09.12.03 Cost Of Funds Pack

The key drivers of NAB’s cost of funds December 2009

Contents

2

1.

How we fund our balance sheet

2.

Customer deposits

3.

Term wholesale funding

4.

Short term wholesale

5.

Overall funding cost picture

There are three key sources of funds for a bank National Australia Bank Balance Sheet


Customer Deposits (55-60%): money which is deposited by retail and business customers.




Wholesale term funding (20%): larger, institutional investors buying debt securities issued by the bank for a fixed term (normally 2-5 years).




Short term wholesale funding (2025%): larger investors buying shorter term (normally 1-6 months) securities issued by the bank.

Mortgages

Custom er Deposits

Credit Cards

Term Wholesale

Bills Corporate Lending

$300 B

Short Term Wholesale

$300 B

Customer Deposits • The global financial crisis has pushed up the cost of offshore wholesale borrowing and made access to overseas markets more difficult • This has forced all banks to rely more upon domestic deposits, which in turn has pushed up customer deposit costs substantially. •The cost of deposits has risen by around 1-1.2% over the past 12 months and we expect this cost to increase further into 2010. A v e r a g e 3 -5 M th B l a c k b o a r d R a te a n d B B S W 9 .0 0 %

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90 Da y B BS W 3 - 5 m o n th s B la c k b o a r d R a te

7 .0 0 %

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5 .0 0 %

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Term Wholesale Funding Cost of Wholesale Term Funding 200 Un-guaranteed UK and Euro public issue

180

Monthly Issuance Margin Culmulative W'td Avg Margin

160

Lehman Brothers Collapse Introduction of 70bp Govt Guarantee

Forecast Issuance Margin Forecast W'td Avg Margin

Recently, NAB has had to raise Offshore term funding at ~150bps, and our FY10 forecast (130bps) recognises that term funding will need to be raised both on and offshore

140

Cost (bps)

120

Bear Sterns Collapse (Mar-Apr 08) Weighted average cost of funding will continue to increase even as the marginal cost of funding falls.

100

80

~100bps

60

40

Start of the Credit Crisis (July-Aug 07)

20

M

M

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• Pre-crisis wholesale term funding costs averaged 0.15%-0.20%. •Following the collapse of Lehman Bros, term funding costs increased sharply to over 1.70% in the half year ending March (including Govt Guarantee fee). • Recently, the cost of domestic issued debt has eased, but offshore issue costs are high. •This month NAB issued un-guaranteed EUR2bn (AUD3.2b) 5 year term funding at a cost of 1.73%.

Short Term Wholesale

•Current Bills OIS spreads are now averaging around 0.3%. •The global financial crisis caused short term funding costs to rise sharply as banks were forced to raise more money onshore. •Pre-crisis, short term funding costs averaged 0.07%-0.10%, but post-crisis, these costs have averaged 0.40%. •As financial markets have become more stabile, short term funding costs have eased. However there is still volatility. 6

Overall Funding Cost Picture


Throughout 2008/2009 most of our increased funding costs were driven by higher short term funding costs.




Recently short term funding costs have eased, however term wholesale and customer funding costs have increased.




We expect overall costs to increase into 2010, driven mainly by the rising average cost of term wholesale and retail deposit costs. Cost of Funding a Standard Variable Rate Mortgage 140 Liquidity

120

Term Funding Customer Deposits Bills / OIS

80

60

40

20

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Basis Points

100