Financial Services Europe Half-Year Results to 31st March 2005

11 May 2005

London, 11 May 2004: National Australia Group today released the interim result for its UK banking and wealth management operations, announcing cash earnings before significant items of £106m for the half year to 31 March 2005, down 10.2% from the corresponding period last year, and up 12.8% on the six months to 30 September 2004.

Mrs Lynne Peacock, Chief Executive Officer, National Australia Group UK, said:

“We are now 12 months into a 2-3 year programme that is fundamentally changing our business from the ground up and this result is exactly what should be expected from our UK operations at this stage in our change programme."

“This strategy was outlined in February this year and is based on reshaping our business to be more
efficient, nimble and competitive. We are encouraged by the progress we have made this year and by the upturn in the past six months, but we are realistic about the time it will take to see a sustained turnaround in our performance."

“We believe the result reflects a business that is stabilising as we start to bring costs under control, are seeing some good asset growth in business banking, some positive signs in our retail business and from our new ventures in the south of England and the sale of mortgages through third-party intermediaries."

“We are committed to a strong presence in the UK and are focused on creating an efficient, competitive business that offers leading products and provides great service to our customers. The initiatives we have announced in the past three months and are announcing today are critical to achieving this objective and building long-term shareholder value.”

Mrs Peacock said key milestones of the past six months had included:

• the sale of the National Irish Bank and Northern Bank to Danske Bank Group.
• further progress in the expansion of Clydesdale Bank Financial Solutions Centres into the south of England, with 18 centres now open. These offer integrated business and private banking services to small to medium sized enterprise. We are on target to have 30 centres open in the south by the end of the year.
• the initiation of a programme to further streamline the businesses, including a significant restructuring provision and the removal of 1700 roles during the next 12-18 months. This restructuring will result in annualised cost savings of approximately £117m.
• continuation of the programme of operational integration of Clydesdale Bank and Yorkshire Bank, including the legal entity merger of the two banks, the integration of wealth management operations and the ongoing centralisation of back office areas.
• the continuation of the process of rationalisation of the product suite to reduce the complexity of our offering to customers.

Mrs Peacock said that a review of the distribution strategy and branch network had also been completed which had included a decision to close approximately 60 of the 217 Clydesdale Bank branches and approximately 40 of the 232 Yorkshire Bank branches during the next 18 months.

“Closing branches is always a difficult decision, but it is necessary to put us on a firm commercial footingfrom which to grow. Our business has to reflect the changing needs of our customers and the differentways in which they are banking. Customers are using branches less often and are increasingly looking to alternative channels like the internet and telephone to do their banking."

"Our review examined every facet of how our customers interact with us including branches, the internetand telephone and ATMs. We have already launched a number of significant initiatives in the past 6-12months and will continue to develop our offering to better meet customer needs.”

Some of the key distribution initiatives have included:

• the commencement of the roll out of the financial solutions concepts into the heartland markets in the north of England and Scotland with plans to transform about 40 business banking centres into financial solutions centres in the next year.
• the establishment of 56 “flagship” branches servicing smaller business and retail customers in key regions in Scotland and the north of England. More than £2.5 million will be invested in the refurbishment of eight of these branches this financial year alone.
• a £7m investment to upgrade the internet banking platform with migration to the new platform commencing in July.
• a £3 million investment to upgrade ATM software and continued expansion of the ATM network which has seen an additional 140 ATMs added in the past years.
• upgraded telephone banking services.

Mrs Peacock said other business developments included the launch of several key new products, such as the offset mortgage in Clydesdale Bank and a Child Trust Fund, and the launch of three major sponsorships - the Clydesdale Bank sponsorship of the Scottish Commonwealth Games team, the Yorkshire Bank sponsorship of Opera North and the sponsorship of the Twenty20 Cup cricket.

Financial Performance: Key Points

• Net interest income of £334m was flat on the second half of 2004 and down 3.2% on the first half of 2004 following the move to provide customers with more competitive lending and deposit products. Net interest margin decreased to 4.00% from 4.10% at 30 September 2004, a continuation of the managed contraction from 4.44% in March 2004.
• Lending volumes have increased 6.5% since 30 September 2004 and 14% since 31 March 2004 as a result of an increased focus on the mortgage business.
• Mortgage lending has increased 7.6% since 30 September 2004 and 18.8% since March last  year, reflecting the success of brand programme, the launch of the current account and offset mortgages and our move into third party distribution.
• Business lending has increased by 13.5% over the 12 months, reflecting our focus on the SME market.
• Retail deposit volumes have dropped by 0.5% on 30 September 2004, but increased 4.5% since 31st March 2004 reflecting growth in term and on-demand deposits following the successful launch of the Current Account Plus product in January 2004.
• Other operating income of £183m was 4.0% higher compared with 30 March 2004 and up 10.2% on 30 September 2004.
• Operating expenses of £330m increased 4.4% since 30 March 2004, and were up 1.5% in the last six months.