Details of directors of the Company in office at the date of this report, and each director’s qualifications, experience and special responsibilities are below:

• Mr Graham J Kraehe
  AO, BEc, FAICD
  Mr Kraehe was appointed Chairman in February 2004 and has been a non-executive director since 1997. He is the Chairman of the Nomination Committee.
  Experience
  38 years in the wine, automotive and diversified manufacturing industries. Managing Director of Pacifica Limited from 1985 until 1994. Managing Director and Chief Executive Officer of Southcorp Limited from 1994 until early 2001.
  Directorships of listed entities within the last three years
  Chairman of Bluescope Steel Limited – director since May 2002 and director of Djerriwarrah Investments Limited since July 2002. He was a director of Brambles Industries from December 2000 to March 2004 and a director of The News Corporation Limited from January 2001 to April 2004.
• Mr Peter JB Duncan
  BE (Chem) (1st Class Hons), DBS (with Distinction)
  Mr Duncan was appointed a non-executive director in 2001. He is Chairman of the Risk Committee and is a member of the Audit Committee and the Nomination Committee.
  Experience
  36 years with Royal Dutch/Shell Group of companies, including senior finance and general management positions in Australia, New Zealand, South America, Europe and South East Asia. He was Chairman of the Shell Group of Companies in Australia and New Zealand. Former Chairman of the Australian Institute of Petroleum.
  Directorships of listed entities within the last three years
  Orica Limited since June 2001 and GasNet Australia Limited since October 2001. Director of Woodside Petroleum Limited from May 1999 to February 2002.
  Other directorships
  Commonwealth Scientific and Industrial Research Organisation (CSIRO). Chairman of Scania Australia Pty Limited. President of the Australian German Association.
• Mr Robert G Elstone
  BA (Hons), MA (Econ), MCom
  Mr Elstone was appointed as a non-executive director in September 2004. He is a member of the Risk Committee and the Nomination Committee.
  Experience
  24 years in financial and senior management roles and has been Managing Director and Chief Executive Officer of SFE Corporation since 2000. Formerly Finance Director of Pioneer International Limited from 1995 to 2000 and Chief Financial Officer of Air New Zealand Limited from 1991 to 1994. Mr Elstone is an Honorary Fellow of the Finance and Treasury Association and has completed the senior development programmes at the Harvard and Stanford business schools.
  Directorships of listed entities within the last three years
  SFE Corporation since May 2000.
  Other directorships
  SFE Corporation related entities, including the Sydney Futures Exchange, SFE Clearing Corporation and Austraclear Limited.
• Mr Ahmed Fahour
  BEc (Hons), MBA
  Mr Fahour was appointed as Chief Executive Officer, Australia in September 2004 and an executive director in October 2004. He is a member of the Nomination Committee.
  Experience
  17 years in economics and finance, most recently as Chief Executive Officer, Australia and New Zealand, Citigroup in 2004, and he held senior management positions in Citigroup from 2000 to 2003. Previously Managing Director, iFormation Private Equity Group and a director of the Boston Consulting Group from 1995 to 1999.
  Other directorships
  Rip Curl Group Pty Ltd since July 2004.
• Mr Daniel T Gilbert
  LLB
  Mr Gilbert was appointed a non-executive director in September 2004. He is a member of the Audit Committee and the Nomination Committee.
  Experience
  30 years in commercial law, specialising in technology and corporate law. Currently Managing Partner of Gilbert + Tobin, which he co-founded in 1988.
  Other directorships
  Chairman of the Australian Film, Television and Radio School. Director of Bangarra Dance Theatre.
• Mr Paul J Rizzo
  BCom, MBA
  Mr Rizzo was appointed a non-executive director in September 2004. He is a member of the Audit Committee, the Risk Committee and the Nomination Committee.
  Experience
  36 years in banking and finance. Formerly Dean and Director of Melbourne Business School from 2000 to 2004, Group Managing Director, Finance and Administration, Telstra Corporation Limited from 1993 to 2000, senior roles at Commonwealth Bank of Australia from 1991 to 1993, Chief Executive Officer of State Bank of Victoria in 1990 and 24 years with Australia and New Zealand Banking Group from 1966 to 1990.
  Directorships of listed entities within the last three years
  Bluescope Steel Limited since May 2002. He was a director of NM Rothschild Australia Holdings Ltd from 2001 to 2003.
  Other directorships
  Consultant director to Mallesons Stephen Jaques.
• Ms Jillian S Segal
  BA, LLB, LLM (Harvard)
  Ms Segal was appointed a non-executive director in September 2004. She is a member of the Human Resources Committee (formerly the Compensation Committee) and the Nomination Committee.
  Experience
  24 years as a lawyer and regulator, most recently at the Australian Securities & Investments Commission from 1997 to 2002 as Commissioner and then Deputy Chairman and as Chairman of the Board of the Banking & Financial Services Ombudsman from 2002 to 2004. In 2002 she was a Panel Member of the Dawson Review into Trade Practices Act. She was an environmental and corporate partner and consultant at Allen Allen & Hemsley and worked for Davis Polk & Wardwell in New York.
  Directorships of listed entities within the last three years
  Australian Securities Exchange Limited since July 2003.
  Other directorships
  Member of the Australia Council’s Major Performing Arts Board.
• Mr John M Stewart
  BA, ACII, FCIB
  Mr Stewart was appointed Managing Director and Chief Executive Officer in February 2004 and has been an executive director since August 2003. He is a member of the Risk Committee and the Nomination Committee.
  Experience
  26 years in banking and finance in the United Kingdom including four years as Group Chief Executive of Woolwich PLC until its acquisition by Barclays PLC in 2000 when he was appointed Deputy Group Chief Executive of Barclays PLC.
• Mr John G Thorn
  FCA
  Mr Thorn was appointed a non-executive director in October 2003. He is Chairman of the Audit Committee and a member of the Human Resources Committee and the Nomination Committee.
  Experience
  37 years in professional services with PricewaterhouseCoopers, over 20 years as a partner responsible for significant international and Australian clients. Australian National Managing Partner and a member of the Global Audit Management Group until 2003.
  Directorships of listed entities within the last three years
  Caltex Australia Limited since June 2004 and Salmat Limited since September 2003.
• Mr Geoffrey A Tomlinson
  BEc
  Mr Tomlinson was appointed a non-executive director in 2000. He is Chairman of National Wealth Management Holdings Limited. He is Chairman of the Human Resources Committee and a member of the Nomination Committee.
  Experience
  29 years with the National Mutual Group, six years as Group Managing Director and Chief Executive Officer until 1998.
  Directorships of listed entities within the last three years
  Chairman of Funtastic Limited – director since May 2000 and Programmed Maintenance Services Limited – director since August 1999. Deputy Chairman of Hansen Technologies Limited, director since March 2000 and a director of Amcor Limited since March 1999 and Mirrabooka Investments Limited since February 1999. He was a director of Reckon Limited from June 1999 to August 2004, Lako Pacific Limited from March 2000 to June 2002 and Neverfail Springwater Limited from April 1999 to September 2003.
• Mr Michael J Ullmer
  BSc (Maths) (Hons), FCA, FAIBF, ASA
  Mr Ullmer was appointed Chief Financial Officer in September 2004 and an executive director in October 2004. He is a member of the Nomination Committee.
  Experience
  32 years in banking and finance, including seven years with Commonwealth Bank of Australia as Group Executive, Institutional and Business Services from 2002 to 2004 and Group Executive, Financial and Risk Management from 1997 to 2002. Formerly Partner of Coopers & Lybrand from 1992 to 1997 and 20 years with KPMG including partner from 1982 to 1992.
  Other directorships
  Director of Sydney Symphony Orchestra.
• Mr G Malcolm Williamson
  Mr Williamson was appointed a non-executive director in May 2004. He is a member of the Nomination Committee and is a non-executive chairman of National Australia Group Europe Limited and on the boards of the Company’s main controlled entity boards in Europe.
  Experience
  37 years in banking and finance in the United Kingdom and the United States. He served with Barclays Bank PLC from 1957 to 1985, reaching the position of Regional General Manager, London. This was followed by a period as a member of the Post Office board and Managing Director of Girobank PLC. In 1989 he joined Standard Chartered PLC and became Group Chief Executive. In 1998 he moved to the United States and took up the role of President and Chief Executive Officer of Visa International, which he held until 2004.
  Directorships of listed entities within the last three years
  Chairman, CDC Group PLC since July 2004, Chairman, Brittanica Group PLC since October 2004 and non-executive director, Securicor PLC since April 2004.

• Mr Garry F Nolan
  MBus, FAICD, FCIS, FAIBF, ASIA, CFTP (Snr)
  Joined the Group in 1970 and has held the position of Company Secretary since 1992. He has senior management experience in financial management, capital markets, corporate strategy, new business development, corporate restructuring, board affairs, corporate governance, shareholder services and globalisation of business. The Company Secretary advises and supports the Board and is the Chief Governance Officer.
• Mr Brendan T Case
  BEc, GDipAppFin, Dip Fin Plan, CPA, ACIS, ASIA
  Joined the Group in 1997 and has held the position of Associate Company Secretary since 2003. He is Head of the Risk Committee and the Audit Committee Secretariat.
• Ms Susan E Crook
  BA, LLB, MBA, FCIS, FSIA, MAICD
  Joined the Group in 2000 as Associate Company Secretary and Head of the Australian Secretariat. She is responsible for the Australian head office companies. She is the current National President of Chartered Secretaries Australia.

On April 6, 2004, the Chairman announced that a process of Board renewal would be undertaken. As a result, Mr Robert G Elstone, Mr Daniel T Gilbert, Mr Paul J Rizzo, Ms Jillian S Segal and Mr G Malcolm Williamson were appointed as non-executive directors during the year. Further, in October 2004 Mr Ahmed Fahour and Mr Michael J Ullmer were appointed as executive directors.

Also during the year, Dr J Brian Clark, Dr Kenneth J Moss, Dr Edward D Tweddell and Mrs Catherine M Walter resigned as non-executive directors.

Further, the Company announced that Mr Michael Chaney will join the Board as a non-executive director from December 2004 and be appointed Chairman in September 2005.

• every liability incurred by the person in the capacity as an officer (except a liability for legal costs); and
• all legal costs incurred in defending or resisting (or otherwise in connection with) proceedings, whether civil, criminal or of an administrative or investigatory nature, in which the officer becomes involved in that capacity,
• unless:
• the Company is forbidden by statute to indemnify the person against the liability or legal costs; or
• an indemnity by the Company of the person against the liability or legal costs would, if given, be made void by statute.

The Company may also pay, or agree to pay, whether directly or through an interposed entity, a premium for a contract insuring a person who is or has been an officer against liability incurred by the person in their capacity as an officer, including a liability for legal costs, unless:

• the Company is forbidden by statute to pay or agree to pay the premium; or
• the contract would, if the Company paid the premium, be made void by statute.

• effect to the rights of the officer or former officer conferred by Article 21; and
• an officer or former officer access to papers, including those documents provided from or on behalf of the Company or a related body corporate of the Company to the officer during their appointment and those documents which are referred to in such documents or were made available to the officer for the purpose of carrying out their duties as an officer.

The existing and former directors, secretaries and executive officers of the Company and of its related bodies corporate are indemnified in terms of Article 21.

The Company has executed deeds of indemnity in terms of Article 21 in favour of each non-executive director of the Company and each non-executive director of a related body corporate of the Company.

The Company has, under deeds of settlement and release, indemnified former officers, Mr Cicutto, Mr Laing and Mr R McKinnon in respect of reasonable costs and expenses arising from defending certain claims and proceedings that may arise with respect to their employment with the Company. For more detailed summaries of the deeds of settlement and release, refer to pages 243 to 244 of the annual financial report 2004.

In accordance with usual commercial practice, the insurance contract prohibits disclosure of details of the nature of the liabilities covered by the insurance, the limit of indemnity and the amount of the premium paid under the contract.

Significant items are those individually significant items included in net profit. The current year result included the following after tax significant items:

• foreign currency options trading losses of $252 million (refer to ‘significant changes in the state of affairs’ for further information);
• write-down of impaired application software of $307 million;
• charge to provide for doubtful debts of $204 million as a result of a revision of an accounting estimate;
• net profit of $315 million on sale of strategic shareholdings in St George Bank Limited, AMP Limited and HHG PLC; and
• net profit of $64 million on write-back of a provision for costs related to the sale of SR Investment, Inc.

Net profit attributable to members of the Company before significant items of $3,561 million in 2004, decreased $394 million or 10.0% compared with 2003.

Net interest income of $7,191 million in 2004, was $228 million or 3.1% lower than 2003. This was driven by a decrease in the net interest margin from 2.53% to 2.35%, partly offset by lending growth. The fall in margin largely resulted from the strong growth in lower margin mortgages and fixed rate lending within the retail banking business, as well as a reduction in contribution from the Markets and Specialised Finance divisions of Corporate & Institutional Banking.

Net life insurance income increased by $568 million from $444 million in 2003 to $1,012 million in 2004. This was driven by an increase in investment earnings resulting from improved performance in global equity markets and favourable claims experience, partially offset by an increase in policy liabilities.

Other banking and financial services income of $4,831 million in 2004, was $179 million or 3.6% lower than 2003. This outcome reflects:

• lower trading income;
• a reduction in money transfer fees;
• the negative impact of the Reserve Bank of Australia credit card interchange fee reform in Australia effective October 31, 2003;
• lower dividend income following the sale of strategic shareholdings in January 2004;
• the inclusion in the prior year of a one-off benefit on the restructure of the hedging swaps on the TrUEPrSSM preference shares;
• flat loan fees from banking; and
• growth in the Fleet Management and custody businesses following recent acquisitions.

Personnel, occupancy and general expenses of $6,812 million in 2004, were $458 million or 7.2% higher than 2003. This outcome reflects:

• increased costs associated with the European defined pension funds, partly offset by a superannuation contribution holiday in Australia reducing Australian defined contribution superannuation expenses;
• higher personnel costs (excluding pensions) reflecting salary increases and growth in staffing levels;
• growth in costs associated with major Group-wide projects – Basel II and International Financial Reporting Standards;
• higher occupancy costs as a result of annual rent increases and relocation costs;
• increased advertising and marketing costs, including the sponsorship of the 2006 Melbourne Commonwealth Games;
• higher software amortisation across the business reflecting prior year investment in infrastructure; and
• $22 million (after tax) write-off of development work associated with the Integrated Systems Implementation program in the first half.

Income tax expense relating to ordinary activities of $1,190 million in 2004, was $491 million or 29.2% lower than 2003. Income tax expense has been impacted by Wealth Management products and international activities, to which a wide range of tax rates are applied. In addition, the decision to elect to consolidate under the Australian tax consolidation regime resulted in a tax benefit of $150 million recognised in the 2004 year, due to the reset tax values of assets of life insurance subsidiaries within the Wealth Management business. Further, the income tax expense has been impacted by the decision not to book a tax benefit on the interest expense relating to exchangeable capital units following the receipt of an Australian Taxation Office assessment.

The growth in total assets was primarily driven by the growth in net loans and advances, investment securities and investments relating to the life insurance business, which offsets declines in due from other financial institutions, due from customers on acceptances, trading derivatives and available for sale securities. Net loans and advances increased $22,101 million or 9.8% from $225,735 million at September 30, 2003 to $247,836 million at September 30, 2004. Excluding the effect of exchange rate movements, net loans and advances increased by $19,086 million or 8.3% during the year. This increase primarily reflects strong growth in housing lending across all regions and solid other term lending growth.

Total liabilities at September 30, 2004 increased to $381,543 million from $370,260 million at September 30, 2003. Excluding the impact of exchange rate movements, total liabilities (in Australian dollar terms) increased $7,226 million or 1.9% during the year.

The growth in total liabilities was primarily driven by growth in deposits and other borrowings, as well as bonds, notes and subordinated debt and life insurance policy liabilities, which offset declines in due to other financial institutions, liability on acceptances and trading derivatives. Deposits and other borrowings increased by $19,558 million or 9.7% to $220,752 million at September 30, 2004, compared with $201,194 million at September 30, 2003. Excluding the effect of exchange rate movements, deposits and other borrowings increased by $17,390 million or 8.6% during the year. The increase primarily relates to growth in term deposits, as well as an increase in other borrowings relating to commercial paper. Bonds, notes and subordinated debt increased by $8,316 million or 34.3% to $32,573 million at September 30, 2004. This increase reflects an increase in the issue of Euro and subordinated medium-term notes, as a result of the Group’s increased capital requirements.

Total equity in the Group increased from $27,211 million at September 30, 2003 to $29,766 million at September 30, 2004. Total parent entity interest in equity increased by $1,493 million from $24,407 million at September 30, 2003 to $25,900 million at September 30, 2004. The movement in total equity was impacted by an increase in contributed equity of $463 million to $10,191 million (2003: $9,728 million), reflecting share issues and dividend reinvestment of $1,355 million, including the underwriting of the dividend reinvestment plan, partially offset by $162 million impact of the on-market share buy-back of ordinary shares and $730 million on the buy-back of preference shares (refer to ‘significant changes in the state of affairs’ for further information). Further, the reserves balance increased by $301 million to $1,194 million (2003: $893 million), primarily reflecting positive movements in the foreign currency translation reserve. In addition, the movement in total equity included an increase in retained profits of $729 million to $14,515 million and an increase in outside equity interest of $1,062 million.

For a more detailed review of the operations of the Group, and the results of those operations, refer to pages 3 to 68 of the annual financial report 2004.

Dividends paid since the end of the previous financial year:

• the final dividend for the year ended September 30, 2003 of 83 cents per fully paid ordinary share, fully franked, paid on December 10, 2003. The payment amount was $1,250 million; and
• the interim dividend for the year ended September 30, 2004 of 83 cents per fully paid ordinary share, fully franked, paid on July 14, 2004. The payment amount was $1,253 million.

The franked portion of these dividends carry imputation tax credits at a tax rate of 30%, reflecting the current Australian company tax rate of 30%. For non-resident shareholders of the Company for Australian taxation purposes, the unfranked portion of the dividend will be paid from the Company’s foreign dividend account. Accordingly, for non-resident shareholders the unfranked portion of the dividend will not be subject to Australian withholding tax.

The extent to which future dividends will be franked, for Australian taxation purposes, will depend on a number of factors including the proportion of the Group’s profits that will be subject to Australian income tax and any future changes to Australia’s business tax system as a result of the Australian Commonwealth Government’s tax reform initiatives.

Based on its assessment, the Company announced a total loss of $360 million before tax, or $252 million after tax, arising from the unauthorised foreign currency options trading. This total loss consisted of losses arising from the removal of fictitious trades from the foreign currency options portfolio of $185 million and a further loss of $175 million arising from a risk evaluation and complete mark-to-market revaluation of the foreign currency options portfolio in January 2004. The Company recognised the total losses during the 2004 year.

The key points from the PricewaterhouseCoopers ‘Investigation into foreign exchange losses at National Australia Bank’ report dated March 12, 2004 included:

• the total loss arising from foreign currency options trading announced on January 27, 2004 was $360 million;
• the losses arising from the foreign currency options trading increased significantly between September 2003 and January 2004;
• four traders on the foreign currency options desk exploited loopholes and weaknesses in systems and processes to hide trading losses and protect bonuses;
• the traders’ activities were contrary to the Company’s strategy of building customer-focused business;
• the foreign currency options trading losses were reported to management by several junior employees;
• no customers were directly or indirectly affected by the foreign currency options trading losses;
• in the Corporate & Institutional Banking Market’s division there was:
  • inadequate management supervision;
  • significant gaps in back office monitoring functions;
  • escalation processes that did not work properly;
  • weaknesses in control procedures;
  • failure in risk management systems; and
  • an absence of appropriate financial controls;
• there was not a suitable compliance culture within this area of the Company and a tendency to suppress bad news rather than be open and transparent about problems;
• warning signals, both inside the Company and from the regulators and other market participants, were not properly acted upon; and
• the Board had overall responsibility for corporate governance, including safeguarding stakeholder interests and reviewing and monitoring risk management and compliance.

APRA has also provided to the Company a report on its investigation into irregular currency options trading. That report identified problems and issues in respect of management supervision, adherence to risk management systems and controls, internal governance procedures and the culture of the Company similar to those described above.

APRA has also specified in its report a number of remedial actions required to be implemented. These include the following:

• Culture – the Board is required to review cultural norms within the Company and clearly articulate the standards of behaviour, professionalism and openness it expects of the organisation; the Board is required to develop policies that promote and support ‘whistle-blowing’; the Board is required to review incentive arrangements to ensure that these promote behaviours that have appropriate regard to risk;
• Governance – the Board, its committees and executive risk committees are required to clarify the appropriate escalation channels available to enable the Board and its committees to deliberate on serious risk issues. The Board must establish more transparent risk reporting systems and place greater reliance on independent checks and balances on executive management to enable it to discharge its duties appropriately;
• Limit frameworks – the Board is required to review, and formally approve, all market risk limits in the Markets division of Corporate & Institutional Banking; limit policies should clearly specify mandatory (or ‘hard’) limits; trigger levels (or ‘soft’ limits) should also be specified; all limit excesses – whether ‘hard’ or ‘soft’ – must have a defined response;
• Markets – the respective roles and responsibilities of the Markets division of Corporate & Institutional Banking and the Market Risk division of Risk Management in respect of risk analysis and escalation of risk issues needs to be clearly specified and distinct from each other;
• Market risk – reporting lines in, and responsibilities of, the Market Risk and Prudential Control (MR&PC) role are required to be streamlined in order to ensure that adequate attention is devoted to market risk issues; roles and responsibilities in MR&PC are required to be clarified and confer an unambiguous mandate; and the process surrounding the approval of product usage authorities is to be reviewed to ensure that all relevant risk management issues are covered;
• Operations – in relation to its Corporate & Institutional Banking Operations division (part of Corporate & Institutional Banking Services), the Company is required to review: all confirmation and reconciliation procedures; operational procedures followed by Operations division staff – especially as regards interaction with the front office; and reporting of transactional and other statistical information;
• Finance – the Finance division is to be assigned responsibility for data integrity; analysis of the components of reported profit and loss data; and critical questioning of discrepancies. The Finance division is also required to review and formally document the materiality thresholds applicable to each desk; and
• Quantitative support – a number of reforms are required to formalise and enhance the role played by the Quantitative Support division of Corporate & Institutional Banking in model validation and testing.

Following the release of the PricewaterhouseCoopers and APRA reports, the Board announced a four point action plan to fully address all of the issues associated with the foreign currency options trading losses:

Board changes:

• the Board accepted that it was ultimately responsible for the culture and reputation of the Company;
• the Company’s former Chairman, Mr D Charles K Allen, and former Managing Director and Chief Executive Officer, Mr Frank J Cicutto, have both resigned;
• the Board has appointed additional directors with banking experience (refer to Board changes on page 43);
• the Board, through its Risk Committee, has endorsed a revised governance framework for the management risk committees within Corporate & Institutional Banking; this has included common guiding principles, strengthening of the charters, common operating procedures, increased market risk representation, and a defined risk monitoring, approval and oversight process; and
• the Board is enhancing existing governance processes including the annual review of Board performance (refer to corporate governance – Board performance section on page 26) and the review of individual directors prior to their standing for re-election at the annual general meeting (refer to corporate governance – appointment and re-election of Board members on page 27).

• primary responsibility for the unauthorised trading in foreign currency options rests with four members of the foreign currency options desk and they were summarily dismissed from the Company. The former Head of Foreign Exchange in the Markets division, who was the direct supervisor of the four traders, was also dismissed;
• a number of other employees within the Company were transferred or counselled as a result of the events surrounding the unauthorised foreign currency options trading; and
• the employment of certain individuals was also reviewed. Those who left the Company include: the former Executive General Manager, Corporate & Institutional Banking, Mr Ian F Scholes, the former Head of Markets division, Mr Ron Erdos, and the former Executive General Manager, Risk Management, Mr Christopher D Lewis. These positions have subsequently been filled.

• the Company will continue to refine its risk management framework to get a more appropriate balance between management and policing functions. Management has already reviewed value at risk limits and reduced the level of risk exposure. Enhanced policies surrounding limit management, compliance and adherence have been introduced;
• weaknesses in the control procedures continue to be rectified. This includes analysis of daily trading profits and accounts, reporting of all large and unusual transactions, investigations of all off-market rates on high risk transactions, critical review of revaluation rates sourced from third parties and a stronger back office function that properly checks all transactions;
• the management team has reviewed responsibilities between business units to ensure that there are clear reporting lines and accountabilities between Risk Management, Operations and Finance functions; and
• further, the progress in addressing the issues is being reported regularly to the Risk Committee and the Board at each meeting.

• the Company is accelerating its cultural change agenda. The development of a new set of Corporate Principles has been the foundation for driving the desired cultural change. The organisation now has a single, consistent framework with clearly articulated behaviours. Refer to corporate governance – ethical standards for details of the Corporate Principles on page 33;
• a principles benchmark survey, utilising the organisational cultural Inventory (OCI), is being used as a cultural measure. This survey (in conjunction with the Hewitt Engagement Survey) provides an externally validated and reliable measurement of culture. The Group Executive Committee and Board have supported the ongoing use of the principles benchmark survey/OCI for at least the next five years;
• a new Performance Management Framework has been put in place. The introduction of ‘quality gates’ which demand minimum levels of compliance and behaviours, will drive increased accountability, and behavioural change; and
• the Company will continue to encourage and protect whistleblowers. Refer to ‘Whistleblower Protection Program’ on page 33 for details of the Company’s program.

The Company’s currency options desk will also remain closed to corporate business and proprietary trading until substantial progress has been made to redress the issues raised by APRA in its report.

The Company has made good progress in its program to implement these required actions according to timeframes agreed with APRA. As of November 30, 2004 of the 81 remedial actions required, 25 have been closed and a further 43 have been responded to by the Company. The Company will remain under close supervision by APRA until all outstanding actions are implemented.

In summary, the undertakings cover three main areas:

• identifying, recording and informing ASIC of any future breaches of the Group’s AFSL;
• ensuring that there are appropriate procedures relating to the role of responsible officers of the Group; and
• ensuring that there are appropriate procedures relating to the role of representatives of the Group.

A project structure has been developed that will report directly to the Chief Executive Officer, Australia.

TrUEPrSSM is a service mark of Merrill Lynch & Co., Inc.

No further matter, item, transaction or event of a material and unusual nature has arisen in the interval between the end of the financial year and the date of this report that, in the opinion of the directors, has significantly affected or may significantly affect the operations of the Group, the results of those operations, or the state of affairs of the Group in future financial years.

The Company announced on July 19, 2004 that it had selected Ernst & Young to become the new external auditor of the Company for the 2005 year. Shareholders will be asked to approve the new auditor at the Company’s annual general meeting to be held on January 31, 2005.

Because the focus of the Board is on the long-term strategic direction of the Company, there is no direct link between non-executive director remuneration and the short-term results of the Company. The fee pool is periodically proposed to shareholders at the annual general meeting for approval. Shareholders approved an increase in the fee pool of $1.3 million to a maximum of $3.5 million at the Company’s annual general meeting held on December 19, 2003.

Fees are established annually for the Chairman and other non-executive directors. Additional fees are paid, where applicable, for participation in Board committees and for serving on the boards of controlled entities. The total fees paid to members of the Board, including fees paid for their involvement on Board committees and controlled entity boards, are kept within the total approved by shareholders from time to time.

At the Company’s annual general meeting held in December 2003, shareholders approved the continuation of the non-executive directors’ share arrangement under the Non-Executive Directors’ Share Plan (which is operated through the National Australia Bank Staff Share Ownership Plan). Under this arrangement, shares are provided to non-executive directors as part of their remuneration, (a minimum 10% of fees) rather than receiving cash. The shares are either issued or acquired on-market on behalf of participants and allocated to non-executive directors on dates determined by the trustee of the National Australia Bank Staff Share Ownership Plan in its sole discretion.

Agreements between the Company and certain of the non-executive directors provided that upon, and in the consequence of, each of these directors ceasing to be a director by reason of retirement or death, the Company should pay a lump sum retirement allowance. This retirement benefit, as approved by shareholders, was based on period of service, as follows:

• Less than 15 years
  One third of the average yearly emoluments paid by the Company to the director:

1. during the last three years of service; or
2. when the period of such service is less than three years, during that period, for each completed year of service and proportionately for part of a year, as a non-executive director; or

• 15 years or more
  Five times the average yearly emoluments paid by the Company to the director during the last three years of service as a non-executive director.

For those non-executive directors, who would have no entitlement to a retirement allowance benefit, their directors’ fees were set at this higher level. All directors now have flexibility in relation to their remuneration, including the opportunity to set aside additional Company superannuation contributions.

Linking total reward to performanceDuring 2004 the Human Resources Committee and management extensively reviewed the Group’s During 2004 the Human Resources Committee and management extensively reviewed the Group’s performance management framework. Three major enhancements to this framework were initiated:

• calibration of key performance indicators at the commencement of the performance period, which define what performance looks like;
• the introduction of a peer review process. This process validates performance at the end of the period by calibrating it relative to the performance of other individuals; and
• the introduction of quality gates, being threshold compliance and behaviour measures. If an individual fails either gate, then no incentive can be provided.

The peer review process will allow for performance to be differentiated and will bias the outcome to those with the best performance and potential. It also identifies those employees who require development and those who are poor performers.

Fixed remuneration reflects the scope of the role and the level of skill and experience of the individual and is generally referenced to the median of the applicable remuneration market, with higher outcomes for the best performing individuals. The Group operates in a number of countries and business segments and fixed remuneration reviews aim to achieve equitable outcomes for employees in comparable roles within the context of the different geographical and specialist remuneration markets in which the Group competes for top executive talent.

Short-term incentives for senior executives during 2004 related solely to the EVA® performance of the Group. The weighting between EVA® performance and individual performance varied depending on the nature of the specific executive role. Under that program, a pre-defined EVA® performance weighting for an individual flowed through automatically with only the non-financial component being variable based on the individual’s achievement of objectives.

The incentive program commencing from the 2005 year is structured to reward the achievement against key individual, business and Group annual performance outcomes. Target amounts are set relative to the applicable remuneration market for executive incentive purposes. The performance of the Group will be measured by growth in earnings per share (EPS) and EVA® and determines the pool available for payments (subject to Board approval), while the performance of an individual executive against their scorecard of performance measures, determines their share of the available pool.

For management employees and above, a threshold level of performance and the achievement of behavioral and compliance quality gates will be required before any short-term incentive reward can be earned.

Relative individual performance may give rise to anywhere between zero and two times the target incentive amount being earned, with only the most outstanding performers (less than 5% of employees) receiving amounts at the top end of the scale. Also, subject to any legal or taxation constraints, all above-target rewards are to be provided in shares with restrictions on trading for at least one year, provided threshold performance is being achieved over the subsequent performance year.

Long-term incentives, in the form of Company shares (subject to various restrictions), performance options and performance rights have become a key mechanism for rewarding executive potential and talent over the last two years.

Shares issued as a long-term incentive are held in trust until various time and/or performance criteria are achieved (dividends are normally received by the individual while the shares are in trust). Performance options and performance rights are rights to acquire shares, if and when specified time and performance hurdles are achieved. The performance hurdles ensure that executive rewards are linked directly to the total shareholder return (TSR) of the Company and are therefore aligned to the outcomes experienced by other shareholders over a specified timeframe (from September 30, 2004 this will generally be three to five years). The value of any long-term incentive rewards is also heavily dependent on the market value of the Company’s ordinary shares at the time of exercise (if and when any securities vest).

The Human Resources Committee introduced performance rights in 2003. Performance rights allow for continued motivation of employees in times when the Group outperforms its peers but for reasons not related to performance the share price may be low.

The Human Resources Committee has again considered the role of long-term reward in helping to drive appropriate management behaviours and to reinforce cultural change. The Human Resources Committee sought advice from external experts in the field and considered best practice in the Australian and international markets regarding the use of long-term incentives. The changes have been implemented with effect from a grant made on September 30, 2004 and will apply to all future grants until amended by the Human Resources Committee. Details of the old and new performance hurdle provided in note 38 of the annual financial report 2004.

Prior to October 1, 2002, the Company disclosed the fair value of performance options granted during the financial year using a numerical pricing model, but did not allocate those values over their expected life for reporting emoluments. Rather, the full fair value of the grant was disclosed as an emolument in the year of grant. As a result, included in the amounts disclosed above as an allocation of fair value of performance options and performance rights in relation to 2004, are amounts related to unvested performance options granted in prior years that were disclosed as part of emoluments in the relevant prior years.

Note however, when the Group transitions to Australian Equivalents to International Financial Reporting Standards, they will not require all unvested performance options and rights to be recognised in this way, only those granted after November 7, 2002 that are unvested at January 1, 2005. A difference may therefore arise between disclosure under AASB 1046A and the remuneration expense recognised under the new accounting standards in the Group’s financial performance.

Performance options and rights granted as part of executive emoluments have been valued using a numerical pricing model, which takes account of factors including the performance option or right exercise price, the current level and volatility of the underlying share price, the risk-free interest rate, expected dividends on the underlying share, current market price of the underlying share and the expected life of the performance option or performance right. The probability of the performance hurdle being reached has been taken into consideration in estimating the number of performance options or rights likely to vest. For further details, refer to note 38 in the annual financial report 2004.

The executive share option plan was approved by shareholders by special resolution in January 1997 and again at the 2002 annual general meeting. All performance options that have not expired are detailed in note 38 in the annual financial report 2004.

The executive share option plan provides for the Board to grant performance options to executives of the Group to subscribe for fully paid ordinary shares in the Company. Each performance option is to subscribe for one fully-paid ordinary share in the Company. The performance options cannot be transferred and are not quoted on the ASX. No payment is required from executives at the time of the grant. The exercise price per performance option is the market price of the Company’s fully paid ordinary shares as at the date the performance option was granted or such other date determined by the Board. The market price is determined as the weighted average of the prices at which the Company’s fully paid ordinary shares were traded on the ASX in the one week up to and including the relevant day. There are no voting or dividend rights attached to the performance options. The Board may determine such other terms for the grant of performance options consistent with the ASX Listing Rules and the Corporations Act 2001 (Cth).

Exercise of the performance options is also subject to satisfaction of a performance hurdle. The performance hurdle for all performance options issued between March 2000 and June 2004 is measured after the first three years by comparing the performance of the Company with the performance of other companies in a peer group. This peer group of companies is based on 50 of the companies listed in the S&P/ASX 100 by market capitalisation (excluding the Company) determined at the grant date or the effective grant date. Performance options become exercisable depending on the maximum total shareholder return (TSR) of the Company relative to the TSR of the peer group companies. TSR measures share price growth, assuming reinvestment of returns to the shareholders including dividends, over consecutive five day (March 2000 to June 2002 grants) or 30 day (March 2003 to June 2004 grants) periods to prevent vesting being achieved on short-term spikes in the Company’s total shareholder return performance during the performance or vesting period (years three to eight).

For performance options granted between June 2002 and June 2004, if the relative performance of the Company during the vesting period (years three to eight) does not reach the median (50th percentile) of the peer group during the vesting period, then no performance options will vest. Half of the performance options will vest when the performance of the Company achieves the median (50th percentile) of the peer group, with an additional 2% of the performance options becoming exercisable with every additional percentile achieved. All of the performance options will therefore vest when the total shareholder return performance of the Company has reached or exceeded the 75th percentile of the peer group. Grants prior to June 2002 also allow vesting from the 25th percentile (25% of the performance options) with an additional 1% of the performance options becoming exercisable with every additional percentile achieved up to the 50th percentile. This does not apply from June 2002 onwards.

The performance hurdle for performance options issued from September 2004 onwards will be measured against two separate peer groups of companies. The first peer group is 50 of the companies listed in the S&P/ASX 200 (as for previous grants), and the second is the 13 top financial services sector organisations listed in the S&P/ASX 200 (excluding the Company). Both peer groups are determined at the grant date or effective date when the performance options are issued. Half of the performance options will become exercisable depending on the maximum TSR (measured over 30 consecutive days) of the Company relative to the first peer group, and the other half relative to the second peer group. The highest rank which is sustained for a 30 consecutive day period relative to each peer group will determine the percentage of performance options which will vest in relation to that peer group. If the performance of the Company during the vesting period (years three to five) does not exceed the median (50th percentile) of either peer group during the vesting period, then no performance options will vest (ie. none are exercisable). Half of each portion of performance options will vest and become exercisable when the performance of the Company achieves the 51st percentile of the relevant peer group, with an additional 2% of each portion of performance options becoming exercisable with every additional percentile achieved. All of the performance options will therefore vest when the TSR performance of the Company has exceeded the 75th percentile of each peer group.

In some circumstances, performance options may, however, be exercised before the third anniversary of the grant and notwithstanding the performance hurdle (described below) where an executive ceases employment with the Group as the result of death or total and permanent disablement. The Board may also allow optionholders to exercise the performance options irrespective of the normal criteria where certain events occur, such as the making of a takeover offer or announcement to the holders of fully paid ordinary shares in the Company.

A loan may be available to executives if and when they wish to exercise their performance options subject to the provisions of applicable laws and regulations (including the United States Sarbanes-Oxley Act of 2002). The rules of this plan provide that the rate of interest applicable to such a loan shall be the Company’s base lending rate plus any margin determined by the Board. Dividends payable in respect of a loan share are applied firstly towards payment of any interest which is due, and secondly towards repayment of the principal amount outstanding under the loan.

Performance options must not be granted if the total number of shares issued in the last five years under the Company’s employee share, performance option and rights plans and the total number of outstanding performance options and rights under its plans, including the proposed offer or grant, exceed 5% of the number of shares in the issued share capital of the Company at the time of the proposed offer or grant. This calculation does not include offers or grants made or shares, performance options or performance rights acquired as a result of an offer or grant made to a person situated outside Australia at the time of the offer or grant or which did not need disclosure under section 708 of the Corporations Act 2001 (Cth) (eg. shares provided to executive officers of the Company) otherwise than as a result of relief granted by ASIC.

The performance rights plan was approved by shareholders at the 2002 annual general meeting and rights issued under this plan during the year are shown in the table on page 52.

This plan provides for the Board to grant performance rights to executives of the Group to subscribe for fully-paid ordinary shares in the Company. Each performance right is to subscribe for one fully-paid ordinary share in the Company. The performance rights cannot be transferred and are not quoted on the ASX.

No payment is required from executives at the time of the grant, but the holder of performance rights must pay a nominal exercise price to exercise those rights. The total exercise price payable on the exercise of any rights on a particular day is $1.00, irrespective of the number of rights exercised on that day. There are no voting or dividend rights attached to the rights. The Board may determine such other terms for the grant of performance rights consistent with ASX Listing Rules and the terms of the Corporations Act 2001 (Cth).

Exercise of the performance rights is subject to the same time and performance hurdle as performance options issued under the executive share option plan. However, performance rights were only granted to executives for the first time in March 2003. An unexercised performance right will lapse in similar circumstances to an unexercised option granted under the executive share option plan.

Performance rights cannot be granted under the performance rights plan if the number of shares to be received on exercise of those performance rights together with all shares issued under the Company’s employee incentive plans over the last five years and the number of outstanding performance options and performance rights issued under those plans exceed 5% of the Company’s issued share capital. This calculation does not include offers or grants made or shares, performance options or performance rights acquired as a result of an offer or grant made to a person situated outside Australia at the time of the offer or grant or which did not need disclosure under section 708 of the Corporations Act 2001 (Cth) (eg. shares provided for no consideration under the staff share allocation plan), otherwise than as a result of relief granted by ASIC.

The holders of exchangeable capital units have the right to exchange those units for ordinary shares in the Company or, at the Company’s option, cash. Refer to note 31 in the annual financial report 2004 for full details of the number and terms of exchangeable capital units issued by the Group.

There were 2,205,000 fully paid ordinary shares of the Company issued during the year as a result of performance options granted being exercised, for a total consideration of $51,248,018. There were 83,000 fully paid ordinary shares of the Company issued since the end of the year as a result of performance options granted being exercised, for a total consideration of $1,767,070. No performance rights were exercised during the relevant time. The amount paid on issue of each of these shares is set out in note 38 to the annual financial report 2004.

No person holding an option has or had, by virtue of the option, a right to participate in a share issue of any body corporate other than the Company.

Subsequent to September 30, 2004 Mr Ahmed Fahour and Mr Michael J Ullmer were appointed as executive directors.

There are no contracts, other than those disclosed above, to which directors are a party, or under which the directors are entitled to a benefit and that confer the right to call for or deliver interests in a registered scheme made available by the Company or a related body corporate.

All of the directors have disclosed interests in organisations not related to the Group and are to be regarded as interested in any contract or proposed contract that may be made between the Company and any such organisations.

The external auditor also provides audit and non-audit services to non-consolidated securitisation vehicles sponsored by the Group, non-consolidated trusts of which a Group entity is trustee, manager or responsible entity and non-consolidated Group superannuation or pension funds. The fees paid or due and payable to the external auditor for these services during the year to September 30, 2004 total approximately $2,731,000.

In accordance with advice received from the Audit Committee, the directors are satisfied that the provision of non-audit services during the year to September 30, 2004 by the external auditor is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001 (Cth). The directors are so satisfied because the Audit Committee has, having regard to auditor independence requirements of applicable laws, rules and regulations, concluded in respect of each non-audit service that the provision of that service would not impair the independence of the external auditor.

A description of the Audit Committee’s pre-approval policies and procedures is set out on page 30. Further details of the services provided by the external auditor to the Group and the fees paid or due and payable to the external auditor for those services are set out in note 52 in the annual financial report 2004. A copy of the external auditor’s independence declaration is set out on this page.

I declare that, to the best of my knowledge and belief, there have been:

1. no contraventions of the auditor independence requirements of the Corporations Act 2001 (Cth) in relation to the audit for the year to September 30, 2004; and
2. no contraventions of the applicable Australian code of professional conduct in relation to the audit for the year to September 30, 2004.

BPJ Greig
Partner
December 2, 2004

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