Scheme Meeting and General Meeting 27 January 2016 Address by Dr Ken Henry Chairman and Andrew Thorburn Group Chief Executive Officer National Australia Bank Good morning, ladies and gentlemen. My name is Ken Henry, and I am delighted to be here today for my first official meetings as Chairman of NAB. It is a great pleasure to welcome all those who are here in the room today, as well as those watching the meetings online, to consider the demerger of CYBG Group, our UK based banking business. I would like to introduce to you the people on the stage with me. Seated on my left, on your right, is our Group Chief Executive Officer & Managing Director, Andrew Thorburn. Next to Andrew is our Group Executive, Finance & Strategy, Craig Drummond. Seated on my right is our Company Secretary, Louise Thomson. Seated in the front row are the other directors whom I will ask to stand as I introduce them. Firstly, David Armstrong, then next to David is Danny Gilbert, Peeyush Gupta, Anne Loveridge and Jillian Segal. Two of our directors, Geraldine McBride and Anthony Yuen are unable to be with us today due to prior commitments overseas. They both send their apologies and are watching the webcast. Thank you all for taking the time to attend today and for reading the Scheme Booklet. The Booklet is big because the demerger and potential IPO are complex and NAB is obliged under the Corporations Act, by its regulators and by the Court to provide securityholders with a full explanation of what you are being asked to vote on - and the consequences of your decision. Equality of disclosure was also important we wanted to ensure that NAB shareholders received the same information on CYBG that prospective institutional investors receive under the proposed IPO. Today we are holding two separate meetings. At the first meeting, which I will refer to as the Scheme Meeting, we will ask ordinary shareholders to approve the Scheme of Arrangement to demerge CYBG Group, our UK 1
based banking business. The head entity of CYBG Group will be CYBG PLC. The terms of the Scheme of Arrangement are set out in Annexure A of the Scheme Booklet dated 7 December 2015 that was sent to ordinary shareholders and holders of NAB CPS, NAB CPS II and National Income Securities. The Scheme meeting is being held to comply with the requirements of section 411 of the Corporations Act, and the orders of the Supreme Court of Victoria made on 7 December which directed that a meeting of ordinary shareholders be convened for this purpose, and appointed me to chair the meeting. The sole resolution to be considered at the Scheme Meeting is to approve the Scheme of Arrangement through which we propose to effect the demerger. The second meeting is a General Meeting, to consider two resolutions. The first resolution is to approve a reduction of capital in NAB a technical requirement to implement the demerger. Holders of ordinary shares, NAB CPS, NAB CPS II and National Income Securities must approve this resolution in order for the demerger to proceed. The second resolution is to approve a reduction of capital in CYBG PLC. The purpose of that capital reduction is to create distributable reserves on the balance sheet of CYBG, to give it the flexibility to pay future dividends if appropriate, or to absorb any impairments in the value of its assets if necessary. Only holders of ordinary shares can vote on this second resolution at the General Meeting and the demerger is not conditional on this resolution being approved. Voting on all resolutions at the Scheme Meeting and General Meeting will be carried out by way of a poll, and Computershare will act as the independent returning officer. I remind those present that today s meetings are securityholder meetings and any questions should relate to the resolutions before the relevant meeting. Any such questions should be directed to me and I will ask the most appropriate person to respond, depending on the nature of the question. If you have a question relating to your personal affairs, please take advantage of the desks in the foyer where our experienced teams can assist you in the areas of NAB and CYBG investor relations, share registry enquiries, nabtrade and JB Were as well as general customer enquiries. I now formally open the Scheme Meeting. 2
The NAB Board recommends that securityholders support the demerger of our UK based banking business. We are proposing that 75 per cent of the new holding company, CYBG PLC, which will own NAB s Clydesdale and Yorkshire Bank operations, be distributed to NAB shareholders. Should securityholders approve this proposal, shareholders will receive one CYBG security for every four NAB shares they own. This means that you will own securities in two banking businesses. The NAB Board proposes an Initial Public Offering of the remaining 25 per cent of CYBG to institutional investors. As announced on 18 January this year, the final IPO price will be determined by the on-going book-build process and is expected to be announced on 2 February 2016. The NAB Board is of the view that a demerger is likely to enhance value for shareholders over the long term, and unanimously recommends that you vote in favour of the resolution before you today. The Independent Expert Grant Samuel has also concluded that the demerger is in the best interests of NAB shareholders. As securityholders in the company, the NAB Directors will vote in favour of the proposed resolutions in respect of their own securityholdings, and intend to hold the CYBG securities they receive under the demerger for at least 12 months. RATIONALE FOR THE DEMERGER NAB first indicated its intention to exit Clydesdale Bank in our 2014 Full Year results. This decision was driven by a number of factors. As a result of the global financial crisis, the UK economy experienced turbulence and a recession which impacted jobs and interest rates, the local housing market, the availability of credit and the liquidity of financial markets. It led to declining commercial property values, higher funding costs and challenging regulatory and political conditions. For UK banks, this manifested in financial challenges. In response, NAB conducted a strategic review, the outcome of which was to simplify Clydesdale Bank s business model to focus on retail operations and small and mediumsized enterprise business lending. At the same time, the UK retail banking sector, including Clydesdale Bank, faced conduct-related issues. 3
Clydesdale Bank has been a significant factor in NAB shareholder returns not being at the level that we have wanted, nor competitive with our Australian peers. We have examined a range of exit options, including a trade sale and a standalone partial or full IPO. In choosing the best exit option, we had to be assured of its merits measured against the probability of success, long-term value to shareholders and exposure to risk. We settled on the structure of a 75 per cent demerger to our shareholders with the remaining 25 per cent to be sold via an IPO to institutional investors. This demerger and IPO will allow acceleration of NAB s exit and presents the most certain outcome for NAB shareholders. The proposed IPO seeks to support the development of an active and liquid market in CYBG shares in the UK. The IPO also has the benefit of strengthening NAB s capital position, as the IPO proceeds will be remitted back to NAB. Importantly, the demerger allows NAB shareholders who choose to retain their CYBG securities to benefit from any improvement in the UK economy, and CYBG s strategy and performance going forward. A STANDALONE CYBG With more than 175 years of regional presence in Scotland and northern England, Clydesdale Bank is a leading mid-sized banking business in the UK. Clydesdale Bank s existing base of 2.8 million customers, serviced by 275 branches, positions it as the largest challenger to the UK s major high street banks. And improvements are occurring in the UK economy: real GDP growth is higher than in any of its European peers, at 3.0 per cent in 2014. In the three months to August last year, the UK s unemployment rate fell to a seven-year low of 5.4 per cent. Further, without competing priorities across the NAB Group, CYBG will be free to pursue a market position that better supports growth and shareholder return on its own. The NAB Board is of the view that Clydesdale Bank is now in a position to operate as a standalone banking group. We undertook a number of key steps to strengthen the business to enable this separation: 1. refocusing Clydesdale Bank on its core retail and SME franchises to improve returns; 4
2. injecting capital to strengthen Clydesdale Bank prior to any separation, with its Common Equity Tier 1 capital ratio above 13.0 per cent on a UK Prudential Regulation Authority basis; 3. reducing reliance on NAB for senior funding support and establishing standalone credit ratings; and 4. improving asset quality by transferring underperforming UK commercial real estate parcels to NAB which we have since largely sold down. An indemnity deed was also settled to provide capital protection to CYBG for certain historic conduct charges, up to a specified cap. We have repositioned the Clydesdale Bank s management team for a standalone business. Led by CEO David Duffy, the team is experienced, energetic and focused on its core customer segments. David and his team will have the flexibility to set strategic, capital allocation and dividend policies that best reflect the UK environment. NAB POST-DEMERGER Post-demerger, NAB will be focused on our Australian and New Zealand core businesses, which have historically delivered higher return on equity and capital generation than our overseas operations. The impact of the demerger on some of NAB s key reported metrics, on a 30 September 2015 pro-forma basis include - better asset quality, lower cost to income ratio, and higher ROE, the details of which can be found in the Scheme booklet, These fundamentals demonstrate that we are well-placed to deliver on our objective of delivering superior returns to our shareholders, and NAB s vision of becoming Australia and New Zealand s most respected bank. NEXT STEPS If the demerger is approved: Each NAB shareholder will retain their current NAB shareholding. As a shareholder you will receive one CYBG security for every four NAB shares that you own. 5
If you hold 2,000 or less NAB shares, you may elect to participate in the Sale Facility and receive cash instead. You may elect for that cash to be remitted either to you or as a tax deductible donation to ShareGift Australia, a registered charity. It is intended that CYBG will have a primary listing on the London Stock Exchange and also a listing on the Australian Securities Exchange. Conditional trading of CYBG Shares on the London Stock Exchange is expected to commence on 2 February and deferred settlement trading of CYBG CDIs on the Australian Securities Exchange is expected to commence on 3 February. I should note that the demerger is not conditional on a successful take-up of the proposed IPO by institutional investors. If the IPO does not proceed in full or in part, NAB will retain up to 25 per cent of CYBG with a view to divest the remaining stake as soon as market conditions allow. Ladies and gentlemen, the NAB Board believes this proposal will create two successful banking businesses that can move forward with confidence and focus on strengths in their own markets. As a shareholder, you will hold an interest in each company. We, the NAB Board, unanimously believe that this demerger is in the best interests of shareholders and recommend that you vote in favour of the demerger of CYBG from NAB. On behalf of the Board I thank NAB s executive leadership team, particularly Andrew Thorburn and Craig Drummond, for leading such a significant body of work with ferocious intent and vision. It has been a complex transaction. Andrew will now speak further to you on how NAB s Australia and New Zealand focus is the right strategy for shareholders, and for the bank. Thank you Ken and welcome to our shareholders, both in the room and via the web. Today is an important day for NAB. It is the start of a new era for both Clydesdale Bank, and indeed for NAB here in Australia. It will allow Clydesdale Bank to focus on its home market, with oversight and direction from a local board and management team. It will also enable Clydesdale Bank to leverage their unique position in the UK to deliver returns for shareholders. For NAB the demerger will enable us to pursue our own focused strategy in our core markets in Australia and New Zealand, as we drive towards our vision of becoming Australia and New Zealand s most respected bank. 6
At our AGM last month in Perth, I outlined our strategy to succeed. Notwithstanding the recent decline and volatility in markets, our strategy is the right one for us to pursue on behalf of our shareholders. Our NAB strategy is focused on our home markets, and on delivering a great customer experience, particularly in key customer segments where we have capability and where we see growth. We are focused on achieving this through our people and sound risk and financial management. Given the detail covered at the AGM in December, and the detail in the comprehensive scheme booklet, I would like to add some comments to what the Chairman has said, and a brief outline of why we believe this transaction makes sense. WHY THE DEMERGER? Over the last 18 months we have progressively clarified our strategy as the market, regulation and competition have evolved. A key part of this has been refocusing back on Australia and New Zealand, and on deploying capital carefully. As a result of this strategic decision, we have made significant progress toward this goal, having: Divested our US bank, Great Western Bank. Reduced the size of our Specialized Group Assets from $4.1 billion to $2.1 billion. Sold a 1.2 billion pound parcel of higher risk loans from our UK Commercial Real Estate portfolio. Partnered with a leading Japanese insurer, Nippon Life, in announcing the sale of 80% of our life insurance business, worth $2.4 billion. Entered into a life reinsurance arrangement with a major global reinsurer. And we have also successfully completed the largest rights issue in Australian corporate history, and we thank shareholders for your support in this important move. As a result, Clydesdale Bank is now NAB s only significant standalone business operating outside our core Australian and New Zealand markets. THE DEMERGER SEPARATING CYBG This demerger positions NAB shareholders well for growth here in Australia and New Zealand. It allows each business to focus on improving returns for their respective shareholders. 7
Importantly, the Conduct Indemnity Deed provides shareholders with certainty surrounding exposure relating to Clydesdale Bank s historic Conduct Matters. After extensive assessment, we believe the demerger/ipo is the best exit option for NAB, balancing all key considerations including price, timing and control of the exit. Specifically for Clydesdale Bank, the demerger will enable CEO David Duffy, together with his Board and management team, to pursue their own strategic objectives and attract capital for their own priorities. I believe this business is now stronger, match-fit and ready for the next step of becoming a standalone bank in the UK market. POST DEMERGER IMPACT ON NAB Post the demerger, NAB s strategy will be to continue to deliver on our core markets where we have knowledge and expertise. We will focus on key segments such as mortgage, debt free, micro, small and medium business customers, and we will continue to maintain an unrelenting focus on delivering a great customer experience. This will include developing leading technology, selective expansion in Asia, and bringing new products to market quickly. We will continue to build the capability of our people and our culture which is centred around our five NAB values: Passion for customers, Will to win, Be Bold, Respect for people, Do the right thing. We will continue to maintain a strong balance sheet with a key focus on risk management, all with the goal of producing superior, and sustainable, returns for shareholders. I know this demerger is a big decision, but I believe it is the right decision and is integral to our NAB strategy. It will enable us to execute with less distractions, complexity and with greater precision. Your support for today s resolutions will enable NAB to move forward with greater certainty and clarity. Thank you to the NAB board, in particular our Chairman, Ken Henry and his predecessor Michael Chaney for their support of this demerger. Thank you to Clydesdale Bank CEO, David Duffy, his management team and his board. We wish them all the best as they prioritise and focus on achieving a strong future for CYBG customers and shareholders. 8
I would also like to thank the NAB team, led by our Group Executive Finance and Strategy Craig Drummond, who have worked hard on this transaction. This has been a very complex deal and I am proud of the disciplined approach that we have taken. Finally, thank you to our NAB shareholders. Your ongoing loyalty and support is recognised and appreciated. Your support today will enable NAB to become a stronger bank and to take an important step of allowing us to focus on our vision of becoming the most respected bank in Australia and New Zealand. Thank you. 9