Wholesale Banking Performance Analysis

107 108 UK FSA Capital Comparison - Basel II ▸ Summarised below are details of current key differences as pertinent to the Group and identified by the ongoing Australian Bankers' Association (ABA) study "Comparison of Regulatory Capital Frameworks - APRA and FSA".1 Item RWA Treatment - Mortgages Interest Rate Risk in the Banking Book (IRRBB) Wealth Value of Business in Force at acquisition Estimated Final Dividend DTA (excluding DTA on the collective provision for doubtful debts) Eligible Deferred Fee Income Capitalised Expenses Investments in Non-Consolidated Controlled Entities UK Defined Benefit Pension Scheme Details of differences APRA requires Loss Given Default estimate for loans secured by mortgages to be a minimum of 20% compared to a 10% minimum under FSA rules. This results in lower RWA under FSA rules. APRA rules require the inclusion of IRRBB within Pillar 1 calculations. This is not required by the FSA and results in lower RWA under FSA rules. This amount represents the value of business in force (VBIF) at acquisition of MLC, which is an intangible asset. VBIF is deducted from Tier 1 capital under APRA guidelines, whereas under FSA rules, it is deducted from Total capital. The FSA requires dividends to be deducted from regulatory capital when declared and/or approved. APRA requires dividends to be deducted on an anticipated basis, which is partially offset by APRA making allowance for expected shares to be issued under a dividend re-investment plan. This difference results in higher capital under FSA rules. APRA requires Deferred Tax Assets (DTA) to be deducted from Tier 1 capital, except for any DTA associated with collective provisions which are eligible to be included in the General Reserve for Credit Losses. Under FSA rules, DTA are risk weighted at 100%. APRA requires certain deferred fee income to be included in Tier 1 capital. The FSA does not allow this deferred fee income to be included in Tier 1 capital, which results in lower capital under FSA rules. APRA requires a deduction from Tier 1 capital for up-front costs associated with a debt issuance. The FSA requires costs associated with debt issuance not used in the capital calculations to follow the accounting treatment. APRA requires Wealth Net Tangible Assets (NTA) to be deducted 50/50 from Tier 1 and Tier 2 capital. The FSA allows embedded value (including NTA) to be included in Tier 1 capital and deducted from Total capital under transitional rules to 31 December 2012 (when it will revert to a 50/50 deduction from Tier 1 and Tier 2). The scheme continues to be in deficit as at 31 March 2011. Under FSA rules, the bank's deficit reduction amount may be substituted for a defined benefit liability. No deficit reduction amounts are presently being paid, therefore the liability can be reversed from reserves (net of tax) and no liability is required to be substituted at this time. (1) The above comparison is based on public information on the FSA approach to calculating Tier 1. Some items cannot be quantified where the FSA may have entered into bi-lateral agreements on specific items, which are not generally in the public domain Impact on Bank's Tier 1 capital ratio if FSA rules applied Increase Increase Increase Increase Increase Decrease Increase Increase Increase National Australia Bank UK FSA Capital Comparison - Basel II Estimated Impact on NAB's capital position ▸ The following table illustrates the impact on the Group's capital position considering these key differences between APRA and UK FSA Basel II guidelines ▸ This reflects only a partial list of the factors requiring adjustment 31 March 2012 - APRA basis RWA treatment - Mortgages¹ IRRBB (RWA) Tier 1 Capital % 10.17% Total Capital % 11.52% 1.10% 1.24% 0.25% 0.28% Wealth Value of Business in Force (VBIF) at acquisition² 0.47% 0.00% Estimated final dividend (net of estimated reinvestment under DRP / BSP) 0.36% 0.36% DTA (excluding DTA on the collective provision for doubtful debts) 0.19% 0.19% Eligible deferred fee income (0.07%) (0.07%) Capitalised expenses³ 0.04% 0.04% Investments in non-consolidated controlled entities (net of intangible component) 0.27% 0.00% UK Defined Benefit Pension 0.03% 0.03% Total Adjustments 2.64% 2.07% 31 March 2012 - Normalised for UK FSA differences 12.81% 13.59% (1) RWA treatment for mortgages is based on APRA 20% loss given default (LGD) floor compared to FSA LGD floor of 10% aligned to the Basel II Framework (2) This ignores any potential accounting differences between IFRS and UK GAAP (3) Capitalised expenses associated with debt raisings only National Australia Bank

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