)
1,983
(603)
1,380
-
1,380
(1)
-
2,075
1,382
3,457
(1,313)
2,144
(170)
1,974
(505)
1,469
-
1,469
(31)
-
NOTES TO THE FINANCIAL STATEMENTS
Corporate
Functions
MLC
Total
and Other(2)
Wealth
Group
$m
507
25
532
(2,104)
(1,572)
(1,874)
(3,446)
880
(2,566)
(39)
(2,605)
27
(178)
(2,756)
$m
$m
-
-
-
-
-
-
-
-
-
-
-
-
-
-
13,871
3,319
17,190
(9,007)
8,183
(2,762)
5,421
(1,672)
3,749
(39)
3,710
(34)
(178)
3,498
(788)
(151)
(939)
(3,544)
(151)
2,559
1,872
520
2,392
(894)
1,498
(140)
1,358
(381)
977
-
977
(20)
-
957
-
957
continuing operations
2,480
1,379
1,438
Net loss after tax for the year from
discontinued operations
Net profit / (loss) attributable to the
-
-
-
owners of NAB
2,480
1,379
1,438
Reportable segment assets(5)
196,772
217,712
317,342
86,413
46,214
2,112 866,565
Information is presented on a continuing operations basis, unless otherwise stated.
(1)
(2) Corporate Functions and Other includes Group Eliminations.
(3)
(4) Comparative information has been restated for immaterial changes in NAB’s organisational structure.
(5) Reportable segment assets include inter-company balances which are eliminated within the Corporate Functions and Other segment.
Includes large notable items. Refer Note 3 Net interest income, Note 4 Other income and Note 5 Operating expenses for further details.
Annual Financial Report 2020
99
NOTES TO THE FINANCIAL STATEMENTS
NOTE 2 SEGMENT INFORMATION (CONTINUED)
Business and
Private
Banking
$m
Personal
Banking
$m
2019(1)(2)
Corporate and
Institutional
Banking
$m
New
Zealand
Banking
$m
5,634
1,004
6,638
(2,265)
4,373
(336)
4,037
(1,220)
2,817
-
2,817
(3)
-
3,836
576
4,412
(2,302)
2,110
(314)
1,796
(536)
1,260
-
1,260
(1)
-
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
-
2,814
1,259
1,485
1,009
Corporate
Functions
MLC
Total
and Other(3)
Wealth
Group
$m
417
202
619
(1,381)
(762)
(96)
(858)
212
(646)
(83)
(729)
(9)
76
(662)
$m
$m
-
-
-
-
-
-
-
-
-
-
-
-
-
-
13,542
3,892
17,434
(8,140)
9,294
(919)
8,375
(2,439)
5,936
(83)
5,853
(24)
76
5,905
-
-
-
-
(1,260)
153
(1,107)
Reportable segment information
Net interest income(4)
Other income(4)
Net operating income
Operating expenses(4)
Underlying profit / (loss)
Credit impairment charge
Cash earnings / (loss) before tax and
distributions
Income tax (expense) / benefit
Cash earnings / (loss) before
distributions
Distributions
Cash earnings / (loss)
Fair value and hedge ineffectiveness
Other non-cash earnings items
Net profit / (loss) for the year from
continuing operations
Net profit / (loss) after tax for the year
from discontinued operations
Net profit / (loss) attributable to the
owners of NAB
2,814
1,259
1,485
1,009
(1,922)
153
4,798
Reportable segment assets(5)
200,910
219,238
295,042
84,307
44,039
3,588 847,124
(1)
Information is presented on a continuing operations basis, unless otherwise stated. 2019 has been restated for the presentation of MLC Wealth as a
discontinued operation.
(2) Comparative information has been restated for immaterial changes in NAB’s organisational structure.
(3) Corporate Functions and Other includes Group Eliminations.
(4)
(5) Reportable segment assets include inter-company balances which are eliminated within the Corporate Functions and Other segment.
Includes large notable items. Refer Note 3 Net interest income, Note 4 Other income and Note 5 Operating expenses for further details.
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)
2020
$m
2019
$m
13,934
14,293
2,481
929
2,537
776
17,344
17,606
(83)
(71)
17,261
17,535
2020
$m
5,618
862
133
6,613
-
6,613
2019
$m
6,537
690
47
7,274
-
7,274
(1) Consists of goodwill and other intangible assets, property, plant and equipment and investments in joint ventures and associates.
100
National Australia Bank
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 (for example, loan origination
fees) 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.
Included in net interest income are interest income and expense on trading securities, hedging instruments and financial
instruments measured at fair value through profit or loss.
Interest income
Effective interest method
Amortised cost
Due from other banks
Loans and advances
Due from customers on acceptances
Due from controlled entities
Other interest income(1)
Fair value through other comprehensive income
Debt instruments
Total effective interest method
Fair value through profit or loss
Due from other banks
Trading instruments
Other financial assets
Total fair value through profit or loss
Total interest income
Interest expense
Effective interest method
Due to other banks
Deposits and other borrowings
Bonds, notes and subordinated debt
Due to controlled entities
Other debt issues
Other interest expense
Total effective interest method
Fair value through profit or loss
Trading instruments
Other financial liabilities
Total fair value through profit or loss
Bank levy
Total interest expense
Net interest income
Group
2020
$m
2019
$m
Company
2020
$m
2019
$m
265
479
19,446
23,817
92
-
738
380
155
-
1,264
785
20,921
26,500
11
1,214
965
2,190
27
1,542
1,125
2,694
240
16,274
92
2,851
678
379
20,514
-
1,125
892
2,017
432
19,089
155
3,398
1,186
782
25,042
-
1,404
1,004
2,408
23,111
29,194
22,531
27,450
268
5,102
2,118
-
202
458
638
9,177
3,823
-
243
462
261
4,166
2,014
4,594
202
455
622
7,916
3,674
3,753
243
464
8,148
14,343
11,692
16,672
54
620
674
412
50
863
913
383
54
231
285
412
50
228
278
383
9,234
13,877
15,639
13,555
12,389
10,142
17,333
10,117
(1)
In the 2020 financial year, the Group and Company recognised charges of $49 million (2019: $72 million) as a reduction in other interest income. These costs
mainly relate to the refund of interest from various banking-related matters.
Annual Financial Report 2020
101
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 are the fair value movements (excluding interest income or
expense) that do not offset the hedged risk.
Includes fair value movements on such items, other than 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.
When a third party is involved in providing goods or services to the Group's customer, the Group
assesses whether the nature of the arrangement with its customer is as a principal or an agent of the
third party. When the Group is not acting in a principal capacity, the income earned by the Group is
net of the amounts paid to the third party provider. The net consideration represents the Group's
income for facilitating the transaction.
Gains less losses on financial instruments at fair value
Trading instruments
Hedge ineffectiveness
Financial instruments designated at fair value
Total gains less losses on financial instruments at fair value
Other operating income
Dividend revenue
Controlled entities
Other entities
Banking fees
Money transfer fees
Fees and commissions(2)(3)
Investment management fees(2)
Other income
Total other operating income
Total other income
Group(1)
Company
2020
$m
2019
$m
1,279
2,315
26
(217)
1,088
103
(984)
1,434
2020
$m
1,305
16
(116)
1,205
2019
$m
1,820
4
(445)
1,379
-
36
-
26
1,020
1,064
440
496
194
110
2,296
3,384
551
525
188
192
2,546
3,980
1,294
1,343
35
835
325
231
-
67
2,787
3,992
27
876
409
(1,056)
-
28
1,627
3,006
(1)
Information is presented on a continuing operations basis, unless otherwise stated. 2019 has been restated for the presentation of MLC Wealth as a
discontinued operation.
(2) Comparative information has been restated to align to the presentation in the current period to reflect revised product classification.
(3)
In the 2020 financial year, the Group recognised charges of $80 million (2019: $78 million) and the Company recognised charges of $162 million (2019: $1,466
million) as a reduction in fees and commissions. This related to progression of work on banking-related matters.
102
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 5
OPERATING EXPENSES
Accounting policy
Operating expenses are recognised as services provided to the Group, over the period in which an asset is consumed or once a
liability is created.
Amounts received by the Group as a reimbursement for costs incurred are recognised as a reduction of the related expense.
Annual leave, long service leave and other personnel expenses
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. 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. Employee entitlements to long service
leave is accrued using an actuarial calculation, including assumptions regarding employee departures, leave utilisation and
future salary increases.
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.
Annual Financial Report 2020
103
NOTES TO THE FINANCIAL STATEMENTS
NOTE 5 OPERATING EXPENSES (CONTINUED)
Personnel expenses
Salaries and related on-costs
Superannuation costs-defined contribution plans
Performance-based compensation
Other expenses
Total personnel expenses
Occupancy and depreciation expenses(3)
Rental expense(4)
Depreciation of property, plant and equipment(5)
Other expenses
Total occupancy and depreciation expenses
General expenses
Fees and commission expense
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
Group(1)
Company(2)
2020
$m
2019
$m
2020
$m
2019
$m
3,429
3,167
3,150
2,680
285
291
455
260
366
225
269
234
462
245
253
256
4,460
4,018
4,115
3,434
92
776
95
963
416
294
98
808
48
1,263
47
1,070
162
257
171
741
84
681
225
291
189
312
176
715
80
567
19
262
3,923
9,346
3,437
8,263
193
554
85
832
44
1,101
138
625
141
684
60
724
2,578
272
6,367
11,314
466
149
84
699
44
875
159
608
149
662
54
519
254
303
3,627
7,760
(1)
Information is presented on a continuing operations basis, unless otherwise stated. 2019 has been restated for the presentation of MLC Wealth as a
discontinued operation.
(2) Operating expenses of the Company includes amounts which are presented in discontinued operations at a Group level. These include customer-related and
payroll remediation charges, MLC Wealth separation charges, and changes in the provision for litigation. Refer to Note 37 – Discontinued operations for further
information.
(3) Current year amounts reflect the adoption of AASB 16 Leases on 1 October 2019. As permitted by AASB 16 comparative information has not been restated. For
details on the adoption of AASB 16 refer to Note 1 Basis of preparation.
(4) Current year amount primarily relates to short-term and low value leases.
(5)
Includes impairment of property-related assets.
Customer-related remediation
In the 2020 financial year, the Group recognised $136 million (2019: $123 million) and the Company recognised $403 million
(2019: $376 million) as a charge to provide for operational risk event losses. The charges relate to costs for executing the
remediation programs for banking-related matters.
Payroll remediation
Payroll remediation relates to costs to address potential payroll issues relating to both current and former Australian colleagues,
comprising payments to colleagues and costs to execute the remediation program.
In the 2020 financial year, the Group recognised charges of $108 million ($128 million in the Company), as a charge to provide
for operational risk event losses.
Capitalised software policy change
In the 2020 financial year, the Group made a change to the application of the software capitalisation policy by increasing the
threshold for capitalisation of software from $2 million to $5 million. This reflects a change in approach to managing projects
which is intended to improve business accountability for projects less than $5 million. In the 2019 financial year, the Group made
a change to the application of the software capitalisation policy by increasing the threshold for capitalisation of software from
$0.5 million to $2 million.
104
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 5 OPERATING EXPENSES (CONTINUED)
In the 2020 financial year, the Group recognised an accelerated amortisation charge of $950 million (2019: $489 million) in the
amortisation of intangible assets. The Company recognised an accelerated amortisation charge of $806 million (2019: $380
million).
Impairment of property-related assets
In the 2020 financial year, the Group recognised a charge of $134 million for the impairment of property-related assets which is
reflected within depreciation of property, plant and equipment. This primarily relates to plans to consolidate NAB's Melbourne
office space with more colleagues expected to adopt a flexible and hybrid approach to working over the longer term.
Impairment losses
In the 2020 financial year, the Group recognised an impairment loss of $214 million ($239 million in the Company) on its
investment in MLC Life, a 20% owned associate. The impairment was driven by a reduction in the embedded value of MLC Life as
a result of adverse assumption changes, as well as the challenging operating environment within the life insurance industry. The
recoverable amount of the investment was determined with reference to its value in use.
In the 2020 financial year, the Company recognised an impairment loss of $2,339 million (2019: $249 million) on its investment in
National Wealth Management Holdings (NWMH) Limited, which is classified as a non-current asset held for sale. The impairment
loss impacts the profit or loss of the Company and not the Group. Refer to Note 37 Discontinued operations for details of the
investment and the goodwill impairment recognised by the Group. The impairment was driven by the sales proceeds under the
agreement with IOOF being lower than the carrying value of the Company's investment in NWMH.
Annual Financial Report 2020
105
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.
The Group undertakes transactions in the ordinary course of business where the income tax treatment requires the exercise of
judgement.
The Company and its wholly owned Australian subsidiaries are part of a tax consolidated group. The Company is the head entity
in the tax consolidated group. The members of the tax consolidated group have entered into tax funding and tax sharing
agreements, which set out the funding obligations and members. Any current tax liabilities / assets and deferred tax assets from
unused tax losses from subsidiaries in the tax consolidated group are recognised by the Company and funded in line with the tax
funding arrangements.
Critical accounting judgements and estimates
The Group estimates the amount expected to be paid to tax authorities based on its understanding and interpretation of relevant
tax laws. The effect of uncertainty over income tax treatments is reflected in determining the relevant taxable profit or tax loss,
tax bases, unused tax losses and unused tax credits or tax rates. Uncertain tax positions are presented as current or deferred tax
assets or liabilities as appropriate.
106
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 6 INCOME TAX (CONTINUED)
Income tax expense
The income tax expense for the year reconciles to the profit before income tax as follows:
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 adjustment
Restatement of deferred tax balances for tax rate changes
Non-deductible hybrid distributions
Dividend income adjustments
Impairment of investment in MLC Life
Impairment of investment in NWMH
Other
Income tax expense
Current tax expense
Deferred tax expense
Total income tax expense
Group(1)
Company
2020
$m
5,163
1,549
5
(60)
32
(56)
3
23
10
61
-
64
-
34
1,665
2,544
(879)
1,665
2019
$m
8,345
2,504
7
(67)
2
(50)
(1)
(53)
2
73
-
-
-
23
2,440
3,124
(684)
2,440
2020
$m
358
107
5
(32)
32
(56)
(3)
40
2
61
2019
$m
4,552
1,366
4
(26)
1
(50)
-
(38)
2
73
(135)
(187)
72
702
90
885
1,574
(689)
885
-
75
53
1,273
1,930
(657)
1,273
(1)
Information is presented on a continuing operations basis, unless otherwise stated. 2019 has been restated for the presentation of MLC Wealth as a
discontinued operation.
Annual Financial Report 2020
107
NOTES TO THE FINANCIAL STATEMENTS
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
Reserves
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
Reserves
Cash flow hedge reserve
Other reserves
Other
Total deferred tax liabilities
Deferred tax liabilities set-off against deferred tax assets pursuant to set-off provisions
Net deferred tax liability
(1) Comparative information has been restated to align to the presentation in the current period.
Deferred tax assets not brought to account
Group
Company
2020
$m
219
1,447
232
25
294
674
496
161
393
3,941
(294)
3,647
5
62
9
133
22
88
319
(294)
25
2019(1)
$m
225
917
250
67
316
759
269
86
192
3,081
(411)
2,670
7
47
16
107
9
225
411
(411)
-
2020
$m
162
1,264
218
25
-
659
358
105
355
3,146
(251)
2,895
-
-
7
148
22
74
251
(251)
-
2019
$m
182
787
219
67
-
739
156
52
134
2,336
(315)
2,021
-
-
8
102
9
196
315
(315)
-
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
2020
$m
1,684
351
2019
$m
1,121
350
2020
$m
1,684
351
2019
$m
1,121
350
The amount disclosed above for capital gains tax losses includes an estimate of the tax loss on disposal of MLC Wealth. The final
loss on sale will be determined at completion and will be impacted by separation and transaction costs, net assets at completion
and other adjustments.
108
National Australia Bank
NOTE 7
EARNINGS PER SHARE
Earnings ($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(2)
Adjusted earnings
Net loss from discontinued operations attributable to owners of NAB
Adjusted earnings from continuing operations
Weighted average number of ordinary shares (millions)
NOTES TO THE FINANCIAL STATEMENTS
Group(1)
Basic
Diluted
2020
2019
2020
2019
2,559
(39)
-
-
2,520
939
3,459
4,798
(83)
-
-
4,715
1,107
5,822
2,559
(39)
162
-
2,682
939
3,621
4,798
(83)
165
90
4,970
1,107
6,077
Weighted average number of ordinary shares (net of treasury shares)
3,068
2,797
3,068
2,797
Potential dilutive weighted average number of ordinary shares
Convertible notes
Convertible preference shares(2)
Share-based payments
-
-
-
-
-
-
258
-
7
133
88
6
Total weighted average number of ordinary shares
3,068
2,797
3,333
3,024
Earnings per share (cents) attributable to owners of NAB
Earnings per share (cents) from continuing operations
Earnings per share (cents) from discontinued operations
82.1
112.7
(30.6)
168.6
208.2
(39.6)
80.5
108.6
(28.1)
164.4
201.0
(36.6)
(1)
Information is presented on a continuing operations basis, unless otherwise stated. 2019 has been restated for the presentation of MLC Wealth as a
discontinued operation.
(2) Convertible preference shares have been excluded from the calculation of diluted earnings per share in the current period as the conversion conditions have
not been met as at 30 September 2020.
Annual Financial Report 2020
109
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.
Initial recognition of financial instruments
A financial asset or financial liability is recognised on the balance sheet when the Group becomes a party to the contractual
provisions of the instrument. The Group recognises regular way transactions on the trade date.
All financial instruments are initially recognised at fair value. Directly attributable transaction costs are added to or deducted
from the carrying value of the asset or liability on initial recognition, unless the instrument is measured at fair value through
profit or loss, in which case they are recognised in profit or loss.
Classification
Subsequently, financial instruments are measured either at amortised cost or fair value depending on their classification.
Classification of financial assets is driven by the Group's business model for managing the asset and the contractual cash flows of
the asset. The Group uses the following flowchart to determine the appropriate classification for financial assets.
Non-derivative financial liabilities are measured at amortised cost unless the Group elects to measure the financial liability at fair
value through profit or loss. The Group will elect to measure a financial liability at fair value through profit or loss if such
measurement significantly reduces or eliminates an accounting mismatch.
Refer to the table at the end of this section for a summary of the classification of the Group's financial instruments.
Measurement
Financial instruments measured at amortised cost
Amortised cost is the amount at which the financial asset or financial liability is measured at initial recognition minus the
principal repayments, plus or minus the cumulative amortisation using the effective interest method and for financial assets,
adjusted for any loss allowance.
110
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
OVERVIEW (CONTINUED)
Financial assets measured at fair value through other comprehensive income
Gains or losses arising from changes in the fair value of debt instruments measured at fair value through other comprehensive
income are recognised in other comprehensive income and accumulated 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 recognised 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 creditworthiness 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 recognised separately in other
comprehensive income.
Derivative financial instruments and hedge accounting
Derivative financial instruments are contracts whose value is derived from an underlying price, index or other variable, and
include instruments such as swaps, forward rate agreements, futures and options.
All derivatives are recognised initially on the balance sheet at fair value and are subsequently measured at fair value through
profit or loss, except where they are designated as a part of an effective hedge relationship and classified as hedging derivatives.
Derivatives are presented as assets when their fair value is positive and as liabilities when their 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.
Annual Financial Report 2020
111
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
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
Fair value through
profit or loss
taking
Derivatives not in a qualifying hedging
relationship
Note 9 Trading
instruments
Cash flows are not solely payments of principal
Note 11 Other
and interest or designated at fair value through
financial assets
profit or loss to eliminate an accounting
mismatch
Debt instruments (bonds, notes or securities
Fair value through
Cash flows represent solely payments of principal
Note 10 Debt
issued by government, financial institutions or
other
and interest, held with the objective to both
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, 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
Hedging derivatives (forwards, swaps, futures,
Fair value(1)
Designated in a qualifying hedging relationship
Note 18 Hedge
options)
accounting
(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.
112
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 8
CASH AND BALANCES WITH OTHER BANKS
Accounting policy
Cash and liquid assets, and balances with other banks are initially measured at fair value and 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
Reverse repurchase agreements
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(1)
Other banks
Total due to other banks
Group
Company
2020
$m
1,366
61,542
1,480
64,388
18,934
33,417
52,351
25,111
25,445
50,556
2019
$m
1,003
53,201
1,253
55,457
9,058
23,072
32,130
7,768
26,505
34,273
2020
$m
1,197
61,016
1,342
63,555
16,914
31,981
48,895
24,900
22,728
47,628
2019
$m
850
52,976
985
54,811
7,481
21,568
29,049
7,693
24,859
32,552
(1)
Included within amounts due to central banks and other regulatory authorities is $14,401 million (2019: $nil) for the Group and $14,270 million (2019: $nil) for
the Company relating to the Term Funding Facility provided by the Reserve Bank of Australia and the Term Lending Facility and Term Auction Facility provided
by the Reserve Bank of New Zealand.
Annual Financial Report 2020
113
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
2020
Assets
$m
30,914
64,937
95,851
Group
2019
2020
2019
Assets
Liabilities
Liabilities
$m
35,545
61,283
96,828
$m
$m
30,021
34,318
-
-
30,021
34,318
2020
Assets
$m
31,326
54,924
86,250
Company
2019
2020
2019
Assets
Liabilities
Liabilities
$m
35,007
54,545
89,552
$m
$m
33,450
37,945
-
-
33,450
37,945
Further details of trading derivatives are disclosed in the below table.
Group
Company
2020
Assets
$m
2019
2020
2019
Assets
Liabilities
Liabilities
$m
$m
$m
2020
Assets
$m
2019
2020
2019
Assets
Liabilities
Liabilities
$m
$m
$m
6,389
5,601
218
6,727
8,478
241
6,527
8,649
136
6,913
10,286
138
6,132
6,462
217
5,772
8,800
239
6,112
12,180
136
6,084
14,385
139
Foreign exchange rate-related
contracts
Spot and forward contracts
Cross currency swaps
Options / swaptions
Total foreign exchange rate-related
contracts
12,208
15,446
15,312
17,337
12,811
14,811
18,428
20,608
Interest rate-related contracts
Forward rate agreements
Swaps
Options / swaptions
Total interest rate-related contracts
Credit derivatives
Commodity derivatives
Other derivatives
25
16,548
1,513
18,086
74
525
21
27
18,584
1,219
19,830
58
165
46
19
12,452
1,718
14,189
156
359
5
17
15,364
1,372
16,753
103
88
37
23
16,353
1,513
17,889
77
528
21
27
18,677
1,219
19,923
61
166
46
16
12,761
1,718
14,495
159
363
5
16
15,717
1,372
17,105
106
88
38
Total trading derivatives
30,914
35,545
30,021
34,318
31,326
35,007
33,450
37,945
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
114
National Australia Bank
Group
Company
2020
$m
42,071
5,827
15,965
1,074
64,937
2019
$m
35,800
6,458
18,034
991
61,283
2020
$m
36,361
3,096
14,394
1,073
54,924
2019
$m
33,484
3,816
16,254
991
54,545
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 cash flows or realising the asset through sale and they have contractual cash flows which are
considered to be solely repayments of principal and interest.
Group
Company
2020
$m
3,282
2019
$m
3,005
23,240
21,689
6,648
7,185
6,273
9,238
40,355
40,205
2020
$m
3,280
23,240
6,648
7,156
40,324
2019
$m
3,005
21,689
6,256
9,216
40,166
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
Other financial assets are measured at fair value through profit or loss. Financial assets are measured at fair value through profit
or loss when they have contractual cash flow characteristics that are not considered to be solely principal and interest or they
have been designated as such to eliminate or reduce an accounting mismatch that would otherwise arise.
Other financial assets are measured at fair value both at initial recognition and subsequently. Changes in fair value and
transaction costs are recognised in the income statement.
Loans at fair value
Other financial assets at fair value
Total other financial assets
Loans
Group
Company
2020
$m
3,860
-
3,860
2019
$m
6,761
349
7,110
2020
$m
2,552
1,333
3,885
2019
$m
4,868
1,361
6,229
The maximum credit exposure of loans (excluding any undrawn facility limits) included in other financial assets is $3,860 million
(2019: $6,761 million) for the Group and $2,552 million (2019: $4,868 million) for the Company. The cumulative change in fair
value of the loans attributable to changes in credit risk amounted to a $66 million loss (2019: $65 million loss) for the Group and
a $35 million loss (2019: $54 million loss) for the Company.
Annual Financial Report 2020
115
NOTES TO THE FINANCIAL STATEMENTS
NOTE 12
LOANS AND ADVANCES
Accounting policy
Loans and advances are financial assets for which the contractual cash flows are solely repayments of principal and interest and
that are held in a business model with the objective of collecting contractual cash flows.
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. Subsequently, loans and advances are measured at amortised
cost using the effective interest rate method, net of any provision for credit impairment.
Group
2020
$m
2019
$m
Company
2020
$m
2019
$m
341,729
219,591
13,009
4,347
5,259
4,780
343,915
216,126
12,763
5,820
6,774
6,703
298,154
184,665
12,611
2,484
4,426
4,463
302,764
180,100
12,230
3,265
5,717
6,242
588,715
592,101
506,803
510,318
(219)
(6,011)
(452)
(3,900)
(282)
(5,179)
(510)
(3,281)
582,485
587,749
501,342
506,527
Loans and advances
Housing loans
Other term lending
Asset and lease financing
Overdrafts
Credit card outstandings
Other lending
Total gross loans and advances
Deduct:
Unearned income and deferred net fee income
Provision for credit impairment
Total net loans and advances
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.
Group
Company
2020
$m
134,181
261,260
34,708
72,221
18,679
25,127
2019
$m
160,328
210,294
39,620
53,672
26,809
31,362
2020
$m
107,044
234,933
34,709
64,163
18,362
25,127
2019
$m
127,997
190,284
39,620
47,861
25,902
31,362
546,176
522,085
484,338
463,026
Term deposits
On-demand and short-term deposits
Certificates of deposit
Deposits not bearing interest
Commercial paper and other borrowings
Repurchase agreements
Total deposits and other borrowings
116
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 14
BONDS, NOTES AND SUBORDINATED DEBT
Accounting policy
Bonds, notes and subordinated debt are 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
Group
Company
2020
$m
85,274
3,126
25,659
11,817
508
2019
$m
2020
$m
2019
$m
104,126
83,711
104,147
4,283
23,999
10,342
508
-
24,769
11,817
-
-
23,110
10,342
-
Total bonds, notes and subordinated debt(1)
126,384
143,258
120,297
137,599
Issued bonds, notes and subordinated debt by currency
AUD
USD
EUR
GBP
Other
38,663
37,633
30,898
5,261
13,929
43,380
41,914
36,359
6,708
14,897
35,390
36,351
30,421
5,219
12,916
38,966
41,813
35,787
6,680
14,353
Total bonds, notes and subordinated debt(1)
126,384
143,258
120,297
137,599
(1) The balances include net discounts / premium adjustments.
Annual Financial Report 2020
117
NOTES TO THE FINANCIAL STATEMENTS
NOTE 14 BONDS, NOTES AND SUBORDINATED DEBT (CONTINUED)
Subordinated medium-term notes
Currency
Notional amount(1)
Maturity / First optional call date
EUR
EUR
AUD
HKD
JPY
AUD
AUD
JPY
SGD
AUD
AUD
CAD
AUD
AUD
AUD
AUD
AUD
USD
USD
AUD
AUD
AUD
AUD
Total
$m
750
1,000
1,100
1,137
10,000
150
650
10,000
450
943
1,000
1,000
225
1,175
275
20
20
1,500
1,500
205
215
245
100
Fixed matured 2019
Fixed matured 2020
Floating matured 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 2025
Fixed due 2026
Floating due 2026
Fixed due 2027
Fixed due 2027
Fixed due 2028
Fixed due 2029
Fixed due 2030
Fixed due 2035
Fixed due 2040
Fixed due 2040
Fixed due 2040
Group
2020
$m
-
-
-
208
133
152
650
134
484
939
1,000
1,103
237
1,175
316
30
30
2,356
2,104
205
215
246
100
2019
$m
1,215
1,637
1,100
213
138
152
650
138
493
938
1,000
-
-
-
309
30
30
2,299
-
-
-
-
-
Company
2020
$m
-
-
-
208
133
152
650
134
484
939
1,000
1,103
237
1,175
316
30
30
2,356
2,104
205
215
246
100
2019
$m
1,215
1,637
1,100
213
138
152
650
138
493
938
1,000
-
-
-
309
30
30
2,299
-
-
-
-
-
11,817
10,342
11,817
10,342
(1) Subordinated medium-term notes qualify as Tier 2 capital, in some cases subject to transitional Basel III treatment.
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 (Optional Redemption Date) or on any scheduled interest
payment date thereafter. The BNZ Subordinated Notes pay a fixed rate of interest, which will be reset if the BNZ Subordinated
Notes are not redeemed on the Optional Redemption Date.
In response to the impacts of COVID-19, the RBNZ has stated that New Zealand-incorporated registered banks should not redeem
non-Common Equity Tier 1 capital instruments (other than on a stated final maturity date), until the economic outlook has
sufficiently recovered.
118
National Australia Bank
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.
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
2020
$m
21
6,170
6,191
2019
$m
77
6,405
6,482
2020
$m
21
6,170
6,191
2019
$m
77
6,405
6,482
Issued
amount
Perpetual floating rate notes
Convertible preference shares
Convertible notes
USD250 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
NAB Wholesale Capital Notes - $500 million
NAB Wholesale Capital Notes 2 - $600 million
Issued date
9 October 1986
NAB CPS II - 17 December 2013
NAB Capital Notes - 23 March 2015
Interest
payment
frequency
Semi-annually in arrears
Quarterly in arrears
NAB Capital Notes - Quarterly in arrears
NAB Capital Notes 2 - 7 July 2016
NAB Capital Notes 3 - 20 March 2019
NAB Wholesale Capital Notes - 12 December 2019
NAB Wholesale Capital Notes 2 - 17 July 2020
NAB Capital Notes 2 - Quarterly in arrears
NAB Capital Notes 3 - Quarterly in arrears
NAB Wholesale Capital Notes - Semi-annually in arrears
until the optional call date. Quarterly in arrears thereafter.
NAB Wholesale Capital Notes 2 - Quarterly in arrears
Interest rate
0.15% per annum above the 6
NAB CPS II - 3.25% per annum
NAB Capital Notes - 3.50% per annum above the 3 month
month USD LIBOR
above the 3 month BBSW
BBSW
NAB Capital Notes 2 - 4.95% per annum above the 3 month
BBSW
NAB Capital Notes 3 - 4.00% per annum above the 3 month
BBSW
NAB Wholesale Capital Notes - 4.95% per annum until the
optional call date. 3.75% per annum above the 3 month
BBSW thereafter.
NAB Wholesale Capital Notes 2 - 4.00% per annum above
the 3 month BBSW
Maturity /
No final maturity
Mandatory conversion:
NAB Capital Notes converted / redeemed on 23 March 2020
conversion
NAB CPS II - 19 December 2022
Mandatory conversion:
Issuer conversion option(1):
NAB Capital Notes 2 - 8 July 2024
NAB CPS II - 17 December 2020
NAB Capital Notes 3 - 19 June 2028
NAB Wholesale Capital Notes - 12 December 2031
NAB Wholesale Capital Notes 2 - 17 July 2027
Issuer conversion option:
NAB Capital Notes 2 - 7 July 2022
NAB Capital Notes 3 - 17 June 2026
NAB Wholesale Capital Notes - 12 December 2029
NAB Wholesale Capital Notes 2 - 17 July 2025
Annual Financial Report 2020
119
NOTES TO THE FINANCIAL STATEMENTS
NOTE 15 OTHER DEBT ISSUES (CONTINUED)
Perpetual floating rate notes
Convertible preference shares
Convertible notes
Outstanding
USD15.05 million
NAB CPS II - $1.72 billion
NAB Capital Notes 2 - $1.50 billion
amount
NAB Capital Notes 3 - $1.87 billion
NAB Wholesale Capital Notes - $500 million
NAB Wholesale Capital Notes 2 - $600 million
Capital
Tier 2 capital, subject to
Additional Tier 1 capital
Additional Tier 1 capital
treatment
transitional Basel III
arrangements
(1) On 5 November 2020, NAB announced it would exercise its option to redeem all of the NAB CPS II on 17 December 2020. Each NAB CPS II will be redeemed for
cash at its par value of $100.
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 by measuring the financial liability at fair value through profit or
loss.
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
2020
$m
2019
$m
Company
2020
$m
2019
$m
22,348
25,998
5,845
6,414
-
856
562
3,089
3,092
24
263
1,251
55
3,296
2,204
216
29,971
33,283
-
-
-
-
3,042
24
8,911
-
-
-
-
2,119
17
8,550
The change in fair value of bonds, notes and subordinated debt attributable to changes in the Group’s credit risk amounts to a
loss for the 2020 financial year of $118 million (2019: $167 million gain) for the Group and a loss of $56 million (2019: $149
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 loss of $83 million (2019: $35 million gain) for the Group and a gain of $10
million (2019: $66 million gain) for the Company. The contractual amount to be paid at the maturity of the bonds, notes and
subordinated debt is $21,230 million (2019: $25,078 million) for the Group and $5,358 million (2019: $5,991 million) for the
Company.
120
National Australia Bank
NOTE 17
PROVISION FOR CREDIT IMPAIRMENT ON LOANS AT AMORTISED COST
NOTES TO THE FINANCIAL STATEMENTS
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 default risk of exposures in comparison to the risk at initial recognition, to
determine the stage that applies to the associated ECL measurement. If the default risk of an exposure has increased significantly
since initial recognition, the asset will migrate to Stage 2. If no significant increase in default risk is observed, the asset will
remain in Stage 1. Should an asset become credit impaired it will migrate 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. In assessing for credit 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.
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.
• For non-retail facilities, internally derived credit ratings, as described above, represent a key determinant of default 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 an account level, to
determine whether or not there has been a significant increase in credit risk.
Annual Financial Report 2020
121
NOTES TO THE FINANCIAL STATEMENTS
NOTE 17 PROVISION FOR CREDIT IMPAIRMENT ON LOANS AT AMORTISED COST (CONTINUED)
• In addition, the Group considers that significant increase in credit risk occurs when a facility is more than 30 DPD.
• Consistent with industry guidance, a customer support payment deferral as part of COVID-19 support packages by itself will
not result in a significant increase in credit risk, and therefore will not trigger an automatic migration from Stage 1 (12-month
ECL) to Stage 2 (lifetime ECL) in the credit impairment for such loans.
Definition of Default
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 remedial action, such as realisation of security. The offer or uptake of a COVID-19 related
payment deferral does not automatically trigger a default event unless there is other evidence that the customer is unlikely to
meet their contractual obligations.
Calculation of expected credit losses
• ECLs are calculated using three main parameters being 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, 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.
Critical accounting judgements and estimates
In determining ECL, management judgement is applied, using objective, reasonable and supportable information about current
and forecast economic conditions. Macro-economic variables used in these scenarios, include (but are not limited to) the cash
rate, unemployment rates, GDP growth rates and residential and commercial property price indices. Forward looking macro-
economic information and assumptions relating to COVID-19 have been considered in these scenarios, including potential
impacts of COVID-19, recognising that uncertainty still exists in relation to the duration of COVID-19 related restrictions and the
anticipated impact of government stimulus and regulatory actions. When determining whether the risk of default has increased
significantly since initial recognition, both quantitative and qualitative information is considered, including expert credit
assessment, forward looking information and analysis based on the Group’s historical loss experience. Consistent with industry
guidance, customer support payment deferrals as part of COVID-19 support packages in isolation will not necessarily result in a
significant increase in credit risk, and therefore will not trigger an automatic migration from stage 1 (12-month ECL) to stage 2
(Lifetime ECL) in the credit impairment provision for such loans.
122
National Australia Bank
NOTE 17 PROVISION FOR CREDIT IMPAIRMENT ON LOANS AT AMORTISED COST (CONTINUED)
NOTES TO THE FINANCIAL STATEMENTS
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
2020
$m
2,990
(169)
(69)
2,752
2019
$m
1,154
(170)
(57)
927
2020
$m
2,651
(130)
(59)
2,462
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
Group
Balance at 1 October 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
$m
324
358
(48)
(2)
(2)
(264)
-
-
2
$m
2,125
(348)
104
(65)
(49)
456
-
-
4
$m
391
(10)
(56)
67
(106)
236
-
-
1
368
2,227
523
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
335
(83)
(2)
(1)
(319)
142
(83)
(46)
New and increased provisions (net of collective provision releases)
(146)
1,981
Write-backs of specific provisions
Write-offs from specific provisions
Foreign currency translation and other adjustments
Balance at 30 September 2020
-
-
(1)
470
-
-
(5)
3,897
(16)
(59)
85
(107)
399
-
-
(1)
824
$m
673
-
-
-
157
726
(170)
(600)
(4)
782
-
-
-
154
756
(169)
(700)
(3)
820
2019
$m
987
(134)
(42)
811
Total
$m
3,513
-
-
-
-
1,154
(170)
(600)
3
3,900
-
-
-
-
2,990
(169)
(700)
(10)
6,011
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 2020 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 $2,111 million compared to the balance at 30 September 2019.
Specific provisions increased by $38 million compared to the balance at 30 September 2019, due to new and increased specific
provisions raised for the Business lending portfolios in Australia and New Zealand, partially offset by work-outs for a small
number of larger exposures.
Annual Financial Report 2020
123
NOTES TO THE FINANCIAL STATEMENTS
NOTE 17 PROVISION FOR CREDIT IMPAIRMENT ON LOANS AT AMORTISED COST (CONTINUED)
Collective provisions increased by $2,073 million compared to the balance at 30 September 2019, comprised of:
Collective provision 12-months ECL (Stage 1) increased by $102 million as a result of:
• $131 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.
• Net collective provision forward looking adjustments raised for targeted sectors impacted by COVID-19 including aviation,
tourism, hospitality, entertainment, retail trade and commercial property.
• Partially offset by $191 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 $1,670 million as a result of:
• Collective provision forward looking economic adjustments raised due to deterioration in broader macro-economic factors as
a result of COVID-19.
• Net collective provision forward looking adjustments raised for targeted sectors impacted by COVID-19 including aviation,
tourism, hospitality, entertainment, retail trade and commercial property.
• $72 billion of loans and advances migrating into Stage 2 as a result of loans and advances transferred from Stage 1 or Stage 3.
• Partially offset by $48 billion of loans and advances that migrated to Stage 1 as a result of improved credit quality or into Stage
3 due to deterioration in credit quality, were repaid or experienced movement in underlying account balances during the
period.
Collective provision Lifetime ECL – credit impaired (Stage 3) increased by $301 million as a result of:
• Collective provision forward looking economic adjustments raised due to deterioration in broader macro-economic factors as
a result of COVID-19.
• $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 $4 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.
ECL scenario analysis
The following table shows the key macro-economic variables used in the base case and downside scenario at 30 September
2020.
GDP change (year ended December)
Unemployment (end of year)
House price change (peak-to-trough)
Base case
Calendar Year
2021
2022
%
3.1
7.6
(11.6)
%
2.8
6.6
2020
%
(5.7)
9.2
Downside
Calendar Year
2020
%
(8.0)
12.0
2021
%
1.5
12.8
(20.7)
2022
%
2.5
9.9
The probability weighted ECL is a blended outcome taking into consideration the respective scenarios applied across each of the
Group’s major loan portfolios. The following table shows the reported total provisions for ECL based on the probability weighting
of scenarios, with the sensitivity range reflecting the ECL impacts assuming a 100% weighting is applied to the base case scenario
or the downside scenario (with all other assumptions held constant).
Total provisions for ECL for key portfolios
Housing
Business
Total Group
124
National Australia Bank
2020
Probability
100% Base
100%
weighted
$m
case
$m
Downside
$m
1,245
4,252
6,011
1,188
3,925
5,611
1,672
5,501
7,774
NOTES TO THE FINANCIAL STATEMENTS
NOTE 17 PROVISION FOR CREDIT IMPAIRMENT ON LOANS AT AMORTISED COST (CONTINUED)
The table below shows weightings applied to the Australian portfolio at 30 September 2020, to derive the probability weighted
ECL.
2020
Housing
Business
Total Group
12-mth
credit
ECL credit
ECL
impaired
impaired
impaired
Collective
Collective
Collective
Specific
provision
provision
provision
provision
Macro-economics scenario weightings
Upside
Base case
Downside
Stage 1
Stage 2
Lifetime
ECL not
Company
Balance at 1 October 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
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 2020
$m
260
282
(39)
(2)
(2)
(201)
-
-
2
$m
1,785
(275)
88
(60)
(35)
379
-
-
1
300
1,883
233
(77)
(2)
(1)
(38)
-
-
(1)
414
(221)
132
(74)
(31)
1,747
-
-
(2)
%
15
60
25
%
15
60
25
Stage 3
Lifetime
Lifetime
ECL
credit
$m
342
(7)
(49)
62
(96)
222
-
-
-
474
(12)
(55)
76
(97)
335
-
-
1
$m
567
-
-
-
133
587
(134)
(525)
(4)
624
-
-
-
129
607
(130)
(618)
(3)
609
%
15
60
25
Total
$m
2,954
-
-
-
-
987
(134)
(525)
(1)
3,281
-
-
-
-
2,651
(130)
(618)
(5)
5,179
3,434
722
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 2020 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 $1,898 million compared to the balance at 30 September 2019.
Specific provisions decreased by $15 million compared to the balance at 30 September 2019, due to work-outs for a small
number of larger names within the Business lending portfolio, partially offset by new and increased specific provisions raised for
the Business lending portfolio.
Collective provisions increased by $1,913 million compared to the balance at 30 September 2019, comprised of:
Collective provision 12-months ECL (Stage 1) increased by $114 million due to:
• $103 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.
Annual Financial Report 2020
125
NOTES TO THE FINANCIAL STATEMENTS
NOTE 17 PROVISION FOR CREDIT IMPAIRMENT ON LOANS AT AMORTISED COST (CONTINUED)
• Net collective provisions forward looking adjustments raised for targeted sectors impacted by COVID-19 including aviation,
tourism, hospitality, entertainment, retail trade and commercial property.
• Partially offset by $171 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 $1,551 million due to:
• Collective provision forward looking economic adjustments raised due to deterioration in broader macro-economic factors as
a result of COVID-19.
• Net collective provisions forward looking adjustments raised for targeted sectors impacted by COVID-19 including aviation,
tourism, hospitality, entertainment, retail trade and commercial property.
• $68 billion of loans and advances migrating into Stage 2 as a result of loans and advances transferred from Stage 1 or Stage 3.
• Partially offset by $35 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 $248 million due to:
• Collective provision forward looking economic adjustments raised due to deterioration in broader macro-economic factors as
a result of COVID-19.
• $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 $3 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 2020 financial year, which are still
subject to enforcement activity was $99 million (2019: $67 million) for the Group and $73 million (2019: $57 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(2)
Net impaired assets(3)
Group
Company
2020
$m
1,866
(840)
1,026
2019
$m
1,972
(782)
1,190
2020
$m
1,299
(609)
690
2019
$m
1,355
(624)
731
(1) Gross impaired assets include $38 million (2019: $5 million) for the Group and $nil (2019: $nil) for the Company of gross impaired loans at fair value, $26
million (2019: $22 million) of impaired off-balance sheet credit exposures for the Group and $19 million (2019: $20 million) for the Company.
(2) Specific provision for credit impairment includes $20 million (2019: $nil) for the Group and $nil (2019: $nil) for the Company of fair value credit adjustments on
loans at fair value.
(3) The fair value of security in respect of impaired assets is $1,065 million (2019: $1,161 million) for the Group and $740 million (2019: $703 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.
126
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 17 PROVISION FOR CREDIT IMPAIRMENT ON LOANS AT AMORTISED COST (CONTINUED)
Modifications
The Group has introduced a number of support measures for customers impacted by COVID-19, including the deferral of
payments for retail and business customers for an initial period of up to six months. The terms and conditions related to the
deferrals were considered to be non-substantial modifications and accounted for as continuation of the existing loan
agreements. No material modification gains or losses have been recognised in respect of loans on deferral.
The table below sets out the gross credit risk exposures which remain on deferral as at 30 September 2020:
Stage 1
Stage 2
Stage 3
Total
Group
Company
2020
$m
26,989
18,104
680
45,773
2020
$m
25,602
18,051
637
44,290
Options for customers upon expiry of initial deferral period include: resuming regular repayments, extension of loan terms,
converting to interest only for a period of time, consolidation of debt, extension of initial deferral period for up to 4 months,
hardship assistance or a combination of these measures.
Annual Financial Report 2020
127
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
Cash flow hedge
To hedge changes to cash flows arising from interest
rate and foreign currency risk.
Methods for testing
hedge
effectiveness
Potential sources of
ineffectiveness
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.
Discounting basis between the hedged item and
hedging instrument.
Recognition of effective
hedge portion
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.
Cumulative dollar offset method.
Mainly mismatches in terms of the hedged item
and the hedging instrument, prepayment risk and
reset risk.
None expected as the net investment is only hedged
to the extent of the notional or carrying amount of
the hedging instrument.
Discounting basis between the hedged item and
hedging instrument.
Fair value changes of the hedging instrument and
those arising from the hedged risk on the hedged
item are recognised in the income statement.
Fair value changes of the hedging instrument are
recognised in the foreign currency translation
reserve within equity.
Recognition of
ineffective
hedge portion
Hedging instrument
expires, is sold, or when
hedging criteria are no
longer met
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.
128
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 18 HEDGE ACCOUNTING (CONTINUED)
Risk Management Strategy
Overview
The Group’s hedging strategy is to manage its exposure to interest rate risk on a net variable basis in Australian or New Zealand dollars. For Australian and New Zealand denominated
exposures the Group will 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 or New Zealand dollars using cross-currency swaps and interest rate swaps. The material risks and the risk
management strategy are explained further below.
Cash flow hedges – interest rate risk
The Group manages interest rate risk exposure on deposits and loans via interest rate derivatives. The Group accounts for these hedge relationships as a macro cash flow hedge. The gross
exposures are allocated to time buckets based on expected repricing dates, with interest rate derivatives allocated to hedge accordingly. The benchmark interest rate is hedged which
represents the largest component of changes in fair value and is observable in relevant financial markets.
Cash flow hedges – foreign currency risk
The Group is exposed to foreign currency risk on credit margin cash flows and foreign currency risk on the principal cash flows, both of which arise from foreign currency debt issuances.
The Group uses foreign currency derivatives to manage changes between the foreign currency and Australian and New Zealand dollars for the above mentioned cash flows.
Fair value hedges – interest rate risk
Interest rate risk arises on fixed rate bonds, notes and subordinated debt issuances, fixed rate debt instruments held for liquidity purposes and fixed rate loans and advances. The Group
hedges its interest rate risk on these instruments with relevant interest rate derivatives to reduce its exposure to changes in fair value due to interest rate fluctuations.
Hedging relationships involving debt issuances and the debt instruments are predominantly one-to-one. The fixed rate loans and advances are predominantly managed on a macro basis,
where exposures are bucketed based on expected repricing dates with hedging instruments designated accordingly.
With all the fair value hedges, the benchmark interest rate is hedged which represents the largest component of changes in fair value and is observable in relevant financial markets.
129
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 18 HEDGE ACCOUNTING (CONTINUED)
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.
Group
Company
Hedging instrument
Risk
$m
$m
$m
$m
$m
$m
2020
Carrying
2019
Carrying
2020
Carrying
amount
Notional
amount
Notional
amount
Notional
Derivative assets
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(1)
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(1)
Net investment hedges
Foreign exchange contracts
Interest
Currency
10
112,785
2,620
273
379
547
1
29
1,222
145
82
772
5
-
95,600
11,972
57,912
9,757
663
54,817
65,451
5,449
40,418
7,505
2,990
-
152
3,530
163
331
500
13
156
1,162
114
113
2,450
27
15
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
9
106,602
2,098
273
266
241
1
29
1,199
145
80
263
5
-
88,825
11,972
44,031
5,191
32
49,853
63,594
5,449
23,892
3,990
2,527
-
2019
Carrying
amount
$m
152
3,153
163
219
359
13
156
1,141
114
112
1,374
27
15
Notional
$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
(1) Futures notional amounts are netted in 2020 for presentation purposes. The equivalent 2019 netted notional amounts are $849 million assets and $5,231 million liabilities for the Group and $120 million assets and $5,231 million
liabilities for the Company.
130
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 18 HEDGE ACCOUNTING (CONTINUED)
The following table shows the maturity profile of hedging instruments based on their notional amounts.
Group
Interest rate swaps
Foreign exchange contracts
Futures(1)
Cross-currency swaps - interest and currency
Cross-currency swaps - currency
Company
Interest rate swaps
Foreign exchange contracts
Futures(1)
Cross-currency swaps - interest and currency
Cross-currency swaps - currency
2020
2019
0 to 12 months
1 to 5 years
Over 5 years
$m
$m
$m
106,450
17,421
3,034
2,917
28,257
93,449
17,421
1,940
2,092
27,799
121,833
-
619
11,065
90,823
96,038
-
619
6,694
84,143
37,649
-
-
3,280
41,971
34,891
-
-
395
40,477
Total
$m
265,932
17,421
3,653
17,262
161,051
224,378
17,421
2,559
9,181
152,419
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
(1) Futures notional amounts are netted in 2020 for presentation purposes. The equivalent 2019 netted notional amounts are $849 million assets and $5,231 million liabilities for the Group and $120 million assets and $5,231 million
liabilities for the Company.
131
National Australia Bank
NOTE 18 HEDGE ACCOUNTING (CONTINUED)
The average rate for major currencies of the final exchange of cross-currency swaps designated in hedge accounting relationships is as follows:
NOTES TO THE FINANCIAL STATEMENTS
USD:AUD
EUR:AUD
GBP:AUD
USD:NZD
CHF:NZD
Group
Company
2020
1.337
1.461
1.790
1.579
1.560
2019
1.329
1.472
1.735
n/a
n/a
2020
1.333
1.489
1.788
n/a
n/a
2019
1.324
1.499
1.776
n/a
n/a
The average executed rate for interest rate swaps in hedge accounting relationships for major currencies is as follows:
Group
Company
2020
2019
2020
2019
Fair value
Cash flow
Fair value
Cash flow
Fair value
Cash flow
hedges
hedges
hedges
hedges
hedges
hedges
%
0.03 - 5.31
-
0.09 - 7.29
%
0.92 - 5.39
0.78 - 3.52
1.16 - 7.25
%
0.92 - 5.31
-
0.59 - 7.29
%
1.95 - 5.39
0.62 - 3.52
1.00 - 7.13
%
-
-
0.09 - 7.29
Fair value
hedges
%
2.16 - 5.39
0.78 - 3.52
1.16 - 7.25
Cash flow
hedges
%
-
-
0.59 - 7.29
-
-
(0.22) - 3.29
-
(0.22) - 2.59
-
(0.22) - 3.29
NZD interest rates
USD interest rates
AUD interest rates
EUR interest rates
%
0.11 - 5.39
0.62 - 3.52
1.00 - 7.13
(0.22) - 2.59
132
National Australia Bank
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 28 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 (2019: $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 (2019: $nil) for
the Group and $nil (2019: $nil) for the Company.
Group
Company
2020
2019
2020
2019
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
21,013
-
19,680
14,102
2,399
52,503
22,807
7,848
131
147
1,850
1,159
410
14,226
2,375
63,802
22,950
6,653
$m
-
138
73
1,512
1,234
168
$m
$m
$m
21,013
-
2,399
50,940
-
7,848
-
-
147
1,790
-
410
19,680
-
2,375
63,802
-
6,653
$m
-
-
73
1,512
-
168
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.
133
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 18 HEDGE ACCOUNTING (CONTINUED)
Hedge ineffectiveness
Fair value and cash flow hedge relationships result in the following changes in value used as the basis for recognising hedge
ineffectiveness for the years ended 30 September:
Change in fair value on
Change in fair value on
recognised in income
hedging instruments
hedged items
statement
Hedge ineffectiveness
2020
$m
2019
$m
Group
Fair value hedges (interest rate risk)
Cash flow hedges (interest rate risk)
Cash flow hedges (currency risk)
Fair value and Cash flow hedges (interest rate and
currency risk)
Total
Company
Fair value hedges (interest rate risk)
Cash flow hedges (interest rate risk)
Cash flow hedges (currency risk)
Total
2020
$m
404
357
(801)
32
(8)
422
284
(553)
153
2019
$m
1,717
333
1,512
-
3,562
802
252
1,307
2,361
2020
$m
(419)
(356)
841
(32)
34
(425)
(284)
572
(137)
2019
$m
(1,573)
(331)
(1,555)
-
(3,459)
(826)
(250)
(1,281)
(2,357)
(15)
1
40
-
26
(3)
-
19
16
Cash flow hedge (interest rate risk)
Cash flow hedges - gains or losses recognised in other comprehensive income
Amount reclassified from the cash flow hedge reserve to income statement
Cash flow hedge (currency risk)
Cash flow hedges - gains or losses recognised in other comprehensive income
Amount reclassified from the cash flow hedge reserve to income statement
IBOR Reform
Group
Company
2020
$m
360
(61)
2019
$m
340
(38)
2020
$m
288
(14)
Group
Company
2020
$m
(818)
640
2019
$m
1,551
(1,569)
2020
$m
(571)
458
The Group early adopted AASB 2019-3 Amendments to Australian Accounting Standards – Interest Rate Benchmark Reform, effective
1 October 2019. This standard amends AASB 7 and AASB 9 to modify some specific hedge accounting requirements to provide
relief from the potential effects of uncertainty caused by interest rate benchmark reform.
Managing the process to transition
The Group has an established Project Team which continues to comprehensively assess and manage the impacts of IBOR reform,
including overseeing the transition from the impacted interest rate benchmarks to Alternative Reference Rates across various
divisions and functions within the Group. A steering committee comprising senior executives from relevant divisions and
functions is responsible for governance ensuring clear accountability for decisions made.
The scope of the Project Team includes:
• Assessing the impact of IBOR reform on systems and processes within the Group and implementing changes to position the
Group post IBOR cessation.
• Assessing the impact of IBOR reform on legal agreements the Group has executed, developing plans to support transition and
future regulatory changes.
134
National Australia Bank
144
2
(43)
-
103
(24)
2
26
4
2019
$m
250
(2)
2019
$m
1,295
(1,189)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 18 HEDGE ACCOUNTING (CONTINUED)
• Periodically updating the Group’s Executive Leadership Team and the Board on progress within the Group, market
developments and important transition events.
Key exposures
The Group’s hedge accounting relationships are exposed to the following significant interest rate benchmarks subject to
cessation: USD Libor, GBP Libor and JPY Libor. These hedging relationships are primarily within the Group’s Corporate and
Institutional Bank division and Treasury function. In addition to interest rate risk, the Group is also exposed to foreign exchange
risk and potentially in the future, additional basis risk as market conventions develop and evolve.
Further information on significant interest rate benchmarks, the extent of risk exposure managed by the Group that is affected by
interest rate benchmark reform and the nominal amount of the hedging instruments in those hedging relationships is outlined
below.
Significant assumptions and judgements
The Group has made the following significant assumptions and judgements in applying AASB 2019-3:
• The Group has applied the assumptions afforded by AASB 2019-3 paras 6.8.1-6.8.8 where applicable.
• The Group will cease applying AASB 2019-3 to individual hedge accounting relationships after the Group adopts the new ISDA
protocol from its effective date and following an announcement by a benchmark regulator on the cessation date of an IBOR
referenced in a hedge accounting relationship.
• Disclosure in the table below is only shown for hedged items and hedging instruments referencing interest rate benchmarks
subject to cessation and where their contractual terms need to be updated as a result of cessation.
• Where a single hedging instrument references more than one benchmark rate and both benchmarks are subject to cessation
(for example in the case of a cross currency swap), the notional amount has been disclosed in the table below twice to reflect
the absolute notional exposure to benchmark reform. Likewise, if only one benchmark rate is subject to cessation, the
notional is only disclosed once in the table below. Since hedging instruments might be in asset or liability positions, the table
below discloses the absolute (gross) notional rather than net notionals.
• Disclosure in the following table in relation to hedged items only includes externally issued standalone instruments where
their contractual cash flows are directly impacted by IBOR reform. In addition to these, hedged items amounting to $2.4 billion
assets (for Group and Company), $42.2 billion liabilities (for Group) and $33.8 billion liabilities (for Company), whose
contractual cash flows are not directly impacted by IBOR reform, are designated in accounting hedge relationships using
hedging instruments affected by IBOR reform.
Group
2020
Company
2020
USD Libor GBP Libor
JPY Libor
Other
USD Libor GBP Libor
JPY Libor
Hedged items (carrying value)
Bonds, notes and subordinated debt
7,215
$m
$m
361
$m
-
Hedging instruments (notional)
Fair value hedges
Cash flow hedges
47,750
160,592
3,159
3,520
4,606
4,606
-
-
-
$m
$m
7,215
$m
361
$m
-
34,113
152,264
542
2,708
4,606
4,606
Other
$m
-
-
-
Annual Financial Report 2020
135
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19
FINANCIAL RISK MANAGEMENT
Overview of Risk Management Framework
Risk is an inherent part of the Group's business and the effective management of risk is a fundamental enabler of the Group's
strategic plan. The strategy for managing risk is to protect customers and enable sustained performance. The Group's risk
management is in line with APRA Prudential Standard CPS 220 Risk Management.
The Risk Management Strategy describes the Group's material risks and the approach to managing them. The Risk Management
Strategy is reviewed by the Board at least annually, or more frequently if there is a material change to the size, business mix and
complexity, or a material change to the Group’s 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
manage the Group's material risks. The Risk Management Framework is comprehensively reviewed every three years for
appropriateness, effectiveness and adequacy by an operationally independent party. The Board is ultimately responsible for the
Risk Management Framework and oversees its operation by management. In addition, directors and senior executives are held
accountable for the parts of the Group’s operations they manage or control, consistent with 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 is:
• First Line - Businesses own risks and obligations, and the controls and mitigation strategies that help manage them
• Second Line - 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 first line businesses, and executes
specific risk management activities where a functional segregation of duties and / or specific risk capability is required
• Third Line - 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 principal 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.
136
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 2020, the
Group holds a forward looking adjustment in its credit impairment provisions of $89 million (2019: $180 million) reflecting the
potential impact of Australian drought conditions.
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 irrevocable loan commitments and other credit-related commitments, 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 for on-balance sheet and off-balance sheet positions before
taking into account 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
Gross 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
2020
$m
63,022
52,351
95,851
40,355
3,860
3,830
2019
$m
54,454
32,130
96,828
40,205
7,110
4,689
2020
$m
62,358
48,895
86,250
40,324
3,885
2,888
2019
$m
53,961
29,049
89,552
40,166
6,229
4,059
588,715
592,101
506,803
510,318
1,477
2,490
1,477
2,490
-
-
177,802
114,786
9,285
9,057
7,748
7,101
858,746
839,064
938,430
857,711
20,626
173,656
194,282
23,811
155,980
179,791
19,707
153,090
172,797
22,893
136,259
159,152
1,053,028
1,018,855
1,111,227
1,016,863
(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.
Annual Financial Report 2020
137
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, guarantees provided by central banks, other forms of credit enhancements or
collateral 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) 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 securities sold not delivered, 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.
138
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 exclude financial instruments not subject to offsetting arrangements 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 are presented in the 'Total balance sheet amount' column in the table below, and
comprise the sum of the 'Net amount reported on balance sheet' and 'Amounts not subject to enforceable netting
arrangements'.
2020
Subject to enforceable netting arrangements
Amounts offset on balance sheet
Amounts not offset on balance sheet
Net amount
Amounts not
subject to
Total
enforceable
balance
Gross
Amount
reported on
Financial
Non-cash
Cash
Net
netting
sheet
amount
offset
balance sheet
Instruments
collateral
collateral
Amount
arrangements
amount
Group
$m
$m
$m
$m
$m
$m
$m
Derivative financial assets
111,672
(83,311)
28,361
(12,372)
(459)
(5,169)
10,361
$m
$m
6,383
34,744
Reverse repurchase
agreements
Total assets
Derivative financial
liabilities
Repurchase agreements
Total liabilities
Company
98,058
(13,731)
84,327
-
209,730
(97,042)
112,688
(12,372)
(84,327)
(84,786)
-
-
-
84,327
(5,169)
10,361
6,383 119,071
(111,868)
(70,647)
(182,515)
83,311
13,731
97,042
(28,557)
(56,916)
(85,473)
12,372
909
8,126
(7,150)
(3,719) (32,276)
-
12,372
56,916
57,825
-
-
-
(56,916)
8,126
(7,150)
(3,719) (89,192)
Derivative financial assets
100,267
(71,796)
28,471
(14,318)
(459)
(4,722)
8,972
5,743
34,214
Reverse repurchase
agreements
Total assets
Derivative financial
liabilities
Repurchase agreements
Total liabilities
97,134
(13,731)
83,403
-
197,401
(85,527)
111,874
(14,318)
(83,403)
(83,862)
-
-
-
83,403
(4,722)
8,972
5,743 117,617
(103,475)
(69,992)
(173,467)
71,796
13,731
85,527
(31,679)
(56,261)
(87,940)
14,318
909
7,411
(9,041)
(3,492) (35,171)
-
14,318
56,261
57,170
-
-
-
(56,261)
7,411
(9,041)
(3,492) (91,432)
Annual Financial Report 2020
139
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19 FINANCIAL RISK MANAGEMENT (CONTINUED)
2019(1)
Subject to enforceable netting arrangements
Amounts offset on balance sheet
Amounts not offset on balance sheet
Net amount
Amounts not
subject to
Total
enforceable
balance
Gross
Amount
reported on
Financial
Non-cash
Cash
Net
netting
sheet
amount
offset
balance sheet
Instruments
collateral
collateral
Amount
arrangements
amount
Group
$m
$m
$m
$m
$m
$m
Derivative financial assets
102,517
(69,497)
33,020
(21,067)
(613)
(5,562)
$m
5,778
$m
$m
7,214
40,234
Reverse repurchase
agreements
Total assets
Derivative financial
liabilities
Repurchase agreements
Total liabilities
Company
77,162
(12,353)
179,679
(81,850)
64,809
97,829
-
(21,067)
(64,809)
(65,422)
-
-
-
64,809
(5,562)
5,778
7,214 105,043
(103,624)
(63,099)
(166,723)
69,497
12,353
81,850
(34,127)
(50,746)
(84,873)
21,067
352
9,819
(2,889)
(4,228) (38,355)
-
21,067
50,746
51,098
-
-
-
(50,746)
9,819
(2,889)
(4,228) (89,101)
Derivative financial assets
92,772
(59,985)
32,787
(21,364)
(613)
(5,172)
5,638
6,279
39,066
Reverse repurchase
agreements
Total assets
Derivative financial
liabilities
Repurchase agreements
Total liabilities
76,608
(12,353)
169,380
(72,338)
64,255
97,042
-
(21,364)
(64,255)
(64,868)
-
-
-
64,255
(5,172)
5,638
6,279 103,321
(97,230)
(62,985)
(160,215)
59,985
12,353
72,338
(37,245)
(50,632)
(87,877)
21,364
352
8,724
(6,805)
(3,639) (40,884)
-
21,364
50,632
50,984
-
-
-
(50,632)
8,724
(6,805)
(3,639) (91,516)
(1) Comparative information for derivative financial assets and derivative financial liabilities has been restated to reflect certain transactions subject to enforceable
netting arrangements.
Derivative financial assets and liabilities
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 or similar
agreements whereby all outstanding transactions with the same counterparty can only be offset and closed out upon a default
or insolvency event. In some instances, the agreement provides the Group with a legally enforceable right of offset in all
circumstances. In such a case and where there is an intention to settle the asset and liability on a net basis, or to realise the asset
and settle the liability simultaneously, the amounts with that counterparty will be offset on the balance sheet.
Where the Group has a right of offset on default or insolvency only, the related non-cash collateral amounts comprise highly
liquid securities, either obtained or pledged, which can be realised in the event of a default or insolvency by one of the
counterparties. The value of such securities obtained or pledged must at least equate to the value of the exposure to the
counterparty, therefore the net exposure is considered to be nil.
Credit risk exposure by risk grade
The following tables show the credit quality of gross credit risk exposures to which the expected credit loss model is applied, for
both 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).
Notional stage allocations (Stage 1, Stage 2 and Stage 3) for gross credit risk exposures incorporate the impact of forward
looking stress applied in the expected credit loss model, including potential COVID-19 impacts. Refer Accounting Policy section of
Note 17 Provisions for credit impairment on loans at amortised cost for further information.
140
National Australia Bank
NOTE 19 FINANCIAL RISK MANAGEMENT (CONTINUED)
NOTES TO THE FINANCIAL STATEMENTS
Total gross loans and advances
424,725
485,576
155,827
Group
On balance sheet assets
Gross loans and advances
Senior investment grade
Investment grade
Sub-investment grade
Default
Other financial assets(1)
Senior investment grade
Investment grade
Sub-investment grade
Default
Total other financial assets
Total on balance sheet assets
Off balance sheet commitments
Senior investment grade
Investment grade
Sub-investment grade
Default
Company
On balance sheet assets
Gross loans and advances
Senior investment grade
Investment grade
Sub-investment grade
Default
Stage 1
Stage 2
Stage 3
Total
2020
$m
2019
$m
2020
$m
2019
$m
2020
$m
2019
$m
2020
$m
2019
$m
116,590
100,469
220,315
254,768
2,689
27,491
87,820
130,339
123,699
-
-
1,948
40,352
39,690
203
233
-
994
879
-
3
278
761
-
40,788
41,563
1,042
1,124
316
6,961
90,272
1,862
99,411
-
108
1,016
-
-
-
-
-
-
-
8,163
8,163
7,114
7,114
119,279
247,806
211,519
10,111
100,785
261,729
220,611
8,976
588,715
592,101
-
-
-
2
2
-
-
-
8
8
40,355
39,690
481
994
2
1,102
1,895
8
41,832
42,695
465,513
527,139
156,869
100,535
8,165
7,122
630,547
634,796
71,894
55,675
16,583
-
68,192
66,644
23,624
-
5,007
16,991
27,433
211
433
2,972
17,367
192
-
-
-
488
488
-
-
-
367
367
76,901
72,666
44,016
699
68,625
69,616
40,991
559
194,282
179,791
Stage 1
Stage 2
Stage 3
Total
2020
$m
2019
$m
2020
$m
2019
$m
2020
$m
2019
$m
2020
$m
2019
$m
Total off balance sheet commitments
144,152
158,460
49,642
20,964
(1) Other financial assets represent debt instruments and acceptances.
91,162
78,961
195,971
231,572
2,668
26,663
65,569
111,169
115,673
-
-
1,943
Total gross loans and advances
352,702
421,702
146,947
Other financial assets(1)
Senior investment grade
Investment grade
Sub-investment grade
Default
40,321
39,651
203
233
-
994
879
-
3
278
761
-
Total other financial assets
Total on balance sheet assets
40,757
41,524
1,042
393,459
463,226
147,989
Off balance sheet commitments
Senior investment grade
Investment grade
Sub-investment grade
Default
66,599
47,925
10,311
-
62,694
60,017
19,173
-
5,007
16,540
25,833
210
Total off balance sheet commitments
124,835
141,884
47,590
16,934
(1) Other financial assets represent debt instruments and acceptances.
296
4,893
75,489
1,859
82,537
-
108
1,016
-
1,124
83,661
406
2,168
14,167
193
-
-
-
-
-
-
7,154
7,154
6,079
6,079
93,830
222,634
181,242
9,097
79,257
236,465
186,658
7,938
506,803
510,318
-
-
-
2
2
-
-
-
8
8
40,324
39,651
481
994
2
1,102
1,895
8
41,801
42,656
7,156
6,087
548,604
552,974
-
-
-
372
372
-
-
-
334
334
71,606
64,465
36,144
582
63,100
62,185
33,340
527
172,797
159,152
Annual Financial Report 2020
141
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
2020
$m
2019(3)
$m
2020
$m
2019(3)
$m
2020
$m
2019(3)
$m
2020
$m
2019(3)
$m
Group
Accommodation and hospitality
Agriculture, forestry, fishing & mining
Business services and property services
Commercial property
Construction
Financial & insurance
Government & public authorities
Manufacturing
Personal
Residential mortgages
Retail and wholesale trade
Transport and storage
Utilities
Other
Total
Company
Accommodation and hospitality
Agriculture, forestry, fishing & mining
Business services and property services
Commercial property
Construction
Financial & insurance
Government & public authorities
Manufacturing
Personal
Residential mortgages
Retail and wholesale trade
Transport and storage
Utilities
Other
Total
7,764
42,963
12,642
63,228
4,327
8,295
42,002
13,157
66,294
4,576
31,804
30,852
2,067
1,975
11,030
11,535
7,102
9,453
340,504
343,056
6,923
17,176
16,675
8,990
18,721
16,046
8,607
20,292
20,393
90
1
148
196
67
385
42
653
-
160
417
191
1,304
1,339
11,271
10,794
6,710
6,299
1,220
12,588
11,112
1
5,644
5,031
9,135
54,619
19,394
76,469
9,971
9,794
53,213
19,647
78,626
9,608
59,679
25,977
39,420
23,977
22
-
25
-
8,900
226
1
-
287
44,283
39,982
135,766
110,254
1,566
7,731
14,977
55,717
11,794
6,801
4,654
9,242
1,180
7,006
14,633
52,941
10,557
5,221
4,415
9,281
29,610
18,783
22,079
27,132
18,566
24,086
403,144
404,897
29,060
23,477
13,792
29,730
29,504
21,268
13,022
29,961
586,564
594,962
94,183
74,825
194,282
179,791
875,029
849,578
6,638
28,814
11,289
55,668
3,384
7,134
26,926
11,802
58,086
3,399
29,751
29,127
1,898
8,183
6,175
1,812
8,472
8,204
67
385
42
653
-
56,223
25,976
22
-
297,022
301,966
6,893
14,306
14,743
8,013
15,357
14,106
7,703
18,292
17,811
90
1
148
196
160
417
191
1,220
1
36,323
23,977
25
-
8,877
226
1
-
287
1,132
9,158
6,069
10,600
4,722
1,087
8,787
5,575
9,075
4,286
7,837
38,357
17,400
66,921
8,106
8,381
36,130
17,568
68,381
7,686
42,892
38,850
128,866
104,300
905
5,629
12,415
52,028
9,921
5,671
4,019
7,636
513
4,910
12,070
48,721
9,025
4,534
3,797
7,922
28,779
13,834
18,590
26,302
13,407
20,274
355,943
359,564
24,317
20,415
12,180
26,124
24,608
18,641
11,500
26,020
504,176
511,905
90,696
71,705
172,797
159,152
767,669
742,762
(1) Net loans and advances includes loans at fair value.
(2) Other financial assets represents due from other banks, debt instruments and acceptances.
(3) Comparative information has been restated to align to the presentation in the current period to reflect revised industry categories.
142
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
2020
$m
20,320
24,645
72,831
30,466
2,552
3,826
2019
$m
5,868
18,150
76,558
30,946
5,095
4,688
485,693
490,388
1,477
7,768
2,490
8,189
649,578
642,372
20,223
24,635
76,740
30,466
2,552
2,884
5,639
18,142
80,319
30,946
4,868
4,059
484,715
489,101
1,477
7,691
2,490
7,939
651,383
643,503
2020
$m
505
3,397
13,572
-
1,308
-
79,767
-
1,668
100,217
-
-
-
-
-
-
-
-
-
-
2019
$m
193
3,026
11,243
-
2,015
1
79,401
-
1,697
97,576
-
-
-
-
-
-
-
-
-
-
2020
$m
42,197
24,309
9,448
9,889
-
4
2019
$m
48,393
10,954
9,027
9,259
-
-
17,025
17,960
-
1,187
104,059
42,135
24,260
9,510
9,858
1,333
4
-
1,142
96,735
48,322
10,907
9,233
9,220
1,361
-
16,627
17,426
-
1,157
104,884
-
831
97,300
Annual Financial Report 2020
143
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19 FINANCIAL RISK MANAGEMENT (CONTINUED)
Market Risk
Market risk overview and management
Market risk primarily 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 & Compliance 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.
144
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
2020
$m
2019
$m
2020
$m
2019
$m
2020
$m
2019
$m
2020
$m
2019
$m
2020
$m
2019
$m
2020
$m
2019
$m
2020
$m
2019
$m
2020
$m
2019
$m
Value at Risk at a 99% confidence level
Foreign exchange risk
Interest rate risk
Volatility risk
Commodities risk
Credit risk
Inflation risk
0.8
10.1
4.7
1.1
2.1
1.7
0.9
7.7
4.3
0.5
1.8
1.0
2.3
10.8
4.2
0.7
1.8
1.9
4.5
8.0
2.5
0.6
1.4
1.9
Diversification benefit
(9.2)
(6.9)
(9.1)
(8.9)
Total Diversified VaR at 99% confidence
interval
Other market risks
Total
11.3
10.0
21.3
9.3
2.7
12.0
12.6
4.9
17.5
10.0
1.8
11.8
Non-traded market risk - Balance sheet risk management
0.5
5.6
2.8
0.3
0.9
1.1
n/a
7.5
2.3
9.8
0.2
5.8
1.6
0.2
0.8
1.0
n/a
6.3
0.3
6.6
5.6
25.0
6.2
1.7
4.4
3.3
n/a
24.2
10.0
34.2
11.8
12.8
5.2
2.1
2.0
4.0
n/a
16.8
4.2
21.0
0.9
7.8
4.7
1.1
1.9
1.7
0.8
7.6
4.3
0.5
1.7
1.0
2.2
9.3
4.2
0.7
1.5
1.7
4.4
7.3
2.5
0.6
1.3
1.7
(8.8)
(6.6)
(8.6)
(8.3)
9.3
10.0
19.3
9.3
2.7
12.0
11.0
4.9
15.9
9.5
1.8
11.3
0.5
5.1
2.8
0.3
0.7
0.9
n/a
6.7
2.3
9.0
0.5
5.0
1.6
0.2
0.7
1.0
n/a
5.5
0.3
5.8
6.1
21.3
6.2
1.7
3.9
3.1
n/a
23.6
10.0
33.6
11.7
12.2
5.2
2.1
1.8
4.0
n/a
15.9
4.2
20.1
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 Group has been accredited by APRA to use its internal model for the measurement of IRRBB.
145
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19 FINANCIAL RISK MANAGEMENT (CONTINUED)
Key features of the internal interest rate risk management model include:
• historical simulation approach utilising instantaneous interest rate shocks
• static balance sheet (i.e. any new business is assumed to be matched, hedged or subject to immediate repricing)
• VaR and EaR are measured on a consistent basis
• 99% confidence level
• three month holding period
• EaR utilises a 12 month forecast period
• at least six years of business day historical data (updated daily)
• investment term for capital is modelled with an established benchmark term of between one and five years
• investment term for core ‘Non-Bearing Interest’ (non-interest bearing assets and liabilities) is modelled on a behavioural basis with a term that is consistent with sound statistical analysis.
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
2020
$m
2019
$m
2020
$m
2019
$m
2020
$m
2019
$m
2020
$m
2019
$m
2020
$m
2019
$m
2020
$m
2019
$m
2020
$m
2019
$m
2020
$m
2019
$m
366.6
261.0
317.4
268.5
255.9
226.3
391.3
303.1
366.6
261.0
317.4
268.5
255.9
226.3
391.3
303.1
48.5
24.5
24.2
12.7
21.4
19.7
26.5
7.6
31.1
21.5
39.7
8.8
14.8
17.4
57.0
5.3
21.9
12.0
18.0
4.2
6.3
14.4
26.5
2.4
48.5
33.1
67.6
12.7
25.8
21.6
109.9
8.3
-
-
-
-
-
-
24.5
19.7
21.5
17.4
12.0
14.4
-
33.1
-
21.6
24.2
26.5
39.7
57.0
18.0
26.5
67.6
109.9
-
-
-
-
-
-
-
-
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.
Residual value risk
As part of its normal lending activities, the Group takes residual value risk on assets such as industrial, mining, rail, aircraft, marine, technology, healthcare and other equipment. This
exposes the Group to a potential fall in prices of these assets below the outstanding residual exposure at the facility expiry.
146
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 Management 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 2020 was $170,141 million (2019: $129,578 million). In addition, the Group
holds internal RMBS as a source of contingent liquidity. As at 30 September 2020, the amount of unencumbered internal RMBS
after haircuts held was $81,617 million (2019: $50,170 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 $15,010 million of term wholesale funding in
the 2020 financial year (2019: $26,231 million) at a weighted average maturity of approximately 6.7 years to first call (2019: 5.7
years). In addition, during the 2020 financial year, the Group continued to access international and domestic short-term
wholesale markets.
On 19 March 2020, the RBA announced the establishment of a collateralised TFF for the Australian banking system to support
ADIs in providing credit into the economy. The TFF provides access to three-year funding supporting ongoing lending to the
Group's customers and reducing wholesale funding refinancing risks. Changes to extend and increase the TFF were announced
on 1 September 2020, with a further change to the cost of the facility announced on 3 November 2020. Drawdowns on or before
3 November 2020 incurred a fixed cost of 0.25% per annum and drawdowns made from 4 November 2020 incur a fixed cost of
0.10% per annum. NAB's total TFF available in September 2020 was $25,412 million with $14,270 million having been drawn
down.
In addition, during the 2020 financial year, the Group continued to access international and domestic short-term wholesale
markets.
Given the uncertain outlook resulting from COVID-19, the Group took a number of proactive steps during the year ended
September 2020 to bolster its capital. These actions are intended to provide sufficient capacity to allow the Group to continue to
support customers through the challenges presented by COVID-19, as well as manage through a range of possible scenarios
including a prolonged and severe economic downturn. In combination, the actions outlined below added 98 bps to the Group’s
CET1 ratio:
• A fully underwritten Institutional Share Placement raising $3.0 billion.
• A non-underwritten Share Purchase Plan raising $1.25 billion.
Annual Financial Report 2020
147
NOTES TO THE FINANCIAL STATEMENTS
NOTE 19 FINANCIAL RISK MANAGEMENT (CONTINUED)
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.
Less than 12 months
Greater than 12 months
No specific maturity
Total
2020
$m
2019
$m
2020
$m
2019
$m
2020
$m
2019
$m
2020
$m
2019
$m
Bonds, notes and subordinated debt
24,838
29,275
101,546
113,983
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
64,388
51,661
10,640
7,321
2,313
55,457
31,905
9,936
7,590
3,813
-
690
54,294
33,034
1,547
-
225
50,364
32,615
3,069
116,150
115,589
461,076
465,386
5,259
1,477
10,806
2,490
11,434
-
-
2,891
3,467
264,756
238,214
553,532
555,126
-
12,101
48,277
36,247
34,273
14,309
-
-
9,035
9,328
540,321
517,030
-
20,936
5,855
23,847
5,055
-
-
-
-
30,021
34,318
-
-
8,703
11,006
619,144
600,912
(354,388)
(362,698)
-
3,047
145,693
407,839
-
2,894
145,779
409,347
-
-
-
-
30,917
36,528
-
-
-
228
6,774
-
10,254
53,784
-
-
-
6,191
4,223
40,435
7,842
108
-
-
6,482
3,921
44,829
8,955
64,388
52,351
95,851
40,355
3,860
55,457
32,130
96,828
40,205
7,110
582,485
587,749
1,477
25,798
2,490
25,155
866,565
847,124
50,556
30,021
29,971
546,176
126,384
6,191
15,973
34,273
34,318
33,283
522,085
143,258
6,482
17,821
805,272
791,520
61,293
55,604
63,555
48,205
6,421
7,320
1,271
54,811
28,824
6,842
7,570
2,258
-
690
48,500
33,004
2,614
-
225
46,720
32,596
3,971
-
-
-
-
31,329
35,990
-
-
-
-
63,555
48,895
86,250
40,324
3,885
54,811
29,049
89,552
40,166
6,229
96,341
94,872
400,575
405,938
4,426
5,717
501,342
506,527
1,477
9,088
2,490
9,360
-
-
-
-
2,059
2,836
190,191
128,146
233,678
207,027
487,442
492,286
225,946
169,853
Deposits and other borrowings
481,691
460,141
Bonds, notes and subordinated debt
24,820
29,274
95,477
108,325
33,358
32,552
14,270
-
437
-
577
-
8,474
2,647
-
-
7,865
2,885
-
-
33,450
37,945
-
-
-
108
-
-
Other debt issues
All other liabilities
Total liabilities
Net (liabilities) / assets
-
-
7,859
9,718
548,165
532,262
(314,487)
(325,235)
-
2,401
123,269
364,173
-
6,191
6,482
1,797
181,349
119,608
120,872
371,414
220,990
164,143
4,956
5,710
148
National Australia Bank
1,477
201,338
947,066
47,628
33,450
8,911
484,338
120,297
6,191
191,609
892,424
54,642
2,490
140,342
869,166
32,552
37,945
8,550
463,026
137,599
6,482
131,123
817,277
51,889
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 is assumed to equate to the carrying value. The fair value of all other loans and
advances is 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, is assumed to equate to the carrying value. The fair
value of other deposits and other borrowings is calculated using discounted cash flow models based
on the deposit type and maturity.
The fair values of bonds, notes and subordinated debt and other debt issues are calculated based on a
discounted cash flow model using a yield curve appropriate to the remaining maturity of the
instruments and appropriate credit spreads, or in some instances are calculated based on market
quoted prices when there is sufficient liquidity in the market.
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.
Critical accounting 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
Annual Financial Report 2020
149
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 take place when there are changes to the inputs in the valuation technique. 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 2020 attributable to reasonably possible alternatives would not
have a material effect.
150
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:
Group
Financial assets
Loans and advances
Financial liabilities
Deposits and other borrowings
Bonds, notes and subordinated debt
Other debt issues
Company
Financial assets
Loans and advances
Financial liabilities
Deposits and other borrowings
Bonds, notes and subordinated debt
Other debt issues
2020
2019
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
582,485
-
4,506 579,047 583,553
587,749
-
6,078 583,436
589,514
546,176
126,384
- 546,530
514 128,297
6,191
5,236
1,128
- 546,530
- 128,811
-
6,364
522,085
143,258
- 522,404
7,855 137,950
6,482
6,714
68
-
-
-
522,404
145,805
6,782
501,342
-
2,528 499,861 502,389
506,527
-
3,324 504,944
508,268
484,338
120,297
- 484,137
- 122,264
6,191
5,236
1,128
- 484,137
- 122,264
-
6,364
463,026
137,599
- 463,256
7,327 132,293
6,482
6,714
68
-
-
-
463,256
139,620
6,782
Annual Financial Report 2020
151
NOTES TO THE FINANCIAL STATEMENTS
NOTE 20 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Fair value measurements recognised on the balance sheet
2020
2019
Level 1
Level 2
Level 3
$m
$m
$m
Total
$m
Level 1
Level 2
Level 3
$m
$m
$m
Total
$m
Group
Financial assets
Trading instruments
Debt instruments
Other financial assets
Hedging derivatives
Investments relating to life insurance business
Equity instruments(1)
42,075
53,668
3,209
36,427
-
-
-
-
3,860
3,830
100
-
Total financial assets measured at fair value
45,284
97,885
Financial liabilities
Trading instruments
Other financial liabilities
Hedging derivatives
-
29,933
1,371
28,600
-
2,255
Total financial liabilities measured at fair value
1,371
60,788
Company
Financial assets
Trading instruments
Debt instruments
Other financial assets
Hedging derivatives
Equity instruments(1)
36,365
49,777
3,209
36,396
-
-
-
3,885
2,888
-
Total financial assets measured at fair value
39,574
92,946
Financial liabilities
Trading instruments
Other financial liabilities
Hedging derivatives
-
33,362
1,343
-
7,568
1,721
Total financial liabilities measured at fair value
1,343
42,651
(1)
Includes fair value through profit or loss instruments.
108
719
-
-
-
116
943
88
-
-
88
108
719
-
-
44
871
88
-
-
88
95,851
40,355
3,860
3,830
100
116
36,776
59,975
3,206
36,520
-
-
-
-
7,110
4,689
101
-
144,112
39,982 108,395
30,021
29,971
2,255
62,247
86,250
40,324
3,885
2,888
44
-
34,262
1,249
32,034
-
4,037
1,249
70,333
34,466
55,009
3,206
36,481
-
-
-
6,229
4,059
-
133,391
37,672 101,778
33,450
8,911
1,721
44,082
-
37,889
1,249
-
7,301
2,939
1,249
48,129
77
479
-
-
-
91
647
56
-
-
56
77
479
-
-
44
600
56
-
-
56
96,828
40,205
7,110
4,689
101
91
149,024
34,318
33,283
4,037
71,638
89,552
40,166
6,229
4,059
44
140,050
37,945
8,550
2,939
49,434
There were no material transfers between Level 1 and Level 2 during the year for the Group and the Company.
152
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 20 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The table below summarises changes in fair value classified as Level 3:
Trading instruments
Debt instruments
Equity instruments(1)
Trading instruments
Assets
Liabilities
2020
$m
91
2019
$m
84
2020
$m
56
2019
$m
225
2020
$m
77
21
-
14
-
(6)
-
2
108
2019
$m
242
(166)
-
-
-
-
-
1
77
2020
$m
479
-
13
91
(215)
429
(78)
-
719
2019
$m
451
-
(1)
317
(119)
4
(173)
-
479
1
(5)
29
-
-
-
-
116
-
9
8
(16)
4
-
2
91
Group
Balance at the beginning of year
Gains / (losses) on assets and (gains) /
losses on liabilities recognised:
In profit or loss
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
21
-
(166)
-
-
13
-
(1)
1
(5)
-
9
Balance at the beginning of year
77
242
479
451
44
47
Gains / (losses) on assets and (gains) /
losses on liabilities recognised:
In profit or loss
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
21
-
14
-
(6)
-
2
108
(166)
-
-
-
-
-
1
77
-
13
91
(215)
429
(78)
-
719
-
(1)
317
(119)
4
(173)
-
479
21
-
(166)
-
-
13
-
(1)
-
-
-
-
-
-
-
44
-
-
-
-
(4)
-
3
-
(2)
44
-
-
(1)
Includes fair value through profit or loss instruments.
31
(170)
-
-
-
-
-
1
88
31
-
56
31
-
-
-
-
-
1
88
31
-
-
-
-
-
-
1
56
(170)
-
225
(170)
-
-
-
-
-
1
56
(170)
-
Annual Financial Report 2020
153
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.
Group
Company
NOTES TO THE FINANCIAL STATEMENTS
Covered bonds
Securitisation
Repurchase
agreements
2020
$m
28,050
25,432
2019
$m
12,565
12,565
2020
$m
33,454
28,648
2019
$m
30,465
26,880
2020
$m
3,051
3,126
3,057
3,186
(129)
2019
$m
4,245
4,283
4,258
4,359
(101)
Repurchase
agreements
2020
$m
26,741
24,146
2019
$m
12,429
12,429
Covered bonds
Securitisation
2020
$m
29,211
24,544
2019
$m
26,120
22,816
2020
$m
135,990
135,990
2019
$m
77,976
77,976
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
136,274
138,214
(1,940)
78,244
79,121
(877)
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
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
154
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.
Critical accounting judgements and estimates
The measurement of goodwill is subject to a number of key judgements and estimates. These include:
• the allocation of goodwill to CGUs on initial recognition
• the re-allocation of goodwill in the event of disposal or reorganisation
• the appropriate cash flows, growth rates and discount rates.
Further details about these items are provided below.
Annual Financial Report 2020
155
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
2020
$m
1,838
1,890
65
16
2019
$m
2,864
2,628
60
24
2020
$m
-
1,705
52
-
2019
$m
-
2,263
43
-
Total goodwill and other intangible assets
3,809
5,576
1,757
2,306
At cost
Deduct: Accumulated amortisation / impairment losses
Total goodwill and other intangible assets
(1) Other acquired intangible assets relates to brand names.
8,860
(5,051)
3,809
9,710
(4,134)
5,576
5,940
(4,183)
1,757
5,419
(3,113)
2,306
Reconciliation of movements in goodwill and internally generated software
Goodwill
Balance at beginning of year
Reclassified to held for sale(1)
Impairment and write-offs
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
Change in application of software capitalisation policy - continuing operations(2)
Change in application of software capitalisation policy - discontinued operations(2)
Foreign currency translation adjustments
Balance at end of year
Group
Company
2020
$m
2,864
(827)
(199)
-
2019
$m
2,863
-
-
1
1,838
2,864
2020
$m
2019
$m
-
-
-
-
-
-
-
-
-
-
2,628
2,821
2,263
2,388
629
(12)
(301)
(950)
(106)
2
871
(14)
(564)
(489)
(5)
8
520
(12)
(260)
(806)
-
-
709
(3)
(453)
(380)
-
2
1,890
2,628
1,705
2,263
(1) Refer to Note 37 Discontinued operations for further information.
(2) The 2020 and 2019 balances include a reduction of software assets balance 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
In the 2019 financial year, the Group allocated goodwill across the following cash generating units (CGUs): Business and Private
Banking, Consumer Banking and Wealth, and New Zealand Banking. The Group has made significant progress in the operational
separation of the MLC Wealth business and since March 2020 MLC Wealth has been a separate CGU.
As a consequence of the operational separation of MLC Wealth, the goodwill previously allocated to the Consumer Banking and
Wealth CGU has been reallocated to the separate MLC Wealth and Personal Banking CGUs based on the relative values of the
notional goodwill in each business. Goodwill allocated to the MLC Wealth CGU has been included in the balance sheet within
Assets held for sale, refer to Note 37 Discontinued operations.
156
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 22 GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
The key assumptions used in determining the recoverable amount of CGUs, to which goodwill has been allocated, are as follows:
Cash generating unit
Business and Private Banking
New Zealand Banking
Consumer Banking and Wealth
Personal Banking
Total goodwill
Discount
rate per
annum
2020
%
Terminal
growth
rate per
annum
2020
%
9.4
9.6
n/a
9.4
n/a
3.8
3.7
n/a
3.8
n/a
Goodwill
2020
$m
68
258
-
1,512
1,838
2019
$m
68
258
2,538
-
2,864
Whilst there is no impairment in any of the CGUs, changes to the key assumptions would affect the recoverable amount of the
CGUs.
For the Personal Banking CGU, either an increase in the discount rate of 25 basis points or a decrease in the growth rate of 90
basis points would result in impairment first becoming evident. The New Zealand Banking CGU would become impaired if the
discount rate increased by 89 basis points or the growth rate decreased by 369 basis points. These sensitivities assume the
specific assumptions move in isolation and all other assumptions are held constant.
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 Life(1)
Securities sold not delivered
Other
Total other assets
(1) Refer table (b) in Note 31 Interest in subsidiaries and other entities for further details.
Group
Company
2020
$m
3,561
789
263
952
345
102
411
3,428
808
2019
$m
4,053
1,014
223
586
366
72
526
2,815
1,448
10,659
11,103
2020
$m
2,703
685
213
872
-
29
441
3,318
606
8,867
2019
$m
3,369
884
176
194
-
29
542
2,570
1,053
8,817
Annual Financial Report 2020
157
NOTES TO THE FINANCIAL STATEMENTS
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 and payroll remediation
Provisions for customer-related and payroll remediation include provisions for potential refunds and other compensation to
customers, payments to colleagues, as well as 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.
Critical accounting 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 recognition and measurement of some of these provisions involves significant judgement
about the existence of a present obligation, the likely outcome of various events and the related estimated future cash flows. If
the future events are uncertain or where the outflows cannot be reliably measured a contingent liability is disclosed, refer to
Note 30 Contingent liabilities and credit commitments.
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 estimates, including the number of impacted customers,
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.
Group
Company
2020
$m
818
348
2019
$m
899
292
2,069
2,092
98
487
45
179
3,820
3,507
2020
$m
744
326
2,019
83
456
3,628
2019
$m
728
214
2,068
27
170
3,207
Employee entitlements
Operational risk event losses
Customer-related and payroll remediation
Restructuring provision
Other
Total provisions
158
National Australia Bank
NOTE 24 PROVISIONS (CONTINUED)
Reconciliation of movements in provisions
Operational risk event losses
Balance at beginning of year
Provisions made(1)
Payments out of provisions
Provisions no longer required and net foreign currency movements
Reclassified to held for sale(2)
Balance at end of year
Customer-related and payroll remediation
Balance at beginning of year
Provisions made (continuing operations)(3)
Provisions made (discontinued operations)(3)
Payments out of provisions
Provisions no longer required
Balance at end of year
Restructuring provision
Balance at beginning of year
Provisions made(1)
Payments out of provisions
Balance at end of year
NOTES TO THE FINANCIAL STATEMENTS
Group
Company
2020
$m
292
323
(100)
(128)
(39)
348
2,092
373
643
(799)
(240)
2,069
45
251
(198)
98
2019
$m
238
314
(208)
(52)
-
292
461
273
1,665
(307)
-
2,092
285
-
(240)
45
2020
$m
214
289
(68)
(109)
-
326
2,068
983
-
(792)
(240)
2,019
27
236
(180)
83
2019
$m
139
261
(157)
(29)
-
214
461
1,914
-
(307)
-
2,068
253
-
(226)
27
(1) Amount includes provisions made in both continuing and discontinued operations.
(2) MLC Wealth’s provision for operational risk event losses has been reclassified to held for sale. Refer to Note 37 Discontinued operations for further information.
(3) Prior period has been restated for the presentation of MLC Wealth as a discontinued operation.
NOTE 25
OTHER LIABILITIES
Accrued interest payable
Payables and accrued expenses
Cash collateral received from third parties
Securities purchased not delivered
Lease liabilities(1)
Other
Total other liabilities
Group
Company
2020
$m
1,283
805
1,544
3,536
1,555
737
9,460
2019
$m
2,217
934
2,113
3,246
-
1,299
9,809
2020
$m
1,105
408
1,542
3,491
1,319
823
8,688
2019
$m
1,881
524
2,109
2,930
-
1,138
8,582
(1) Current year amounts reflect the adoption of AASB 16 Leases on 1 October 2019. As permitted by AASB 16 comparative information has not been restated. For
details on the adoption of AASB 16 refer to Note 1 Basis of preparation.
Annual Financial Report 2020
159
NOTES TO THE FINANCIAL STATEMENTS
NOTE 26
LEASES
Accounting Policy
At inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the
contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. At
inception or on reassessment of a contract that contains a lease component, the Group allocates the consideration in the
contract to each lease component on the basis of their relative stand-alone selling prices. For the leases of land and buildings
where the Group is the lessee, the Group has elected not to separate non-lease components and account for the lease and non-
lease components as a single lease component.
The Group recognises a right-of-use asset and a lease liability at the lease commencement date. Except for right-of-use assets
measured in accordance with the standard's transition provisions, the right-of-use asset is initially measured at cost, which
comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date,
plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the
underlying asset, less any lease incentives received.
The right-of-use asset is subsequently measured under the cost model and depreciated using the straight-line method from the
commencement date to the end of the lease term. In addition, the right-of-use asset is reviewed for impairment and adjusted for
certain remeasurements of the lease liability.
The lease liability is initially measured at the present value of the lease payments that have not been paid at the commencement
date, discounted using the Group’s incremental borrowing rate which is based on the Group’s funds transfer pricing curve. The
lease liability is subsequently measured at amortised cost using the effective interest method. It is remeasured when there is a
lease modification that is not accounted for as a separate lease, there is a change in future lease payments arising from a change
in an index or rate, if there is a change in the Group’s estimate of the amount expected to be payable under a residual value
guarantee, or if the Group changes its assessment of whether it will exercise a purchase, extension or termination option. The
Group does not include extension options in the measurement of the lease liability until such time that it is reasonably certain
that the options will be exercised.
The Group has elected not to recognise right-of-use assets and lease liabilities for short-term leases and leases of low-value
assets. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the
lease term.
When the Group acts as a lessor, it determines at lease inception whether each lease is a finance lease or an operating lease. To
classify each lease, the Group makes an overall assessment of whether the lease transfers substantially all the risks and rewards
incidental to ownership of the underlying asset. Where this is the case, the lease is a finance lease. All other leases are classified
as operating leases.
Effect of leases on the Balance Sheets
Right-of-use assets
Property, plant and equipment
Buildings
Technology
Total right-of-use assets
Group(1)
Company(1)
2020
$m
1,331
32
1,363
2020
$m
1,084
28
1,112
Additions to right-of-use assets during the period
480
411
Lease liabilities
Other liabilities
Total lease liabilities
1,555
1,555
1,319
1,319
(1) Current year amounts reflect the adoption of AASB 16 Leases on 1 October 2019. For details on the adoption of AASB 16 refer to Note 1 Basis of preparation.
160
National Australia Bank
NOTE 26 LEASES (CONTINUED)
Effect of leases on the Income Statements
Depreciation
Buildings(2)
Technology
Total depreciation on right-of-use assets
Interest
Total interest expense on lease liabilities
Short-term lease expense
Total short-term lease expense
NOTES TO THE FINANCIAL STATEMENTS
Group(1)
Company(1)
2020
$m
433
32
465
31
49
2020
$m
383
30
413
26
44
(1) Current year amounts reflect the adoption of AASB 16 Leases on 1 October 2019. For details on the adoption of AASB 16 refer to Note 1 Basis of preparation.
(2)
Includes impairment of property-related assets.
Future cash flow effect of leases
The table below is a maturity analysis of future lease payments in respect of existing lease arrangements on an undiscounted
basis.
Due within one year
Due after one year but no later than five years
Due after five years
Total future lease payments
Group(1)
Company(1)
2020
$m
362
840
515
1,717
2020
$m
317
697
439
1,453
(1) Current year amounts reflect the adoption of AASB 16 Leases on 1 October 2019. For details on the adoption of AASB 16 refer to Note 1 Basis of preparation.
The Group has committed to a number of future lease contracts in relation to new buildings across Australia. As these new leases
become effective, the Group will recognise additional right-of-use assets and lease liabilities of approximately $1,127 million over
the next five years.
Annual Financial Report 2020
161
NOTES TO THE FINANCIAL STATEMENTS
CAPITAL MANAGEMENT
NOTE 27
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
Total contributed equity
Reconciliation of movement in ordinary shares
Balance at beginning of year
Shares issued:
Institutional share placement
Retail share purchase plan
Conversion of convertible preference shares and convertible notes
Dividend reinvestment plan
Dividend reinvestment plan underwritten allotments
Transfer from equity-based compensation reserve
Balance at end of year
Group
2020
$m
2019
$m
Company
2020
$m
2019
$m
43,531
36,762
42,745
35,976
1,945
45,476
1,945
38,707
1,945
44,690
1,945
37,921
Group
2020
$m
2019
$m
Company
2020
$m
2019
$m
36,762
33,062
35,976
32,276
2,954
1,250
750
976
700
139
-
-
750
1,803
1,000
147
2,954
1,250
750
976
700
139
-
-
750
1,803
1,000
147
43,531
36,762
42,745
35,976
162
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 27 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:
Institutional share placement
Retail share purchase plan
Conversion of convertible preference shares and convertible notes
Dividend reinvestment plan
Dividend reinvestment plan underwritten allotments
Bonus share plan
Share-based payments
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
2020
2019
No. ’000
No. ’000
2,883,019
2,734,119
212,014
88,337
35,141
39,745
26,898
1,445
3,494
-
-
-
30,185
73,265
38,053
2,307
5,084
6
3,290,093
2,883,019
19
-
19
25
(6)
19
3,290,112
2,883,038
(5,572)
(7,524)
3,284,540
2,875,514
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. 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. 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.
NIS distributions are unfranked.
NIS currently qualify as Additional Tier 1 capital, subject to transitional Basel III treatment. NIS will cease to qualify as Tier 1
capital from 1 January 2022. Under Australian tax law, when the NIS no longer qualify as Tier 1 capital, it is expected that any
subsequent NIS distributions will be franked to the same extent as dividends on NAB’s ordinary shares are franked. The
attachment of franking credits will not reduce the cash component of the NIS distributions.
Annual Financial Report 2020
163
NOTES TO THE FINANCIAL STATEMENTS
NOTE 28
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.
164
National Australia Bank
NOTE 28 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 29
DIVIDENDS AND DISTRIBUTIONS
2020
Final dividend determined in respect of the year ended 30 September 2019
Interim dividend determined in respect of the year ended 30 September 2020
Deduct: Bonus shares in lieu of dividend
Dividends paid by the Company during the year ended 30 September 2020
Add: Dividends paid to non-controlling interest in controlled entities
Dividends paid by the Group (before dividend reinvestment plan)
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)
Franked dividends paid during 2020 were fully franked at a tax rate of 30% (2019: 30%).
NOTES TO THE FINANCIAL STATEMENTS
Group
Company
2020
$m
(38)
26
307
(396)
115
77
8
99
2019
$m
20
80
201
(235)
190
46
4
306
2020
$m
(243)
-
346
(264)
115
77
3
34
Group
Company
2020
$m
20
-
-
(36)
(22)
-
(38)
2019
$m
(343)
14
287
110
(38)
(10)
20
2020
$m
(214)
-
-
(7)
(22)
-
(243)
2019
$m
(214)
-
235
(147)
190
46
3
113
2019
$m
(227)
-
-
13
-
-
(214)
Amount
Total
per share
amount
cents
83
30
n/a
n/a
n/a
n/a
99
83
n/a
n/a
n/a
n/a
$m
2,393
895
(32)
3,256
4
3,260
2,707
2,333
(57)
4,983
4
4,987
Annual Financial Report 2020
165
NOTES TO THE FINANCIAL STATEMENTS
NOTE 29 DIVIDENDS AND DISTRIBUTIONS (CONTINUED)
Final dividend
On 5 November 2020, the directors determined the following dividend:
Final dividend determined in respect of the year ended 30 September 2020
Amount
per share
cents
30
Total
Franked
amount
amount
per share
$m
987
%
100
The final 2020 ordinary dividend is payable on 10 December 2020. The Dividend Reinvestment Plan discount is nil, 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 2020 and will be recognised in subsequent financial reports.
Australian franking credits
The franking credits available to the Group at 30 September 2020, after allowing for Australian tax payable in respect of the
current reporting period's profit and the receipt of dividends recognised as a receivable at reporting date, are estimated to be
$1,017 million (2019: $660 million). Franking credits to be utilised as a result of the payment of the proposed final dividend are
$423 million (2019: $1,026 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 $0.09 per share will be attached to the final 2020 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
2020
$m
39
-
39
2019
$m
62
21
83
Company
2020
2019
$m
39
-
39
$m
62
-
62
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.
166
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
UNRECOGNISED ITEMS
NOTE 30
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
2020
$m
4,252
3,272
3,313
9,789
20,626
2019
$m
4,515
7,041
878
11,377
23,811
2020
$m
4,216
3,272
3,016
9,203
19,707
2019
$m
4,483
7,041
598
10,771
22,893
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
Annual Financial Report 2020
167
NOTES TO THE FINANCIAL STATEMENTS
NOTE 30 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
2020
$m
2019
$m
Company
2020
$m
2019
$m
-
173,656
173,656
2
155,978
155,980
-
153,090
153,090
2
136,257
136,259
136,823
120,756
136,267
120,178
20,010
16,823
19,143
16,081
173,656
155,980
-
16,823
153,090
-
16,081
136,259
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 $28,141 million (2019: $29,636 million) of commercial paper issuances by National
Australia Funding (Delaware) Inc. Commercial paper of $317 million (2019: $907 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 MLC Wealth Limited 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 MLC Wealth Limited no longer continues as
a wholly owned controlled entity of the Company, the Company will provide the Commission with a guarantee of the current
workers' compensation liabilities of MLC Wealth Limited.
• 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 investigations, reviews and litigation involving Australian and New Zealand financial institutions
has increased significantly in recent years. Some matters have related customer remediation programs which are expected to
continue beyond the 2020 financial year. Some of these matters may result in enforcement proceedings.
There are contingent liabilities in respect of all such matters. Such matters are often highly complex and uncertain. Where
appropriate, provisions have been made. The aggregate potential liability of the Group in relation to these matters cannot be
accurately assessed.
168
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 30 CONTINGENT LIABILITIES AND CREDIT COMMITMENTS (CONTINUED)
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 against
three banks in relation to the Bank Bill Swap Reference Rate. The relevant ASIC proceeding against NAB was concluded in
November 2017 with NAB admitting certain contraventions.
In February 2020, the Court dismissed all claims against NAB. The decision could potentially be appealed or reconsidered.
However, any appeal would not occur until after final judgment against the rest of the defendants in the class action is delivered.
NULIS and MLCN – class actions
In October 2019, litigation funder Omni Bridgeway (formally IMF Bentham) and William Roberts Lawyers commenced a class
action against NULIS Nominees (Australia) Limited (NULIS) alleging breaches of NULIS’s trustee obligations to act in the best
interests of the former members of The Universal Super Scheme in deciding to maintain grandfathered commissions on their
transfer into the MLC Super Fund on 1 July 2016. NULIS filed its defence in the proceeding in February 2020.
In January 2020, Maurice Blackburn commenced a class action against NULIS and MLC Nominees Pty Ltd (MLCN) alleging
breaches of NULIS's trustee obligations in connection with the speed with which NULIS and MLCN effected transfers of members’
accrued default amounts to the MySuper product. NULIS and MLCN filed their joint defence in the proceeding in April 2020.
The potential outcomes and total costs associated with these matters remain uncertain.
UK conduct issues – class actions and insurance claims in relation to UK customer-related remediation matters
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) in the English Courts. The First Claim concerns tailored business loans (TBLs)
which customers entered into with CYBG and in respect of which NAB employees performed various functions. 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.
In November 2019, a further claim (the Second Claim) was served on behalf of 146 claimants. The Second Claim is in similar terms
to the First Claim and is currently stayed.
On 14 October 2020, RGL issued a further claim (the Third Claim) in respect of a further 350 claimants (a number of which appear
to be Scottish claimants from their addresses). This claim has not yet been served on NAB or CYBG. NAB expects RGL’s lawyers to
seek a stay of the Third Claim (as they did with the Second Claim).
RGL has 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. NAB does not have any details of these potential further claimants.
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 made insurance
claims in relation to these losses. NAB and the reinsurers reached agreement for the settlement of the claims during the 2020
financial year. The net settlement proceeds have been set off against operating expenses where the original conduct expenses
and the legal fees incurred were recognised.
Annual Financial Report 2020
169
NOTES TO THE FINANCIAL STATEMENTS
NOTE 30 CONTINGENT LIABILITIES AND CREDIT COMMITMENTS (CONTINUED)
Regulatory activity, compliance investigations and associated proceedings
Adviser service fees, fee disclosure statements (FDS) and plan service fees (PSF)
In 2015, ASIC commenced 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 pay an
adviser service fee to receive ongoing financial review 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 or that customers were adequately
informed of their ability to terminate the service fee. NAB is undertaking a remediation program in relation to this matter for the
Wealth business, including NAB Financial Planning, NAB Advice Partnerships and JBWere.
NAB Financial Planning has made payments to most impacted customers, with only some complex cases still being assessed. 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.
On 12 October 2018, ASIC announced that it was conducting an industry-wide review of compliance with requirements for FDSs
and Renewal Notices in the financial advice sector. ASIC also continues to review compliance in relation to plan service fees.
NAB continues to assess 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 FDSs. NAB has commenced refunding
fees paid by NAB Financial Planning customers from 1 June 2018 up until they entered a new advice arrangement or the fees
were switched off. NAB Financial Planning no longer offers ongoing services arrangements to its customers. NAB Advice
Partnerships is also phasing out ongoing fee arrangements.
On 17 December 2019, ASIC commenced Federal Court proceedings against NAB alleging that between December 2013 and
February 2019, NAB Financial Planning failed to comply with a number of provisions of the Australian Securities and Investments
Commission Act 2001 (Cth) (ASIC Act) and the Corporations Act 2001 (Cth) (Corporations Act) in relation to the ongoing service
arrangements and FDSs, including misleading conduct and unconscionable conduct. NAB has filed its response to ASIC’s claim
making some admissions about FDS noncompliance and misleading conduct but has denied that it acted unconscionably.
Following on from ASIC’s May 2017 report about its industry-wide investigation into financial advice fees, 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. The Federal Court has also delivered its judgement in the ASIC proceedings
against two Group entities – NULIS and MLCN – in relation to PSF, imposing a civil penalty of $57.5 million on NULIS and MLCN.
The potential outcomes and total costs associated with these matters remain uncertain.
Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) program uplift and compliance issues
Since July 2016, NAB has been working to uplift and strengthen the Group AML and CTF program and its implementation. The
work involves significant investment in systems and personnel, to ensure an effective and efficient control environment and uplift
compliance capability. In addition to a general uplift in capability, the program of work aims to remediate specific compliance
issues and weaknesses.
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. The Group has reported compliance breaches to relevant regulators,
including over the last financial year, and has responded to a number of requests from regulators requiring the production of
documents and information. Identified issues include certain weaknesses with the Group’s implementation of ‘Know Your
Customer’ (KYC) requirements, other financial crime risks, as well as systems and process issues that impacted transaction
monitoring and reporting in some specific areas. In particular, the Group has identified issues with collection and verification of
identity information and enhanced customer due diligence for non-individual customers. This is the subject of a dedicated
remediation program that is underway.
The Group 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.
170
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 30 CONTINGENT LIABILITIES AND CREDIT COMMITMENTS (CONTINUED)
As this work progresses, further compliance breaches may be identified and reported to AUSTRAC or equivalent foreign
regulators, and additional uplifting and strengthening may be required. The potential outcome and total costs associated with
these investigations and remediation processes 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, both internally and in some cases
by regulatory authorities, including matters where:
• incorrect fees were applied in connection with certain products, including in relation to periodic payments
• customers may not have been provided notice of increases to loan repayments within the timeframe required by the National
Credit Code
• incorrect interest rates were applied in relation to certain products, including home lending products on conversion from
interest only to principal and interest
• there were issues in delivering electronic statements, capturing customer consent to receive electronic statements and
inconsistencies with recording statement preferences
• business term lending facilities were not amortising in accordance with approved facilities; and
• various responsible lending matters such as where business loans were used for residential purposes.
The potential outcome and total costs associated with these matters remain uncertain.
Breach reporting
In the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, NAB
was criticised for failing to comply with breach reporting requirements under section 912D of the Corporations Act. There is an
ongoing ASIC investigation in relation to this matter. The potential outcome and total costs associated with this matter remains
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.
On 12 May 2020, the Federal Court approved the settlement of a class action brought by plaintiff law firm Slater & Gordon
against NAB and MLC Limited in connection with the issuance and sale of NAB Credit Card Cover (NCCC) and NAB Personal Loan
Cover (PLC).
NAB is currently making remediation payments to NAB Mortgage Protect (NMP) customers (the third and final CCI product sold
by NAB) 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 sale of CCI products.
The outcome and total costs associated with these matters 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
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.
Deceased estates
There are certain instances where fees were incorrectly charged to deceased estates. There is an ongoing ASIC investigation into
deceased estates. The outcome and total costs associated with this matter remain uncertain.
Annual Financial Report 2020
171
NOTES TO THE FINANCIAL STATEMENTS
NOTE 30 CONTINGENT LIABILITIES AND CREDIT COMMITMENTS (CONTINUED)
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.
Other wealth matters
A number of investigations into wealth advice related matters are being carried out across the Group. These include a review of
the implementation of financial advice provided by NAB Financial Planning in relation to reinvestment as well as into the
disclosure of a customer’s cost base in a product. The potential outcome and total costs associated with these matters
remain uncertain.
Payroll review
In December 2019, NAB announced an investigation into payments of both current and former Australian colleagues. The review
has identified a range of potential payroll under and over payment issues and a remediation program has been established.
Provisions have been taken but the final outcome and total costs associated with this matter 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. Customers may also be
compensated where regular audit reviews identify non-compliant advice which warrants compensation. 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.
Workplace super
A number of investigations are being carried out in relation to workplace super, including matters where some employer
superannuation plans and member entitlements were not correctly set up in the administration systems, and matters relating to
disclosure and administration of certain features of the super product such as insurance and fees. The potential outcome and
total costs associated with these matters 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 Life insurance transaction
In connection with the sale of 80% of MLC Life 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 MLC Life as a standalone entity, including by providing transitional services as well as support for data migration
activities and the development of technology systems. The final financial impact associated with this transaction remains
uncertain.
172
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 30 CONTINGENT LIABILITIES AND CREDIT COMMITMENTS (CONTINUED)
MLC Wealth transaction
On 31 August 2020, NAB announced that it had agreed to sell MLC Wealth, comprising its advice, platforms, superannuation &
investments and asset management businesses to IOOF Holdings Ltd (IOOF).
As part of this transaction, NAB has provided IOOF with indemnities relating to certain pre-completion matters, including a
remediation program relating to workplace superannuation, breaches of anti-money laundering laws and regulations, regulatory
fines and penalties and certain litigation and regulatory investigations. NAB also provided covenants and warranties in favour of
IOOF. NAB also agreed a process to reassess certain provisions for pre-completion matters as part of the completion accounts
process, which may involve increases to such provisions. A breach or triggering of these contractual protections may result in
NAB being liable to IOOF.
The Group will retain the companies that operate the Advice business, such that the Group will retain all liabilities associated
with the conduct of that business pre-completion.
From completion, NAB will provide IOOF with certain transitional services and continuing access to records, as well as support for
data migration activities. NAB may be liable to IOOF if it fails to perform its obligations under these agreements.
The final financial impact associated with this transaction remains uncertain.
Annual Financial Report 2020
173
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 is not control or joint control of those 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 2020 and 30 September 2019. 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
174
National Australia Bank
Ownership %
100
100
100
100
100
100
Incorporated /
formed in
Australia
Australia
New Zealand
New Zealand
Australia
Australia
Australia
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.
On 2 April 2020, the RBNZ announced a restriction on dividend payments by New Zealand banks. This has the effect of restricting
NAB's ability to access cash by way of dividends from its wholly owned subsidiary, BNZ. The restrictions imposed by RBNZ will
remain in place until further notice and are expected to be relaxed when the economic outlook has improved.
(b) Investment in associates
The Group’s investments in associates include a 20% interest in MLC Limited (MLC Life), a provider of life insurance products in
Australia. Set out below is the summarised financial information of MLC Life 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 Life
Revenue
Net loss for the period
Total comprehensive income for the period
Reconciliation to the Group's share of loss
MLC Life's net loss for the period
Prima facie share of loss at 20%
Deduct amortisation of intangible assets recognised at acquisition, net of tax
Group's share of loss for the period
Summarised balance sheet of MLC Life
Total assets
Total liabilities
Net assets
Reconciliation to the Group's investment in MLC Life
Prima facie share of net assets at 20%
Add intangible assets recognised at acquisition, net of deferred tax
Accumulated impairment losses
Group's carrying amount of the investment in MLC Life
2020
$m
1,549
(167)
(167)
(167)
(34)
(3)
(37)
6,810
4,327
2,483
497
128
(214)
411
2019
$m
2,030
(61)
(61)
(61)
(12)
(8)
(20)
6,223
4,263
1,960
392
134
-
526
There was no dividend received from MLC Life during the 2020 financial year (2019: $2.6 million). The Group made additional
capital contributions to MLC Life, in proportion to its 20% shareholding, totalling $138 million during the 2020 financial year
(2019: $nil).
Significant restrictions
Assets in a statutory fund of MLC Life 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 Life'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 Life, the Group refers certain bank customers to MLC
Life, makes available MLC life insurance products on the approved product lists of the Group’s owned and aligned advice
distribution network, and offers MLC life insurance products to the Group's superannuation customers.
Annual Financial Report 2020
175
NOTES TO THE FINANCIAL STATEMENTS
NOTE 31 INTEREST IN SUBSIDIARIES AND OTHER ENTITIES (CONTINUED)
Under a financial services agreement and certain linked arrangements, the Group provides MLC Life 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 Life 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 Life. MLC Life also uses the MLC brand under licence from the Group.
(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 2020 is $1,530 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.
176
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 31 INTEREST IN SUBSIDIARIES AND OTHER ENTITIES (CONTINUED)
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
2020
$m
13,401
7,194
20,595
8,392
2019
$m
10,936
9,253
20,189
5,753
2020
$m
4,947
-
4,947
20
2019(1)
$m
5,588
-
5,588
100
2020
$m
18,348
7,194
25,542
8,412
2019
$m
16,524
9,253
25,777
5,853
structured entities
28,987
25,942
4,967
5,688
33,954
31,630
(1) Comparative information has been restated to appropriately reflect the Group’s exposure to unconsolidated structured entities.
Exposure to loss is managed as part of the Group's Risk Management Framework. 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. Consequently, the Group has presented these measures rather than the total assets of the unconsolidated
structured entities. 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(2)
Group
Securitisations
Other financing
Total
2020
$m
2019
$m
20,388
20,007
206
1
179
3
20,595
20,189
2020
$m
1,228
1,812
1,907
4,947
2019(1)
$m
1,559
3,678
351
5,588
2020
$m
2019
$m
21,616
21,566
2,018
1,908
3,857
354
25,542
25,777
(1) Comparative information has been restated to appropriately reflect the Group’s exposure to unconsolidated structured entities.
(2) Of the total, $25,640 million (2019: $25,146 million) represents the Group's interest in senior notes and $120 million in subordinated notes (2019: $86 million).
Comparative information has been restated to more closely align with relevant regulatory definitions.
Annual Financial Report 2020
177
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.
The Company may incur costs on behalf of controlled entities in respect of customer-related remediation, regulatory activity,
compliance investigations and associated proceedings. Refer to Note 30 Contingent liabilities and credit commitments for further
information in respect of these matters.
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
2020
$m
(1,247)
1,486
141
380
2019
$m
(2,405)
1,227
(69)
(1,247)
Company
2020
$m
(1,743)
1,294
2019
$m
(355)
1,343
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
2020
$m
243
1
7
8
2019
$m
239
1
9
7
2020
$m
243
-
-
8
2019
$m
239
-
-
7
Transactions between the Group and superannuation plans sponsored by the Group were made on commercial terms and
conditions.
178
National Australia Bank
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 Section 5.1 and Section 6.2 of 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
2020
$
2019(1)
$
16,111,161
14,868,471
69,183
686,998
136,212
518,244
420,756
411,710
173,623
164,569
1,467,630
738,803
2,520,742
(1,390,958)
2,497,237
1,796,599
224,764
991,906
24,172,094
18,235,556
(1) The 2019 comparative amounts have been adjusted to reflect changes in the definition of non-monetary benefits and amounts related to a cash variable reward
and other equity awards granted to some KMP prior to their appointment as KMP. See Section 5.1 Remuneration report 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 $8 million (2019: $5
million). 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 may be secured or unsecured depending on the
nature of the lending product advanced. As at 30 September 2020, the total loan balances outstanding were $22 million (2019:
$23 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.
Annual Financial Report 2020
179
NOTES TO THE FINANCIAL STATEMENTS
NOTE 33
REMUNERATION OF EXTERNAL AUDITOR
EY Australia
Audit services
Audit-related services
Taxation-related services
Non-audit services
Total Australia
EY Overseas
Audit services
Audit-related services
Taxation-related services
Non-audit services
Total Overseas
Total Australia and Overseas
Services for non-consolidated trusts of which a Group entity is a trustee, manager or
responsible entity and non-consolidated Group superannuation funds
Total remuneration paid to the external auditor
Group
Company
2020
$'000
12,971
5,792
60
26
2019
$'000
11,717
7,568
60
91
2020
$'000
10,138
4,278
60
26
2019
$'000
8,587
5,970
60
84
18,849
19,436
14,502
14,701
4,163
606
-
6
4,775
23,624
3,274
26,898
4,070
731
165
8
4,974
24,410
3,274
27,684
2,083
283
-
-
2,366
16,868
1,953
363
151
-
2,467
17,168
-
-
16,868
17,168
180
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 33 REMUNERATION OF EXTERNAL AUDITOR (CONTINUED)
The Joint Parliamentary Committee inquiry into the Regulation of Auditing in Australia highlighted the disparity and lack of
comparability of the external auditor fee remuneration disclosure for ASX Listed Corporates. ASIC are proposing four categories
to define external auditor services as the basis of the proposed future disclosure requirements which are set out below.
Auditor’s Remuneration - ASIC disclosures
EY Australia - consolidated entities
Audit services for the statutory financial report of the parent and any of its' controlled
entities
Group
Company
2020
$'000
2019
$'000
2020
$'000
2019
$'000
12,971
11,717
10,138
8,587
Assurance services that are required by legislation to be provided by the external auditor
299
274
126
96
Other assurance and agreed-upon-procedures under other legislation or contractual
arrangements
Other services
Total Australia
EY Overseas - consolidated entities
Audit services for the statutory financial report of the parent and any of its' controlled
entities
Other assurance and agreed-upon-procedures under other legislation or contractual
arrangements
Other services
Total Overseas
Total Australia and Overseas
EY Australia and Overseas - non-consolidated entities
Other assurance and agreed-upon-procedures under other legislation or contractual
arrangements
Other services
Total remuneration paid to the external auditor for the non-consolidated entities
5,409
5,018
4,068
3,620
170
18,849
2,427
19,436
170
14,502
2,398
14,701
4,163
4,070
2,083
1,953
606
6
4,775
23,624
2,754
520
3,274
719
185
4,974
24,410
2,406
868
3,274
283
-
2,366
16,868
363
151
2,467
17,168
-
-
-
-
-
-
Total remuneration paid to the external auditor
26,898
27,684
16,868
17,168
For a description of the Board Audit Committee’s pre-approval policies and procedures, refer to the NAB 2020 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 2020 and the fees paid or due and
payable for those services are set out in the Report of the Directors.
Annual Financial Report 2020
181
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 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, 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 vesting period for the shares or performance rights. The expense for general employee shares in Australia 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.
Critical accounting judgements and estimates
The key estimates 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 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 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 granted 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.
182
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 the:
• 2018 financial year, for 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
Prior to 2019, permanent
Australia, New Zealand, the United
Team were previously eligible to receive LTI
basis, with the recommendation
basis, with the recommendation
employees based in Australia,
Kingdom and the United States having
grants except for the 2018 financial year.
of the People & Remuneration
of the People & Remuneration
Asia, New Zealand, the United
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.
Committee and the approval of
Committee and the approval of
Kingdom and the United States
the Board.
the Board.
were eligible to participate. From
2019, only permanent employees
in Australia were eligible to
participate.
Type of equity-
Generally shares. However, performance
Performance rights.
Generally shares. However,
Generally shares. However,
Shares.
based 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 or
regulatory reasons.
183
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:
on the executive’s resignation from the
certain forfeiture or lapsing
certain forfeiture or lapsing
Australia and Asia, are not
• the employee resigns
Group and a pro rata portion will lapse on
conditions, including forfeiture
conditions, including forfeiture
subject to forfeiture. In New
• the employee does not meet conduct
cessation of employment in other
or lapsing on resignation from
or lapsing on resignation from
Zealand, the United Kingdom
standards
circumstances.
the Group or if conduct
the Group or if conduct
and the United States, the shares
Recognition / Retention
• the employee's employment with the
Group is terminated, subject to certain
exclusions.
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.
are 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
regulatory requirements. The vesting
period will generally be between 1 and 7
years.
evidence of foregone awards
from previous employment.
Exercise period
If the applicable conditions are met,
Performance rights granted in 2014
If the applicable conditions are
If the applicable conditions are
n/a.
(only applicable for
performance rights will vest and each
generally have an expiry date between 5
met, performance rights will
met, performance rights will
performance rights)
performance right will be automatically
and 6 years from the effective date, if they
vest and each performance right
vest and each performance right
exercised.
n/a for share grants.
remain unexercised. Performance rights
will be automatically exercised.
will be automatically exercised.
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 vesting, performance or deferral period 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.
184
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
2020
Fully paid
2019
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.
$
No.
1,686,075
433,537
1,041,183
26.86
21.36
25.38
3,993,696
390,944
1,032,504
$
24.76
25.43
24.19
The closing market price of NAB shares at 30 September 2020 was $17.75 (2019: $29.70). The volume weighted average share
price during the year ended 30 September 2020 was $19.92 (2019: $25.80).
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
2020
2019
2,794,858
456,144
(984,769)
(489,619)
1,776,614
-
2020
2019
Weighted
Outstanding at
average
Outstanding at
4,753,714
185,185
(1,882,568)
(261,473)
2,794,858
-
Weighted
average
30 Sep
remaining life
30 Sep
remaining life
No.
months
No.
months
741,323
875,305
159,986
25
8
30
1,553,319
993,980
247,559
11
20
27
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 table also shows a ‘no hurdle’ value for performance rights that
do not have any market-based performance hurdles attached. The 'no hurdle' value is calculated as the grant date fair value of
the rights, adjusted for expected dividends over the vesting period.
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 with a market hurdle
Fair value of performance rights without a market hurdle
Expected time to vesting (years)
2020
2019
4.0
0.64%
16%
$26.24
6.30%
$10.07
$22.84
3.73
2.3
2.02%
n/a
$24.83
6.92%
n/a
$21.59
2.06
Annual Financial Report 2020
185
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 is subordinated to all other
CET1 capital plus Additional Tier 1 capital.
Tier 1 capital plus Tier 2 capital. Tier 2 capital
elements of funding, absorbs losses as and
Additional Tier 1 capital comprises high quality
comprises other components of capital that,
when they occur, has full flexibility of
components of capital that satisfy the following
to varying degrees, fall short of the quality of
dividend payments and has no maturity date.
essential characteristics:
Tier 1 capital but nonetheless contribute to
CET1 capital consists of the sum of paid-up
• provide a permanent and unrestricted
the overall strength of an ADI and its capacity
ordinary share capital, retained profits plus
commitment of funds
to absorb losses.
certain other items as defined in APS 111.
• are freely available to absorb losses
• rank behind the claims of depositors and other
more senior creditors in the event of winding
up of the issuer
• provide for fully discretionary capital
distributions.
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 implementation of APRA’s ‘Unquestionably Strong’ CET1 benchmark of 10.5% is delayed until 1 January 2023.
The Group remained well capitalised during the year to September 2020. The Group's CET1 ratio as at 30 September 2020 was
11.47%.
In April 2020, APRA announced temporary changes to expectations for ADI capital requirements, allowing for the current 1.50%
'Unquestionably Strong' buffer to be drawn upon to support ongoing lending to the economy during the COVID-19 disruption, as
long as ADIs continue to meet their minimum capital requirements.
In April and June 2020, in light of the uncertain economic outlook due to COVID-19, the Group took proactive steps to build
capital via a $4.25 billion equity raise and a reduction in the interim dividend. These actions provided sufficient capacity to
continue supporting customers through this period and will assist in managing a range of possible scenarios, including a
prolonged and severe economic downturn.
186
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 / (loss) 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 / (decrease) 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
2020
$m
2,559
218
(915)
(234)
(3,186)
2,027
74
424
2,821
2,184
(387)
(57)
(331)
(836)
(15)
2019
$m
4,798
176
(347)
16
(3,034)
2,298
105
19
984
1,412
(58)
(135)
408
(665)
(23)
2020
$m
(527)
194
(770)
(227)
(2,548)
1,898
74
2,578
2,521
1,655
(705)
(118)
(401)
(833)
143
2019
$m
3,279
160
(306)
8
(2,589)
2,267
105
217
853
1,024
(34)
(143)
405
(641)
(6)
29,537
4,517
29,190
4,323
-
-
-
9
(18)
(32)
(12)
1
-
-
-
-
-
41
(12)
(3)
Net cash provided by / (used in) operating activities
33,892
10,410
32,124
8,948
Annual Financial Report 2020
187
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 and
Other debt
Lease
Bonds‚ notes and
Other debt
Lease
subordinated debt
issues
liabilities
subordinated debt
issues
liabilities
At fair
At amortised
At fair
At amortised
Balance at 1 October 2018
Cash flows
Proceeds from issue
Repayments
Non-cash changes
Conversion of convertible
preference shares and convertible
notes
Fair value changes, including fair
value hedge adjustments
Foreign currency translation and
other adjustments
Balance at 30 September 2019
Cash flows
Proceeds from issue
Repayments
Non-cash changes
Opening lease liabilities on
adoption of AASB 16
Additions to lease liabilities
Conversion of convertible
preference shares and convertible
notes
Fair value changes, including fair
value
$m
23,580
4,213
(3,734)
-
982
957
25,998
552
(4,140)
-
-
-
cost
$m
140,222
22,946
(27,267)
$m
6,158
1,874
(799)
-
(750)
3,131
-
4,226
143,258
14,444
(30,384)
(1)
6,482
1,100
(649)
value
$m
5,485
227
(170)
-
570
302
6,414
-
$m
-
-
-
-
-
-
-
-
(322)
(573)
cost
$m
136,110
21,316
(26,260)
$m
6,158
1,874
(799)
-
(750)
2,215
-
4,218
137,599
12,939
(29,227)
(1)
6,482
1,100
(649)
$m
-
-
-
-
-
-
-
-
(278)
-
-
-
-
-
1,425
473
-
-
-
-
-
-
204
450
-
-
(21)
1,555
(200)
5,845
(1,464)
120,297
(750)
-
8
6,191
-
-
1,204
404
(750)
-
8
6,191
-
-
(11)
1,319
value hedge adjustments
342
512
Foreign currency translation and
other adjustments
Balance at 30 September 2020
(404)
22,348
(1,446)
126,384
188
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 36 NOTES TO THE CASH FLOW STATEMENTS (CONTINUED)
Reconciliation of cash and cash equivalents
For the purposes of the cash flow statement, cash and cash equivalents includes cash and liquid assets and amounts due from
other banks (including reverse repurchase agreements and short-term government securities) net of amounts due to other banks
that are readily convertible to known amounts of cash within three months.
Cash and cash equivalents as shown in the cash flow statement is reconciled to the related items on the balance sheet as follows:
Assets
Cash and liquid assets(1)
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
(1)
Includes cash and liquid assets held in MLC Wealth. Refer to Note 37 Discontinued operations.
Non-cash financing and investing activities
New share issues
Dividend reinvestment plan
Conversion of convertible preference shares and convertible notes
Group
Company
2020
$m
64,560
1,607
31,806
97,973
2019
$m
55,457
795
23,705
79,957
2020
$m
2019
$m
63,555
54,811
-
28,363
91,918
-
20,635
75,446
(35,932)
(32,931)
(33,112)
(31,282)
62,041
47,026
58,806
44,164
Group
Company
2020
$m
976
750
2019
$m
1,803
750
2020
$m
976
750
2019
$m
1,803
750
The Group did not offer a discount on the Dividend Reinvestment Plan for the interim or final dividends in respect of the year
ended 30 September 2020. The Group offered a 1.5% discount on the Dividend Reinvestment Plans for dividends paid in respect
of the year ended 30 September 2019.
On 23 March 2020, the Group completed the resale of all NAB Capital Notes (NCN) issued on 23 March 2015 to a nominated
purchaser, in accordance with the resale notice issued on 17 February 2020. Following the resale, $750 million of NCN were
converted into Ordinary Shares, and the remaining balance of approximately $593 million NCN were redeemed.
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.
Annual Financial Report 2020
189
NOTES TO THE FINANCIAL STATEMENTS
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.
Critical accounting judgements and estimates
MLC Wealth has been presented as a disposal group held for sale, although third party approvals remain outstanding, as it is
considered highly probable that the contracted sale will be completed within 12 months. The classification and presentation as
held for sale is a matter of judgement and the status of the transaction will be reviewed on an ongoing basis to ensure that the
classification remains appropriate.
Sale of MLC Wealth
On 31 August 2020, the Group entered into an agreement for the sale of 100% of MLC Wealth, including the advice, platforms,
superannuation & investments and asset management businesses, to IOOF Holdings Limited for $1,440 million, subject to
completion adjustments. The agreement follows the strategic decision announced by NAB in 2018 to pursue an exit of MLC
Wealth and is in line with NAB’s strategy to simplify and focus on its core banking business, while creating a stronger future for
MLC Wealth. The business being disposed of was previously presented as the MLC Wealth reportable segment.
The transaction is subject to certain conditions, including certain regulatory approvals. Subject to the timing of regulatory
approvals, completion is expected to occur before 30 June 2021. Management have concluded that MLC Wealth meets the
criteria to be classified as a disposal group held for sale and a discontinued operation as at 30 September 2020.
Loss upon classification as held for sale
Based on the selling price of $1,440 million and the carrying value of the disposal group, net of expected completion
adjustments of $1,639 million, an impairment loss of $199 million was recognised within the 'net loss from discontinued
operations' for the year ended 30 September 2020. The impairment loss was attributed to the $1,027 million of goodwill
allocated to the MLC Wealth cash generating unit in the March 2020 half year.
A provision of $284 million has been recognised in respect of the estimated separation costs, and the after tax expense of $200
million has been recognised within 'net loss from discontinued operations'.
The combined effect of the impairment loss and separation costs of $483 million ($399 million after tax) represents the loss that
has been recognised in the 2020 financial year as a result of the transaction. The final loss on the sale will be determined at
completion and will be impacted by separation and transaction costs, net assets at completion and other adjustments.
MLC Life discontinued operation
Amounts presented in the life insurance discontinued operation related to the Group's life insurance business. The Group
disposed of 80% of its investment in MLC Life to Nippon Life Insurance Company in 2016. The amounts presented relate to a re-
assessment of customer-related remediation provisions associated with the MLC Life business and additional costs associated
with the sale. Refer to Note 30 Contingent liabilities and credit commitments for further information.
190
National Australia Bank
NOTE 37 DISCONTINUED OPERATIONS (CONTINUED)
Analysis of net loss from discontinued operations
MLC Wealth discontinued operation
Net operating income
Operating expenses
MLC reportable segment profit before tax
MLC Wealth-related items(2)
Income tax benefit
Net loss related to MLC Wealth
Impairment of goodwill
Net loss from MLC Wealth discontinued operation
MLC Life discontinued operation
Net profit / (loss) from MLC Life discontinued operation
Net loss from discontinued operations
Attributable to owners of NAB
Attributable to non-controlling interests
NOTES TO THE FINANCIAL STATEMENTS
Group
2020
$m
1,258
(1,194)
64
(1,308)
340
(904)
(199)
(1,103)
168
(935)
(939)
4
2019(1)
$m
1,486
(1,270)
216
(1,384)
353
(815)
-
(815)
(289)
(1,104)
(1,107)
3
(1) Prior periods have been restated for the presentation of MLC Wealth as a discontinued operation.
(2) Primarily relates to customer-related remediation, MLC Wealth separation costs, the impact of the change in the application of the software capitalisation
policy and changes in the provision for litigation.
Cash flows provided by / (used in) discontinued operations
MLC Wealth discontinued operation
Net cash provided by / (used in) operating activities
Net cash provided by / (used in) investing activities
Net cash provided by / (used in) financing activities
Net cash inflows / (outflows) from MLC Wealth discontinued operation
MLC Life discontinued operation
Net cash provided by / (used in) operating activities
Net cash inflows / (outflows) from life insurance business discontinued operation
Group
2020
$m
(728)
27
(71)
(772)
(98)
(98)
Annual Financial Report 2020
191
NOTES TO THE FINANCIAL STATEMENTS
NOTE 37 DISCONTINUED OPERATIONS (CONTINUED)
Non-current assets and disposal group held for sale
As at 30 September 2020, the Company had assets held for sale of $1,837 million (2019: $nil) which represents NAB’s investment
in NWMH. An impairment loss has been recognised within Operating Expenses in respect of this investment, refer to Note 5
Operating expenses.
The major classes of assets and liabilities included in the MLC Wealth disposal group as at 30 September 2020 are summarised
below:
MLC Wealth disposal group(1)
Assets
Cash and liquid assets
Other financial assets
Deferred tax assets
Property, plant and equipment
Goodwill and other intangibles
Other assets
Assets held for sale
Liabilities
Provisions
Deferred tax liabilities
Other liabilities
Liabilities directly associated with assets held for sale
(1) Amounts are shown net of inter-company balances.
Group
2020
$m
172
226
91
1
827
162
1,479
96
6
119
221
As at 30 September 2020, the fair value of total assets in the disposal group held for sale is $1,479 million and the fair value of
total liabilities in the disposal group held for sale is $221 million. These fair values are categorised within Level 2 of the fair value
hierarchy.
192
National Australia Bank
NOTES TO THE FINANCIAL STATEMENTS
NOTE 38
EVENTS SUBSEQUENT TO REPORTING DATE
On 19 October 2020, the Federal Court of Australia delivered its judgement in proceedings brought by ASIC against NAB in
connection with the introducer payments program, imposing a civil penalty of $15 million on NAB. The financial impact has been
reflected in the Group's results for the 2020 financial year.
On 5 November 2020, with the prior consent of APRA, NAB announced it would exercise its option to redeem the $1.72 billion
NAB CPS II on 17 December 2020. Each NAB CPS II will be redeemed for cash at its par value of $100.
There are no other items, transactions or events of a material or unusual nature that have arisen in the interval between
30 September 2020 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.
Annual Financial Report 2020
193
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 85 to 193 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 Basis of
preparation 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 2020, and of the performance of NAB and the Group for the year ended 30 September
2020;
(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 11th day of November 2020 and signed in accordance with a resolution of the directors.
Philip Chronican
Chairman
Ross McEwan
Group Chief Executive Officer
194
National Australia Bank
INDEPENDENT AUDITOR'S REPORT
Annual Financial Report 2020
195
A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Ernst & Young 8 Exhibition Street Melbourne VIC 3000 Australia GPO Box 67 Melbourne VIC 3001 Tel: +61 3 9288 8000 Fax: +61 3 8650 7777 ey.com/au Independent Auditor's Report to the Members of National Australia Bank Limited Report on the Audit of the Financial Report Opinion We have audited the Financial Report of National Australia Bank Limited (the Company) and its subsidiaries (collectively the Group), which comprises: the Group consolidated and Company balance sheets as at 30 September 2020; 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, and the Directors’ declaration. In our opinion the accompanying Financial Report is in accordance with the Corporations Act 2001, including: giving a true and fair view of the Company’s and the Group’s financial position as at 30 September 2020 and of their financial performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the Financial Report in Australia. We have also fulfilled 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 for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the Financial Report of the current year. These matters were addressed in the context of our audit of the Financial Report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. The key audit matters identified below, unless otherwise stated, relate to both the Company and the Group. INDEPENDENT AUDITOR'S REPORT
196
National Australia Bank
A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the Financial Report. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying Financial Report. Why significant How our audit addressed the key audit matter Provision for credit impairment As described in Note 17 Provision for credit impairment on loans at amortised cost and Note 19 Financial risk management, the provision for credit impairment is determined in accordance with Australian Accounting Standard – AASB 9 Financial Instruments (AASB 9). This was a key audit matter due to: the value and timing of the recognition of the provision; the significant impact of COVID-19 and related industry responses (e.g. deferral programs and government stimulus packages) on expected credit losses; and the degree of judgment and estimation uncertainty associated with the calculations. Key areas of judgment included: the application of the impairment requirements under AASB 9 within the Company’s and the Group’s expected credit loss methodology; the identification of exposures with a significant deterioration in credit quality; assumptions used in the expected credit loss model (for exposures assessed on an individual or collective basis); and forward-looking macroeconomic factors, including developing and incorporating macroeconomic scenarios, given the wide range of potential economic outcomes and impacts from COVID-19 that may impact future expected credit losses. We assessed the alignment of the Group’s expected credit loss model and its underlying methodology with the requirements of AASB 9, with consideration of COVID-19 impacts and related industry responses. We assessed the following for exposures evaluated on a collective basis and overlays: significant modelling and macroeconomic assumptions, including the reasonableness of forward-looking information and scenarios; the basis for and data used to determine overlays; and sensitivity of the collective provisions to changes in modelling assumptions. We involved our actuarial specialists to test the mathematical accuracy of the model and to consider key assumptions. We examined a sample of exposures assessed on an individual basis by: assessing the reasonableness and timeliness of internal credit quality assessments based on the borrowers’ particular circumstances; and evaluating the associated provisions by assessing the reasonableness of key inputs into the calculation, with particular focus on the impact of COVID-19 on high-risk industries, work out strategies, collateral values, and the value and timing of recoveries. In conjunction with our IT specialists, we assessed the effectiveness of relevant controls relating to the: capture of data, including loan origination and transactional data, ongoing internal credit quality assessments, storage of data in data warehouses, and interfaces with the models; and expected credit loss models, including functionality, ongoing monitoring/ validation and model governance. We considered the processes used to identify, assess and manage climate-related risks associated with the Company’s and the Group’s loan portfolio. We considered the adequacy and appropriateness of the disclosures related to credit impairment within the Financial Report. INDEPENDENT AUDITOR'S REPORT
Annual Financial Report 2020
197
A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Why significant How our audit addressed the key audit matter Provisions for customer-related remediation and associated costs, regulatory compliance matters and legal proceedings As detailed in Note 24 Provisions and Note 30 Contingent liabilities and credit commitments, the Company and the Group has recorded provisions and/or made disclosures in relation to matters requiring customer remediation, regulatory compliance investigations (including from APRA, ASIC and AUSTRAC) and associated legal proceedings. This was a key audit matter due to the significant judgment required to determine a reliable estimate of the provision. Key areas of judgment included the: decision whether to recognise a provision and/or disclose a contingent liability, including whether sufficient information existed to allow a provision to be reliably measured; assumptions used to estimate the customer-related remediation payments, including refund rates and average compensation amounts; and costs required to complete the remediation programs. We developed an understanding of the Company’s and the Group’s processes for identifying potential regulatory compliance matters and customer-related remediation obligations. We held discussions with management, reviewed Board of Directors and Board committee minutes, reviewed correspondence with regulators and attended Board Audit Committee and Board Risk and Compliance Committee meetings. We discussed ongoing and potential legal matters with management, including General Counsel, and considered the need to obtain external legal confirmations. We assessed key assumptions used to estimate the customer-related remediation amounts, including a consideration of industry and historical trends and compensation experience to date. We also reviewed and assessed legal advice where applicable. We evaluated the adequacy of the costs recognised with reference to the status of each program and costs incurred to date. For those matters where the Company and the Group determined that a sufficiently reliable estimate of the amount of the obligation cannot be made and for which no provisions have been recognised, we assessed the appropriateness of this conclusion and any related disclosure as a contingent liability. We considered the adequacy and appropriateness of the disclosures within the Financial Report related to the provisions and/or related contingent liability disclosure. INDEPENDENT AUDITOR'S REPORT
198
National Australia Bank
A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Why significant How our audit addressed the key audit matter Information Technology (IT) systems and controls over financial reporting A significant part of the Company’s and the Group’s financial reporting process is primarily reliant on IT systems with automated processes and controls relating to the capture, storage and extraction of information. A fundamental component of these IT controls is ensuring that risks relating to inappropriate user access management, unauthorised program changes and IT operating protocols are addressed. We focused on those IT systems and controls that are significant to the Group’s financial reporting process. We involved our IT specialists, as audit procedures over IT systems and controls require specific expertise. We assessed the design and tested the operating effectiveness of the Company’s and the Group’s IT controls, including those related to user access, change management and data integrity. Where we identified design and/or operating deficiencies in the IT control environment, our procedures included the following: we assessed the integrity and reliability of the systems and data related to financial reporting; and where automated procedures were supported by systems with identified deficiencies, we assessed alternative controls that were not reliant on the IT control environment. INDEPENDENT AUDITOR'S REPORT
Annual Financial Report 2020
199
A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Why significant How our audit addressed the key audit matter Impairment assessment of goodwill The Group has recognised goodwill of $1.8 billion on its balance sheet. As detailed in Note 22 Goodwill and other intangible assets, the Group performs an annual impairment assessment, or more frequently, if there is an indication that goodwill may be impaired. This involves a comparison of the carrying value of the cash generating unit (CGU) to which the goodwill has been attributed with its recoverable amount. The recoverable amount was determined using a value in use calculation. This calculation incorporated a range of assumptions, including: future cash flows; discount rate; and terminal growth rate. The impairment assessment of goodwill was a key audit matter due to the degree of estimation uncertainty associated with the assumptions applied in the impairment assessment, including the potential impacts of COVID-19. Goodwill allocated to the previous MLC Wealth CGU, has been recorded within Assets held for sale, in accordance with AASB 5 Non-current Assets Held for Sale and Discontinued Operations. The fair value less costs of disposal was determined with reference to the sale proceeds under the agreement with IOOF Holdings Limited (“IOOF”). In addition, as detailed in Note 5 Operating expenses, the Company recognised an impairment charge in respect of its investment in National Wealth Management Holdings Limited (NWMH), the holding company for MLC Wealth. This was a key audit matter due to the value of the impairment charge recorded. We gained an understanding of the sale agreement entered into between NAB and IOOF through discussions with management and Directors, review of the relevant sale agreements and Board of Directors and Board committee minutes. We assessed the appropriateness of the CGUs identified to which goodwill has been allocated. We assessed whether the methodology used by the Group for the impairment assessment of Goodwill, and the Company for the impairment assessment of the investment in NWMH, was in accordance with the requirements of Australian Accounting Standards. We agreed the forecast cash flows to the most recent Board or management-approved cash flow forecasts and assessed the accuracy of the previous forecasts by performing a comparison of historical forecasts to actual results. We involved our valuation specialists to assess the key assumptions, including the discount rate, terminal growth rate and growth assumptions, used in the impairment assessment with reference to comparable companies and to test the mathematical accuracy of the impairment models. We considered market capitalisation of the business and recent trading history relative to net assets and benchmarked the implied valuations to comparable company valuation multiples. We evaluated the adequacy of impairment charge recognised during the financial year. We considered the disclosures within the Financial Report related to the impairment of goodwill and investment in NWMH. INDEPENDENT AUDITOR'S REPORT
200
National Australia Bank
A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Information Other than the Financial Report and Auditor’s Report Thereon The Directors are responsible for the other information. The other information comprises the information included in the Company’s Annual Financial Report for the year ended 30 September 2020 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 not express any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the Financial Report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the Financial Report 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 this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Financial Report The Directors of the Company are responsible for the preparation of the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the Directors determine is necessary to enable the preparation of the Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the Financial Report, the Directors are responsible for assessing the Company’s and Group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the 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 Report Our objectives are to obtain reasonable assurance about whether the Financial Report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this Financial Report. INDEPENDENT AUDITOR'S REPORT
Annual Financial Report 2020
201
A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the Financial Report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s or the Group’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates 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 or conditions that may cast significant doubt on the Company’s or Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the Financial Report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company or the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the Financial Report, including the disclosures, and whether the Financial Report represents the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the Financial Report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the Directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. From the matters communicated to the Directors, we determine those matters that were of most significance in the audit of the Financial Report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. INDEPENDENT AUDITOR'S REPORT
202
National Australia Bank
A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Report on the Audit of the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 54 to 82 of the Report of the Directors for the year ended 30 September 2020. In our opinion, the Remuneration Report of National Australia Bank Limited for the year ended 30 September 2020 complies with section 300A of the Corporations Act 2001. Responsibilities The Directors of the Company are responsible for the preparation and presentation of the Remune-ration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Ernst & Young Sarah Lowe Partner Melbourne 11 November 2020 Twenty largest registered fully paid ordinary shareholders of the Company as at 20 October 2020
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED
J P MORGAN NOMINEES AUSTRALIA PTY LIMITED
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