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Half Yearly Report/ASIC accounts

Document date:  Fri 26 Apr 2002
Published:  Fri 26 Apr 2002 11:05:58
Document No:  189561
Document part:  G
Market Flag:  Y
Classification:  Half Yearly Report , Half Year Audit Review , Half Year Directors' Statement , Half Year Accounts , Dividend Rate

AUSTRALIA AND NEW ZEALAND BANKING GROUP       2002-04-26  ASX-SIGNAL-G

HOMEX - Melbourne                                                     

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CHIEF FINANCIAL OFFICER'S REVIEW

OVERVIEW

Australia and New Zealand Banking Group Limited (ANZ, or the Group)
recorded a profit after tax of $1,050 million for the half year ended
31 March 2002, an increase of 17.3% over the March 2001 half year.
Adjusting for the 4% reduction in the Australian corporate tax rate,
profit after tax increased by 13%. Earnings per ordinary share were
18.8% higher, at 66.3 cents, and return on ordinary shareholders'
equity was up from 19.6% to 21.6%.

In January 2002, the Group settled its litigation with National
Housing Bank in India (NHB). This resulted in the recovery of $248
million ($159 million after tax), from the net amount of $575
million, which had been provided when the Group sold Grindlays to
Standard Chartered Bank.

Operating Income was 8% higher than the March 2001 half year, with
net interest income up 5% and non-interest income up 14%. Operating
Expenses excluding the NHB recovery were 3% ($39 million) higher,
with acquisitions and exchange rate movements adding $11 million and
$7 million respectively.

The cost income ratio excluding the NHB settlement reduced to 46.5%,
with investment in a number of growth initiatives offset by
continuing efficiency gains.

Following an assessment of the general provision balance, a special
provision for doubtful debts of $250 million has been charged in the
half. Our economic loss provisioning models recognise that the
general provision balance must be regularly reviewed, and in rare
situations, increased to cover unusual events. The balance has been
restored to an appropriate level.

Profit after tax, excluding the NHB recovery and the special general
provision for doubtful debts, was $1,066 million, an increase of 19%
over the March 2001 half year. Adjusting for the tax rate change, the
increase was 14%.

On 10 April 2002, the Group entered a contract to sell certain life
and general insurance and funds management businesses to a joint
venture with ING Group, and acquire a 49% interest in the joint
venture (refer notes). The profit on sale of the businesses
(approximately $180 million) will be accounted for in the second
half. The sold businesses had a profit of $25 million (after
adjustments, refer page 79) in the March 2002 half.

COMPARISON WITH THE SEPTEMBER 2001 HALF YEAR

Profit after tax, excluding the NHB recovery and the special
provision for doubtful debts, was 9% higher than the September 2001
half year. Adjusting for the tax rate change, the increase was 5%.

Operating income growth was modest, at 3% (net interest income 1%,
non-interest income 6%). The March half traditionally has lower
activity than the September half, due to the timing of Christmas and
the tax year-end. This effect was exacerbated by the impact of
September 11 on certain markets and by Easter falling in the March
2002 half.

Total net interest margin reduced by 2 basis points, with falling
rates eroding the benefit of non-interest bearing items, yet allowing
improved spreads on most assets (excluding mortgages), and balance
sheet management activities to widen spreads. Lending growth was
constrained, with overall lending margins relatively stable. Mortgage
lending increased 7%, whilst corporate lending contracted. There was
no securitisation of mortgage assets during the half, with asset
funding boosted by a successful campaign to grow deposit volumes. The
growth in deposits was offset by lower deposit margins in a falling
interest rate environment.

Operating expenses excluding the NHB recovery were held to a $25
million, or 2%, increase. Additional costs of $5 million from
acquisitions in the Pacific were partly offset by a reduction of $1
million due to exchange rate movements. Our focus going forward is
investment to grow income, whilst continuing to maintain a healthy
buffer between income growth and cost growth and thus continuing to
lower the cost income ratio.

There has been minor reclassification of amounts collected in
interchange fees, to better reflect the substance of transactions
where we collect fees to cover amounts we disperse to third parties.
The reclassification, which has also been made in prior period
comparatives, relates to scheme fees and Cardlink authorisation
expenses. Operating expenses and other operating income have been
reduced by $18 million in the March 2002 half year (September 2001
half year $18 million; March 2001 half year $21 million).

MAJOR PROJECTS

Major projects being undertaken across the Group are designed to
streamline our processes and to improve our interaction with
customers. Our eTransformation program is leveraging the value of
technology to create better ways to work and to serve our customers.

Our present projects include:

* A new information technology platform for our branch network. The
new system will provide a multi-channel Sales and Service platform
for general banking including branches, call centres, business
centres, MILs, financial and mobile planners.

* Upgrading merchant EFTPOS devices in Australia and New Zealand with
new devices that are able to read smart-chip credit cards.

* Implementation of a Common Administration System to deliver
integrated web-based administration across Australia and New Zealand,
covering accounts payable, procurement, general ledger, human
resources management and payroll, and fixed assets management. This
program will increase straight through processing, reduce paper
consumption, and encourage employee self service.

* Proponix, a provider of global trade processing services to
financial institutions. Proponix implemented trade processing for ANZ
in October, and in February announced the opening of a Hong Kong
service centre.

* The Payments Transformation Project will simplify the payments
architecture of the Bank by replacing a range of existing payments
processing applications and functions with a single integrated vendor
solution.

* The replacement of the current cards back office processing with
VisionPLUS, which is a user friendly and modern system. It has the
flexibility to enable us to develop and implement new products and
changes much quicker than we currently do.

* Our Restoring Customer Faith program is an initiative designed to
radically transform our approach to the business of branch banking.
The program aims to enable a customer-centric ownership culture that
drives the transformation of the branch network. The pilot program in
a Melbourne locality has been running for five months, and the model
will now roll out across Victorian Consumer branches. The
organisational model empowers our frontline staff, cuts bureaucracy
and builds customer and staff advocacy.

The restructuring costs associated with these programs (mainly
retrenchment costs, asset write offs and costs of surplus leased
space) were provided for centrally at September 2000. Restructuring
expenditure against the provision raised at September 2000 was $68
million in the March 2002 half (total spend to date $256 million).

ANZ also announced changes to its Qantas Telstra Visa Card program.
The program will now be known as the Qantas ANZ Visa card, and points
earned will be redeemable for Qantas award flights. Costs associated
with the restructuring of the program were previously provided for.

RISK

The Group economic loss provision (ELP) was $301 million, compared
with $290 million in the September 2001 half. A new methodology,
which has enhanced our measurement of corporate credit risk, was
implemented during the March 2002 half. Notably, and recognising
recent experience, parameters for usage in the event of default and
weightings for off balance sheet credit products have been increased,
resulting in higher ELP charges. In addition, a more forward-looking
ELP methodology has been developed for the Consumer Finance
portfolio, which dynamically responds to modelled risk assessments of
the current portfolio. These changes each increased ELP by
approximately $15 million and prior period ELP charges in Business
Unit results have been restated.

Including the revised methodologies, the calculated ELP charge
increased to $273 million in the March 2002 half year, from $266
million, driven principally by volume growth. A larger proportion of
mortgage lending and improved risk profiles in Corporate Banking
offset deterioration in Institutional Banking and Consumer Finance.
The second half of 2001 included a special charge to estimate the
impact of September 11. Little effect directly attributable to
September 11 is evident in the first half. Nonetheless, recognising
the continued uncertain credit markets and unusual level of
investment grade defaults the overall ELP rate has been maintained at
around 42 basis points with an additional charge taken centrally.

Net specific provisions were $366 million, up from $339 million in
the September 2001 half. The collapse of Enron dominated losses in
the half with $170 million in new specific provisions representing
approximately three-quarters of our exposure. Net non-accrual loans
were $833 million at March 2002 compared with $770 million at
September 2001 with new non-accruals principally from former
investment grade names. The general provision balance at 31 March
2002 was $1,546 million (1.14% of risk weighted assets), compared
with $1,386 million (1.00% of risk weighted assets) at 30 September
2001.

CAPITAL MANAGEMENT

The Group's Tier 1 ratio increased in the half to 7.8%. The total
capital adequacy ratio remains strong at 10.4%, with a small
reduction in the Tier 2 ratio.

In light of the joint venture with ING Group, we have refined our
capital management policy to incorporate non-consolidated vehicles.
Our principal focus going forward is Adjusted Common Equity, defined
as the Tier 1 capital, less preference shares and deductions from
total capital, including investments in funds management
subsidiaries. Adjusted Common Equity increased from 6.0% to 6.3% of
risk weighted assets, comfortably above our target range of 5.25% to
5.75%, providing the necessary capacity to fund the joint venture
from internal resources. The investment in the joint venture
increases the deductions from capital, as shown in the table below.

                          PROFORMA AFTER
                           JOINT VENTURE   MAR 02   SEP 01   MAR 01
                                      $B       $B       $B       $B
Tier 1                              10.8     10.6     10.4     10.0
Preference Shares                   (1.4)    (1.4)    (1.5)    (1.5)
Deductions                          (1.7)    (0.7)    (0.6)    (0.3)
Adjusted Common Equity               7.7      8.5      8.3      8.2
% of risk weighted assets            5.7%     6.3%     5.9%     6.0%

The Group is managed to maximise value for our shareholders. One
measure of shareholder value is EVA(TM) (Economic Value Added) growth
relative to prior periods. EVA(TM) for the half-year ended 31 March
2002 was $718 million, up from $594 million for the half-year ended
31 March 2001.

EVA(TM) is a measure of risk adjusted accounting profit. It is based 
on operating profit after tax, adjusted for one-off items, the cost of
capital, imputation credits and economic credit costs. Of these, the
major component is the cost of capital, which is calculated on the
risk adjusted or economic capital at a rate of 11%.

At ANZ, economic capital is the equity allocated according to a
business unit's inherent risk profile. It is allocated for several
risk categories including: credit risk, operating risk, interest rate
risk, basis risk, mismatch risk, investment risk, trading risk and
other risk. The methodology used to allocate capital to business
units for risk is designed to help drive appropriate risk management
and business strategies throughout the Group.

EVA(TM) is a key measure for evaluating business unit performance and
correspondingly is a key factor in determining the variable component
of remuneration packages. Business unit results are equity
standardised, by eliminating the impact of earnings on each business
unit's book capital and attributing earnings on the business unit's
risk adjusted or economic capital.

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