Message from the Chairman
John T Ralph, AC
Chairman
The Bank experienced another strong year with the Australian economy continuing to perform well. Housing lending remained buoyant for most of the year with early signs of some slowing towards the end of the year. Very low levels of corporate and personal defaults were experienced in a favourable credit environment. Investment markets recovered which led to an improvement in the performance of the funds management and insurance businesses as well as contributing to an increase in the assessed value of the funds management business.
The Bank embarked on the three year Which new Bank program during the year, the successful execution of which is critical to the long term success of the Bank. So it is pleasing to be able to report that very good progress was made in the first year of the program in the achievement against the milestones set for the program.
Results
The Bank's statutory net profit after tax for the year ended 30 June 2004 was $2,572 million, an increase of 28% over that earned in the prior financial year. Net profit from ordinary activities ("cash basis") was $2,695 million, an increase of 5% over that earned in the prior year. This increase was achieved after expensing $749 million ($535 million after tax) on the Which new Bank program.
Strong operating performances were recorded by all businesses, with the underlying profit after tax increasing by 15% to $3,078 million for the year. Underlying profit excludes the after tax impact of shareholder investment returns and the cost of initiatives, including Which new Bank.
The banking result was driven by the continued good performance of the Australian and New Zealand lending operations, partly offset by an anticipated contraction in the net interest margin. In funds management, recovery in funds flows was underpinned by strong international flows and the continued growth of FirstChoice, while for the insurance business, performance improved across all regions.
Loan asset quality strengthened during the year, reflecting the Bank's ongoing, disciplined approach to risk management. Productivity improvement was evident across all businesses, particularly insurance and funds management.
For more information on the company's financial performance, please refer to the Review of Operations.
Dividends and Capital Position
At last year's Annual General Meeting I informed shareholders that, although we would be charging the costs of the Which new Bank program against profit, we regarded that expenditure as being in the nature of an investment in the future of the Bank. I said that, for this reason, we would add back the after-tax cost of the program to the profit in determining the dividends for the year. This we did, and determined the total dividend out of the year's profit would be $1.83 per share which represented 73.9% of the adjusted result and a 19% increase on the dividend for the prior year.
The dividend of $1.83 per share continues the uninterrupted growth in the dividend rate since the Bank was privatised and listed as a public company twelve years ago. The final dividend of $1.04 per share, fully franked, will be paid on 24 September 2004.
The Bank's capital position remained strong throughout the year, sitting comfortably above the Bank's target ranges and in conformance with the requirements of regulators. During the year, the Bank undertook a number of capital management initiatives that were well received by shareholders and which provide capital flexibility for the future. These included the issuance of hybrid capital and PERLS II, a $532 million share buyback, a $467 million share purchase plan, and a share sale facility for small shareholdings. These initiatives were in addition to the issue of new shares to the value of $389 million under the Dividend Reinvestment Plan during the year.
Which new Bank
As foreshadowed in last year's annual report, the Which new Bank program was announced to the market in September 2003. Which new Bank is a three-year strategic program aimed at supporting the Bank's vision to excel in customer service. The aim of the program is to provide better service to customers by engaged people using improved systems and simpler processes. The focus is very much on the training and motivating of people within the Bank and giving them the authority and accountability to be able to deliver excellence in service. They can only do this if they have the systems and processes that allow them to do it. Customers are beginning to notice differences and these differences will become more pronounced as the Which new Bank program is implemented.
More information about the program and the milestones achieved during the year are contained in the Message from the Chief Executive Officer.
During the year, the Board has actively participated in activities that facilitate a better understanding of the prerequisites for strategic transformation. In September 2003, the Bank's Directors spent five days touring the Bank's branches, processing centres and call centres in Australia and New Zealand, gaining first hand experience of the Bank's systems and processes. In May 2004, the Board was pleased to conduct its monthly Board meeting in Townsville, the Bank's first regional branch in Australia. The Board will continue to be active in gaining first-hand knowledge of the operations of the Bank and its service standards throughout the duration of the program and beyond.
Outlook
The Global economy has improved noticeably, with an expectation of monetary tightening across the major economies in the near term.
The Australian economy continues to perform well although growth in domestic spending has slowed as the construction sector loses some momentum.
Consumer confidence is high while job security concerns are low and personal incomes are rising. Businesses should continue to benefit from sustained capital spending. High levels of spending on infrastructure are underway. The consequences of the housing slowdown remain a key domestic issue, although the effects so far have been muted.
Subject to market conditions being maintained, the Bank is targeting:- Growth in cash Earnings Per Share ("EPS") exceeding 10% compound annual growth rate ("CAGR") over the three year period to 30 June 2006, which is expected to be ahead of industry growth;
- Improvement in productivity between 4-6% CAGR over this period; and
- Growth in profitable market share across major product lines.
Having regard to the factors considered in determining the dividend as set out on page 5, and subject to no significant change in the Bank's strategy and operating environment, the ratio of dividends per share to "cash" earnings is expected to be maintained at around the current level (that is, the ratio with Which new Bank costs added back). The Bank expects that the impact of expenses related to Which new Bank will be significantly lower going forward, and benefits will continue to increase. Accordingly, cash earnings should be significantly higher and we expect to increase the dividend per share each year.
Board Changes
This coming Annual General Meeting will mark my retirement as Chairman and as a Director of the Bank. Mr Ross Adler has also signalled his intention to retire from the Board at that meeting. Mr Adler has been a committed and consistent valuable contributor to the deliberations of the Board since his appointment in 1990. He has served on the Audit, Remuneration and Risk Committees of the Board at various times and has always been a diligent member of those committees.
There have been many changes in the Bank and in the financial services industry since I joined the Board in 1985 and since I became chairman in 1999. Early during my term on the Board the Bank was privatised and became a publicly listed company. There were other significant structural changes along the way, including the merger with the State Bank of Victoria and the acquisition of ASB Bank and Colonial Limited, all of which contributed to the strengthening of the competitive positioning of the Bank. During this time there has been considerable innovation as the Bank has diversified into new lines of wealth management businesses and led the introduction of banking technologies, such as telephone and internet banking and internet broking, with CommSec now servicing the greatest number of broking transactions in the market.
Currently, the Bank is engaged in the most important change since its privatisation, with the Which new Bank program. The execution of this program is vital for the long term success of the Bank and it is pleasing, therefore, that such good progress has been made to date. It is an important underpinning of the Board's commitment to achieving strong growth in all of the Bank's businesses and in growing sustainable and reliable returns for shareholders.
I have been privileged to serve on your Board and as Chairman for the last five years. I am confident that the Board is well positioned for the future under the capable chairmanship of John Schubert who will be succeeding me. I would like to take the opportunity to thank shareholders, customers and staff for their continued support of the Bank.
John Ralph, AC
Chairman
11 August 2004
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