PwC Comment on Bank Results

BIG FOUR PROFITS HIT RECORD HIGHS

Australia's four major banks have reported record profits in FY05. Today's
announcement by the National Australia Bank brings the total profits for
the major banks this year to $14 billion, up 25.7% on last year's
reported earnings.

This reporting season has seen the banks' underlying profits '” or cash
earnings before significant items '” up 7.4% on FY04, or 12%
when NAB is excluded from the analysis.

"The results this year have been better than expected and they extend the
long period of earnings growth which has been underpinned by a booming
economy and benign credit environment. However, the three key drivers of
traditional banking results '” market growth, market share and interest
margins '” all displayed worrying signs," said Michael Codling,
PricewaterhouseCoopers' Banking and Capital Markets Leader.

Overall market growth eased this year, with the cooling in the housing
market partly offset by increases in business lending and credit card debt.
Additionally the major banks lost share in key markets.

"The banking sector has got tremendously competitive. The re-emergence of
high quality foreign banks, together with the influence of brokers and
non-banks, caused the four majors' share of both home lending and deposit
markets to fall by approximately 1% in the past year. It also
contributed to an average 10 basis point reduction in interest margins,"
said Mr Codling.

The bank's results were bolstered by good performances from their wealth
management businesses '” up 26% '” spurred on by a buoyant equity
market, improvements in net funds flow, increased insurance premiums and
good claims experiences.

"Given that the financial services landscape will be significantly impacted
by changing customer demographics '” particularly the ageing population '”
the major banks are well positioned to benefit from providing life-cycle
wealth management offerings," said Mr Codling.

The banks held operating costs to a 5.7% increase over FY04. The
bulk of the increase related to staff expenses, primarily as a result of
growing staff numbers in front-line roles. "With financial products
becoming increasingly commoditised, superior customer service is seen as a
key to differentiation," said Mr Codling.

Additional staff members were also devoted to the large compliance projects
such as Basel II, IFRS and Sarbanes Oxley undertaken by the banks this
year.

The banking sector has been dealing with increased regulatory scrutiny at a
time when customers are more financially literate and expect more
information and greater transparency from their financial services
providers. The response of the banks will be to simplify their offerings to
make them easier to understand. Moreover, efforts will also be directed to
internal simplification of platforms and processes to reduce costs and the
risk of compliance breaches.

"We are entering into a key period for the big four banks," Mr Codling said. "We expect to
see some common themes in bank strategies: building a culture truly centred
on the customer; business simplification; and a keen focus on core
competencies '” what they do best."

See PwC charts and tables