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Preliminary Final Report

Document date:  Thu 24 Oct 2002
Published:  Thu 24 Oct 2002 10:50:19
Document No:  196680
Document part:  F
Market Flag:  Y
Classification:  Preliminary Final Report , Periodic Reports - Other , Dividend Record Date , Dividend Pay Date , Dividend Rate

AUSTRALIA AND NEW ZEALAND BANKING GROUP       2002-10-24  ASX-SIGNAL-G

HOMEX - Melbourne                                                     

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CHIEF FINANCIAL OFFICER'S REVIEW

CHIEF FINANCIAL OFFICER 
Peter Marriott

Australia and New Zealand Banking Group Limited (ANZ, or the Group)
recorded a profit after tax of $2,322 million for the year ended 30
September 2002, an increase of 24% over the September 2001 year.
Earnings per ordinary share were 25% higher, at 147.3 cents, and
return on ordinary shareholders' equity was up from 20.2% to 23.2%.

Net profit after tax was impacted by three significant items:

* In January 2002, the Group settled its long standing 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.

* In March 2002, following an assessment of the general provision
balance, a special provision for doubtful debts of $250 million ($175
million after tax) was charged in order to restore the provision
balance to an appropriate level in the current environment of
unexpected investment grade defaults.

* In April 2002, certain life and general insurance and funds
management businesses were sold to a joint venture with ING Group,
and a 49% interest in the joint venture was acquired. A profit after
tax of $170 million arose on sale of the businesses. This is slightly
lower than the estimated $180 million advised at the time of sale due
to higher exit and clawback provisions.


Profit after tax for the year excluding these items was $2,168
million, an increase of 16% over the September 2001 year. Adjusting
for the 4% reduction in the Australian corporate tax rate, profit
after tax increased by 11%. Key influences on the operating result
for the year were:

* Growth of 5% in net interest income. Changes in the funding mix
(deposits grew by $4 billion in the Personal businesses, and by $4
billion in the Corporate businesses) assisted this growth. Net
lending assets grew by $7.5 billion overall, with growth of $8.9
billion in Mortgages offset by a $2.7 billion decline in Corporate
and Investment bank lending assets.

* A 9% increase in other operating income. Lending fees grew by 11%,
principally from an increased range of specialist services in
Corporate businesses. Non-lending fees grew principally from higher
transaction volumes in Consumer Finance.

* Expenses increased by 2% (3% adjusting for sale of businesses to
INGA joint venture). Personnel numbers were held steady. Increases in
computer expenses were primarily driven by increased software
amortisation.

* The provision for doubtful debts increased by 15%. While the ELP
charge to operating segments was relatively stable, central charges
were taken in each half as a conservative measure to reflect higher
levels of default in our UK and US portfolios. The recent collapses
of previously investment grade corporates, and the uncertain economic
outlook, have influenced the level of central provisioning.


EQUITY INSTRUMENTS ISSUED TO EMPLOYEES

Under current Australian Accounting Standards, certain equity
instruments issued to employees are not required to be expensed. The
Group does not presently expense shares issued to employees under the
$1,000 scheme, nor options issued to employees.

The absence of accounting guidance in this area, and the current
Australian taxation legislation leads to the possibility of share
capital becoming tainted, for tax purposes, should these equity
instruments be expensed. Accordingly it has not been possible to
change our accounting to expense these items. It is expected that
changes will be made shortly to both accounting standards and
taxation laws to overcome these impediments. The impact of expensing
these equity instruments issued to employees is shown below and
detailed on page 73:

                                 ACTUAL          AFTER EXPENSING
                                            $1,000 SHARE AND OPTIONS
                                  2002               2002

NPAT                              $2,322m            $2,278m
EPS                               147.3 cents        144.4 cents


Profit after tax for the September half year, excluding the profit on
sale of businesses to the joint venture, was $1,102 million. This was
3% higher than the March half year, excluding the NHB recovery and
the special provision for doubtful debts. Excluding amortisation of
notional goodwill on the INGA joint venture, "cash earnings"
increased 5% demonstrating continued earnings momentum.


FEATURES OF THE SECOND HALF

Key factors effecting the second half were:

* Official interest rates in Australia and New Zealand rose by 0.5%
and 1% respectively during the half and the financial markets
anticipate further rises. This benefited the net interest margin of
our deposit-taking businesses (principally Personal Banking), but
reduced the net interest margin in our Mortgages, Consumer Finance
and Group Treasury businesses.

* Overall net interest margin increased by 4 basis points, with
improved spread.

* Lending growth of 4.5% was driven principally by strong home loan
growth of 8.3% reflecting the focus of increasing our portfolio
towards consumer.

* Deposit volume growth was again sufficient to fund lending growth
without securitising mortgage assets.

* Non interest income fell by $22 million. Adjusting for the sale of
ANZ Funds Management business, income increased $50 million or 4%
(including $18 million of goodwill amortisation).

* Operating expenses were impacted by increasing software
amortisation, initiatives in cards programs, and from the first half,
acquisitions in the Pacific. The sale of the ANZ Funds Management
business to the INGA joint venture reduced costs by $31 million
meaning that the underlying increase in costs was 1.8%.

Our focus going forward remains investment in more attractive sectors
to grow income, whilst continuing to maintain a healthy buffer
between income growth and cost growth and thus continuing to
moderately lower the cost income ratio.


MAJOR PROJECTS

Major projects being undertaken across the Group are designed to
streamline our processes and to improve our interaction with
customers. Our programs leverage the value of technology to create
better ways to work and to serve our customers. During the second
half, the Group:

* Implemented a new general ledger across Australia and New Zealand,
as part of the Common Administrative System (CAS). The final part of
CAS, payroll services, will roll out in Australia and New Zealand
during the next 6 months. Accounts payable, procurement, fixed assets
management and human resources management are already operating on
CAS.

* Completed the implementation of the new back office processing
system for cards, VisionPlus. This system provides increased
flexibility to develop and implement new products.

* Development of the new technology system for our branch network,
including a branch sales platform, continued. This project will
improve our general banking processes, and will better support our
front line staff and our Restoring Customer Faith program.

* 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.

* 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 model is
initially being implemented in Victoria and New Zealand. The
organisational model empowers our frontline staff, cuts bureaucracy
and builds customer and staff advocacy.

* Completed the replacement of merchant EFTPOS terminals for the new
smart-chip enabled credit cards.

* Restructured the Telstra and Qantas Visa card loyalty structure and
administration.

* Progressed the upgrade of all PC hardware to Windows 2000
compatible hardware to enhance security and enable centralised and
standardised management.

Restructuring expenditure against the provision raised at September
2000 was $37 million in the half and $105 million for the full year
(total spend to date $361 million, ie. fully utilised). The remaining
central restructuring balance of $95 million represents on-going
restructuring programs to which we are committed and has been funded
from annual profits.

Approximately one-third of the original restructuring provision has
been used for redundancies and the balance for surplus lease space,
EDP hardware write offs (Windows 2000 and EFTPOS terminals), payout
costs, write off on fittings on refurbishment and restructuring
program costs. Benefits from these programs are estimated to be
two-thirds costs and one-third revenue enhancement and the
efficiencies from these programs have contributed to ANZ's leading
cost income ratio.


MAJOR PROJECTS (CONTINUED)

The Group has capitalised the development of software for major
projects. As at 30 September, 2002, the balance of software
capitalised was $419 million ($303 million at September 2001).
Software is amortised over 3 to 5 years, commencing on the date of
implementation (the only exception is the branch network platform,
which is amortised over 7 years). During the second half, software
amortisation of $27 million was recognised. The software amortisation
charge is expected to approach $90 million for the 2003 full year.
The build up in capitalised projects has been at a time when the
Group has had an unusually high number of long term infrastructure
projects.

Balances of amounts capitalised for major projects include:
                                                           $ MILLION

Branch Sales and Service Platform and Telling 
- new technology platform for our branches, 
including telling                                            91

Common Administrative System - web based 
administration system                                        69

VisionPlus - Cards processing platform                       34

Yuetsu - back office processing for Esanda                   30

CVM - single view of customer database                       28

Middleware - allows better communication 
between host systems and applications                        16

Mortgages Origination System  streamline 
mortgage processing                                          13

Payments Transform - simplifying payments 
architecture                                                 13

Tandem - replacement of current EFTPOS/ATM 
infrastructure                                               13

STP Mortgages - straight through processing for mortgages    11

Contact Centre - consolidation of call centres               10


RISK

The Group economic loss provision (ELP) was $610 million, compared
with $531 million in the year to September 2001. A new methodology
implemented in the first half of 2002 has enhanced our measurement of
corporate credit risk, and allowed more accurate risk assessment in
the Consumer Finance portfolios.

The ELP charge to operating segments remained stable at $538 million
in the year to September 2002. ELP reduced slightly in the Personal
portfolios offset by an increase in risk in the offshore investment
banking portfolio.

In addition to the $250 million special provision taken in March 2002
(refer page 7), a charge of $72 million (5 basis points) was taken
centrally. This charge recognises the continued uncertainty in the
international economic outlook, and is based on moving the credit
profile of our offshore structured finance portfolio down one grade
on our internal rating scale (equivalent to increasing the expected
default percentages by approximately 150%) to reflect the higher
incidence of downgrade and default evident in the portfolio. We do
not expect to see a significant decrease in our ELP charge until
there is evidence that the level of unexpected losses have reduced.
Excluding the $250 million special provision, the ELP rate increased
over the year to 43 basis points compared to 38 basis points for the
September 2001 year.

Net specific provisions were $728 million, up from $520 million in
the September 2001 year. A small number of large single name losses
in the United Kingdom and Americas portfolios caused the increase
with provisions in the Australia and New Zealand portfolios falling
by 30% or $153 million over the year. Provisions on formerly
investment grade names dominated the total net specific provisions
including Marconi and Enron which alone accounted for 43% of the
total net specific provisions (64% of Corporate businesses net
specific provisions).

Net non-accrual loans were $628 million at September 2002 compared
with $770 million at September 2001 with new non-accruals principally
from former investment grade names in the UK and US. The general
provision balance at 30 September 2002 was $1,496 million (1.06% 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 7.9%. The total
capital adequacy ratio remains strong at 9.5%, with a small reduction
in the Tier 2 ratio and an increase in deductions.

Following the establishment of the joint venture with ING Group, our
principal focus is Adjusted Common Equity, defined as the Tier 1
capital, less preference shares and deductions of investments in
funds management subsidiaries from total capital. Over the September
2002 half, Adjusted Common Equity decreased from 6.3% to 5.7% of risk
weighted assets, however remains at the top of our target range of
5.25% to 5.75%. The investment in the joint venture, which was funded
from internal resources, has increased the deductions from capital,
as shown in the table below.

                                      Sep 02    Sep 01
                                      $B        $B

Tier 1                                11.2      10.4
Preference Shares                     (1.4)     (1.5)
Deductions                            (1.7)     (0.6)
Adjusted Common Equity ($B)            8.1       8.3
% of risk weighted assets              5.7%      5.9%


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 year ended 30
September 2002 was $1,475 million, up from $1,275 million for the
year ended 30 September 2001. EVA (TM) for the September 2002 half
was $757 million, compared with $718 million for the March 2002 half.

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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