TRANSLATING REGULATORY CHANGE TO BALANCE SHEET ACTION

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2 TRANSLATING REGULATORY CHANGE TO BALANCE SHEET ACTION ACTUARIES INSTITUTE CONFERENCE PLENARY 1 August 2016 Shaun Dooley, Group Treasurer

3 CONTENTS Dimensions of regulatory change Net Stable Funding Ratio 2 An unquestionably strong bank New research into deposit system dynamics

4 REGULATORY CHANGE multiple dimensions NSFR Capital ratios TLAC RWA FRTB Revised standardised credit Capital floors Constraints on int. models SA-CCR CVA Securitisation Operational risk IRRBB LCR TLAC Leverage FSI: unquestionably strong Leverage ratio (Tier 1) FY16 FY17 FY18 FY19 1 FY19+ 1 FSI mortgage risk weights Unquestionably strong SA-CCR Securitisation IRRBB FRTB Operational risk Credit risk CVA 3 (1) Indicative timing only

5 NET STABLE FUNDING RATIO system implications of policy settings Retail customers Retail & SME deposits 90% Available Stable Funding Business customers Corporate & FI deposits 0-50% NSFR 1 metric makes system support more expensive Mortgages (not encumbered 2 ) > 1 year 65% Required Stable Funding Non residential lending > 1 year 85% = = NSFR +25% NSFR -35% 4 (1) NSFR example based on APRA Discussion Paper, Basel III liquidity the net stable funding ratio and the liquid assets requirement for foreign ADIs, 31 March 2016 (2) Mortgages supporting covered bonds or securitisations require 100% stable funding

6 % 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% NAB BALANCE SHEET STRENGTHENING has occurred over a number of years NAB GROUP STABLE FUNDING INDEX (SFI) NAB RELIANCE ON SHORT TERM WHOLESALE FUNDING 1 ex. CYBG 85% 86% 89% 90% 92% 91% 89% 20% 20% 20% 20% 21% 22% 21% ($bn) 16% 11% 10% 9% 9% 65% 66% 69% 70% 71% 69% 68% Sep 11 Sep 12 Sep 13 Sep 14 Sep 15 Sep 15 Mar 16 Customer Funding Index Term Funding Index Sep 11 Sep 13 Sep 14 Sep 15 Mar 16 Short Term Funding of Core Assets Offshore as % of Total Funding Liabilities and Equity 100% 80% 60% 40% 20% 0% $31.3bn NAB HISTORIC DIVERSIFIED FUNDING $25.8bn $28.2bn $26.5bn $17.7bn FY12 FY13 FY14 FY15 1H16 NAB reliance on cheaper and less stable sources of funding has declined the last 5 years Subordinated Private Placements Secured public domestic Secured public offshore Senior public domestic Senior public offshore 5 Source: NAB 1H16 Results Investor Presentation 5 May 2016 (1) September 2015 figures presented on a continuing operating basis, prepared in accordance with AASB 9. Prior periods have not been restated per accounting methodology

7 RESPONSES TO SOLVE FOR NSFR at a bank level Driver Action Constraints Capital Increase volume Returns > cost of capital; cost Wholesale Funding Increase tenor Mix (less secured funding) Market capacity constraints NSFR Increase Available Stable Funding (ASF) Deposits Increase share of Retail & SME deposits FI mix (more operational deposits) Increase deposit tenor System constraints Decrease Required Stable Funding (RSF) Wholesale securities & Liquidity Decrease volume Increase netting of derivatives Liquidity requirements Counterparty processes and suitability The main swing factors are deposits and lending Loans & Acceptances Other assets Decrease volume Mix (more mortgages/less other) Decrease volume Ability to support the economy and credit growth 6

8 A COMPETITIVE MARKET constrains deposit market share gains Market share growth is difficult to sustain on price: the average price lead lasts for 1.4 weeks. Highest 6M TD rate quoted by bank Source: NAB. Week ending 7

9 MONEY CREATION IN A MODERN ECONOMY BEFORE LOANS ARE MADE / AFTER LOANS ARE MADE BEFORE LOANS ARE MADE / AFTER LOANS ARE MADE BEFORE LOANS ARE MADE / AFTER LOANS ARE MADE 8 Source: BOE (b) The central bank balance sheet only shows base money liabilities and corresponding assets. (c) Commercial banks balance sheets only show money assets and liabilities before any loans are made. (d) Balance sheet only slows broad money assets and corresponding liabilities real assets such as the house being purchased with the borrowing are not shown.

10 WHAT CAN BE DONE TO GROW THE DEPOSIT SYSTEM? DEPOSIT GROWTH AND CREDIT GROWTH AUD, Billion UK BANK BALANCE SHEETS Percent change in individual banks assets, debt and equity between 1998 and Deposits Credit Source: NAB modelling. Note: similar relationships are evident for all countries included in the BOE study (US, Germany, France, Italy, Japan) Source: BOE.

11 DRIVERS OF SYSTEM DEPOSIT VOLUMES two key determinants A deposit proxy explains most of the movement in deposit volume, based on credit growth and bank funding of the Current Account Deficit. DEPOSIT GROWTH AND PROXY AUD, Billion Deposit Proxy Deposits (M3) Source: NAB modelling. 10

12 WHAT ROLE FOR PRICE at a system level? DEVIATION IN LOAN AND DEPOSIT GROWTH AUD, Billion There is only one example in 32 years where increases in deposit rates has corresponded with deposit growth > loan growth ~ ~ X X X X X Periods with annual increases in deposit interest rates Gap in change of loans vs deposits Source: NAB modelling. Loan growth out-stripped deposit growth, even though deposit interest rates increased The rate of increase in the gap between loans and deposits slowed, but loan growth remained above deposit growth 11

13 UNQUESTIONABLY STRONG is multi-dimensional Dimensions of a Resilient Bank Depositors and Payment Processing Customers Equity Investors Debt Investors Capital Funding / Liquidity Earnings Asset Quality Stress Testing Assessment of each stakeholder based on observable metrics Concentration Risk Management & Risk Management Strategy Reputation Governance (including conduct & culture) Influencers of the Assessment Govt/ regulators Rating Agencies Media Analysts Rating Agencies ESG, etc Rating Agencies Govt / regulators 12

14 FINAL THOUGHTS We are in a period of significant regulatory change. Significant structural change is required. The final shape awaits finalisation of standards and calibration. NAB is committed to a safer, stronger and more resilient banking system. 13

15 IMPORTANT NOTICE This presentation is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any particular investor. This presentation is directed at finance industry professionals and is for information purposes only. National Australia Bank Limited (ABN ) (NAB) makes no representation or warranty as to the accuracy of the information, including without limitation any forward looking statement or forecast, or certain information that has been sourced from third parties. Anyone proposing to rely on or use the information contained in this presentation should independently verify and check the accuracy, completeness, reliability and suitability of the information and should obtain independent and specific advice from appropriate professionals or experts. This presentation does not constitute an offer or invitation for the sale or purchase of securities or of any of the assets, business or undertaking described herein, nor does it form part of any prospectus or offering document relating to any securities of NAB. Distribution of this presentation may be restricted or prohibited by law. Recipients are required to inform themselves of, and comply with, all such restrictions or prohibitions and NAB does not accept liability to any person in relation thereto. This presentation is delivered to you on the basis that by accessing or reading this presentation, you confirm that you understand and agree to the contents of this important notice and that you are a person that may lawfully receive this presentation in accordance with laws applicable to you, including those of the jurisdiction in which you are located. This presentation does not constitute an offer of securities for sale in the United States, or to any person that is, or is acting for the account or benefit of, any U.S. person (as defined in Regulation S under the U.S. Securities Act of 1933 (Securities Act) (U.S. Person)), or in any other jurisdiction in which such an offer would be illegal. Securities may not be offered or sold in the United States or to, or for the account or benefit of, U.S. Persons without registration under the Securities Act or an exemption from registration. 14