Business Overview

The following commentary provides an overview of the performance of the main businesses of the Group. For further information on the financial performance of these businesses, please refer to Comments on the Statement of Financial Performance.

Banking

Australian Retail

The Australian retail banking operations performed strongly over the year.

The Bank was able to further improve its market share position in home lending, credit cards and other personal lending through a combination of competitive products, effective marketing and good customer service. Margins increased in all products except home loans, where there was only a minor contraction, reflecting growth in third party volumes.

Credit quality remained sound. A decision was taken to increase the risk profile on personal lending unsecured credit, which had a positive impact on lending volume and revenue growth, but with some increase in the bad debt expense. The Bank’s personal loan quality remains on par with the average of major competitors.

There has been some loss of retail deposit market share in the high interest rate segment as competitors aggressively price in an effort to gain market share. The Bank’s strategy remains focussed on delivering segmented product offers as the basis for maintaining profitable market share. In June, the Bank introduced its new NetBank Saver account to meet the needs of customers in this market segment.

The Bank introduced changes to its mortgage broker business model during the year with a progressive implementation from April 2005. Results to date have been in line with expectations, including a significant reduction in the proportion of introductory rate or ‘honeymoon’ business. Separately, development continues on the Bank’s new commission-only proprietary home loan channel ‘Innovators’ (launched late 2004), with early results encouraging. The new channel is designed to acquire new home loan customers from external sources, and to complement our existing branch, mobile and broker channels.

Premium, Business and Corporate and Institutional

Premium Business Services provides financial services to a broad client base that incorporates the institutional, corporate and business segments as well as the Bank’s high-net worth personal clients.

Our working capital services business had a strong year with continued market share growth and good earnings momentum. The global markets trading business was limited by the low volatility in the Australian dollar and in particular Australian interest rates, leading to some decline in domestic customer activity. The lending business saw intense competition, especially for larger credit and particularly during the first half of the year.

While business lending market share reduced slightly, the Bank’s pricing and credit discipline led to further improvements in credit quality.

The Bank’s relationship-based service approach has been successful for a broad range of investment products including primary offerings of equities and debt.

Other performance highlights include:

• Lead roles in a number of new financings, including a $1 billion bond issue for Goldman Sachs and a $1.9 billion Syndicated Standby Revolving and Term Loan Facility for Qantas Airways Ltd. This was the largest Australian dollar syndicated debt raising by an Australian corporate in the market last year; and
• The acquisition of AOT Australia, which further leverages CommSec’s scale into the institutional market. CommSec continues to be the most active broker by number of transactions on the ASX and has the busiest single purpose website in Australia.

Asia Pacific

Asia Pacific Banking incorporates the retail and commercial banking operations in New Zealand, Fiji, and Indonesia. ASB Bank in New Zealand represents the majority of this business.

During the year, the Bank acquired an 11% interest in Jinan City Commercial Bank, one of the 10 largest city commercial banks in China by assets. Subject to regulatory approval, the Bank will also acquire a 19.9% interest in Hzangzhou City Commercial Bank, ranked in the top five city commercial banks by assets.

The New Zealand banking sector has continued to remain buoyant during the second half, with some evidence of a slowdown in the home loan market. The impact of the cash rate increases continues to be negative across the market and competition remains intense.

ASB Bank has strengthened its position, further increasing its market share in home lending throughout the year.

ASB Bank was recognised for the third consecutive year as the ‘Bank of the Year’ for New Zealand (Source: Banker Magazine, UK) reflecting the Bank’s strong operational performance and commitment to customer service.

Funds Management

The operating environment was favourable, with revenue growth and fund flows benefiting from strong investment markets. At the same time competition remained intense. While the market environment has been conducive to volume growth, the focus of the business on expense control and margins has ensured this volume growth has translated to an excellent profit result.

The year also saw a significant improvement in retail flows and a corresponding increase in retail market share (following several years of declining share). Retail flows were driven by the FirstChoice product which continues Concise Annual Report 2005 53 to dominate industry retail flows due to a combination of competitive pricing, excellent service and extensive distribution reach.

Another highlight for the year was investment performance, where 95% (by value) of our domestic funds outperformed benchmark including our flagship Australian Equity funds which all ranked in first or second quartile.

Other key developments within the business during the year included:

• Acquisition of a minority stake in 452 Capital, which gives access to the rapidly growing boutique segment of the market;
• Establishment of a new quantitative asset management business (as a joint venture with Acadian);
• Continuing progress in rationalising legacy systems and products (now down to seven systems from 17 at the start of the program);
• Organisational changes which saw the creation of a discrete asset management business, quite separate from the platform/retail distribution business; and
• Excellent progress in selling funds management products through the Bank network, with productivity of planners up 38%.

Insurance

Australia

The Australian business delivered a good profit result for the year, achieved through revenue growth, improved underwriting performance, reduced unit costs and favourable Life Insurance claims experience.

Key drivers were:

• Life insurance revenue growth, with life insurance premiums increasing by 5%, despite the loss of a large Group risk mandate;
• Positive claims experience in life insurance products;

offset by

• Significant weather related claims in the general insurance portfolio, predominantly attributed to the February Eastern Seaboard storms.

The Bank maintained its number one market share of Australian risk premiums with 13.8% of the life insurance risk market. The Bank’s share of retail life sales (new business) was 12.9%.

Total operating margin in the Australian business for the year increased by 21% to $94 million. Improved operating margins in Life Insurance offset the lower contribution from the underwritten General Insurance business. The Bank has the largest branch based general insurance distribution footprint in Australia.

Cash net profit after tax increased by 4% to $186 million as stronger operating margins were offset by lower Shareholder investment returns.

New Zealand

The life insurance operations in New Zealand trade predominantly under the Sovereign brand.

Sovereign has continued to focus on the delivery of operational improvements and the successful execution of service excellence initiatives. The three key achievements during the year were:

• Continued strengthening of business volumes across all major business lines;
• Further improvements to operations and systems infrastructure; and
• Positive claims experience.

Total cash net profit after tax was $74 million for the year, an increase of 35% on prior year, while the operating margin was $52 million, 41% above the same period last year.

Sovereign’s sales momentum has continued into the second half of the year. New business market share increased significantly to 30.4% (March 2005 quarter), up from 28.4% in the previous corresponding period. The business has also maintained its market leadership position with 27.5% of the ‘in-force’ premium market. (Source: ISI)

Asia

Asia includes the life insurance and pension administration operations in Hong Kong, and life businesses in China, Vietnam, Indonesia and Fiji. The Hong Kong businesses represent the largest operations in the region.

The total cash net profit after tax in the Asia business was $49 million, up from $17 million in the prior year. Operating margin for the year was $8 million, an increase from $3 million in the prior year. This primarily reflects positive investment returns, partly offset by a stronger Australian dollar.

Post balance date, the Bank has entered into an agreement to sell its Hong Kong based life insurance, pensions administration and financial planning businesses to Sun Life Financial. The transaction, targeted for completion within three months, is subject to regulatory approvals. More details are set out in the Directors' Report.

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