Performance Ratio

The interest margin expresses the difference between the interest generated from investments and interest expenses. This is a good indicator of how well their investment decisions are comparing to the cost of their funds. NAB had an interest margin of 1.87% in 2006 and 1.76% in 2007. This decrease is minimal and when considered in conjunction with the 12.2% increase in NAB’s Net interest income from 2006 to 2007 it suggest a significant increase in earning assets. This has been driven “continued strong growth in

lending along with growth in customer deposits”. NAB would desire their interest margin to increase as it reflects the performance of the company’s investments however they would be pleased with the sizeable increase in their net interest income. Declining interest margins were not unique to Australia in the UK “Interest margins in the major banks in the UK declined from 2.49% in December 2006 to 2.38% in June 2007”.

(NAB 2007 Annual Financial Report pg2)

(http://www.kpmg.com.au/Portals/0/MajorsYearEnd2007-Commentary.pdf

page 5)

Net margin is the ratio of net profits to revenues that shows how much of the companies revenue eventuates into a profit. An increasing net margin is desirable as it increases the profitability of the company which pushes up the value of a company’s share price. NAB had a net margin of 15.86% in 2006 and 15.43%% in 2007. A fall in net margin is unfortunate for NAB. Factors that contributed to the fall “Total liabilities at September 30, 2007 increased by 17.1% to $534,749 million from $456,813 million at September 30, 2006”. NAB’s increase in debt offset their profits and decreased their margins. The bank also experienced an increase in their tax expenses “Income tax expense of $2,255 million in 2007, was $121 million or 5.7% higher than 2006”

and a sizeable increase of “$184 million or 30.4% higher than 2006” in their provisions for doubtful debts.

(NAB 2007 Annual Financial Report pg2)

Asset Utilization is a ratio that measures how well a company has invested in earning assets. It is desirable for a company to have a high asset utilization ratio because it means the earning assets that have been invested in provide high returns relative to their value. NAB had an Asset Utilization ratio of 5.66% in 2006 to 5.86% in 2007. An increase is positive for NAB as they improving their ability to obtain high returns from their investments.

Return on assets ratio is an indication of how well a company’s assets generate profit and more specifically how profitable a company is relative to its total assets. NAB had a return on assets ratio of 0.898% in 2006 and 0.905% in 2007. This shows that not only is NAB experiencing asset growth the revenue generated is increasing as NAB seeks to reduce its cost to income ratios. “Through efficiency and productivity initiative, comparing the full year, NAB’s cost to income fell from 51.1% to 46%.” Many financial regulators believe that return on assets is the best measure of a firm’s efficiency

(http://www.nabgroup.com/vgnmedia/downld/ASXAnnouncement_NAB2007FullYearProfit_20071109b.pdf page 2)

The leverage multiplier is a ratio that expresses how hard each unit of a firm’s capital has to work to support their assets. Because of the nature of the banking environment and having to mis-match long-term assets with short-term debt banks are highly geared with high levels of debt to capital and higher leverage multipliers than other non banks. NAB had a leverage multiplier of 13.29 times in 2006 and 15.14% in 2007. A higher leverage multiplier for a given return on assets means a greater return on equity but leaves the company more open to the risk of fluctuations in the cost of funds to the bank. The banks need the help of financial leverage through high leverage multipliers to help bring their return on equity up to the levels of non-financial intermediaries to keep attracting shareholder capital.

(Hogan chapter 3 page 86)

Return on equity is a ratio that expresses how much profit is realized relative to the amount of funds a company has available for dividends and investment. NAB had a return on equity ratio of 11.93% in 2006 and 13.7% in 2007. This is desirable for NAB as it means for a given level of equity the firm is earning greater profit. The rise will attract more shareholder capital as the firm is more likely to pay dividends with high levels of equity.

Liquidity risk ratio expresses a firm’s liquid assets relative to its deposits. This shows the liquid assets the firm has