National Australia Bank : 2020 First Quarter Pillar 3 Report

800 Bourke Street

Docklands VIC 3008

AUSTRALIA

www.nabgroup.com

Thursday, 13 February 2020

ASX ANNOUNCEMENT

NAB 2020 First Quarter Pillar 3 Report

National Australia Bank Limited (NAB) today released its First Quarter Pillar 3 Report, as required under the Australian Prudential Regulation Authority Prudential Standard APS 330 Public Disclosure.

The report is attached to this announcement and available at: http://www.nab.com.au/about-us/shareholder-centre/regulatory-disclosures

For further information:

Media

Mark Alexander	Jessica Forrest
M: [phone]	M: [phone]

Investor Relations

Sally Mihell	Natalie Coombe
M: [phone]	M: [phone]

The release of this announcement was authorised by Gary Lennon, Group Chief Financial Officer.

National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686

	Pillar 3 report
	2020
Table of Contents
Section 1
Introduction	1
Section 2
Capital	2
Section 3
Credit Risk	3
Section 4
Securitisation	5
Section 5
Liquidity Coverage Ratio	6
Section 6
Glossary	7

Pillar 3 report

2020

Introduction

Section 1

Introduction

National Australia Bank Limited (NAB) is an Authorised Deposit-taking Institution (ADI) subject to regulation by the Australian Prudential Regulation Authority (APRA) under the authority of the Banking Act 1959(Cth). This document has been prepared in accordance with the quarterly reporting requirements of APRA Prudential Standard APS 330 Public Disclosure, which requires disclosure of information to the market relating to capital adequacy and risk management practices. APS 330 was established to implement the third pillar of the Basel Committee on Banking Supervision's framework for bank capital adequacy. In simple terms, the framework consists of three mutually reinforcing pillars.

Pillar 1	Pillar 2	Pillar 3
Minimum capital requirement	Supervisory review process	Market discipline
Minimum requirements for the level and quality	Management's responsibility for capital adequacy to	Disclosure to the market of qualitative and quantitative
of capital	support risks beyond the minimum requirements,	aspects of risk management, capital adequacy and various
	including an Internal Capital Adequacy Assessment	risk metrics
	Process (ICAAP)

This document provides information about risk exposures, capital adequacy and liquidity of the Group, being NAB and its controlled entities.

Amounts are presented in Australian dollars unless otherwise stated, and have been rounded to the nearest million dollars ($m) except where indicated.

Capital Adequacy Methodologies

The Group uses the following approaches to measure capital adequacy as at 31 December 2019.

Credit Risk	Operational Risk	Non-traded Market Risk	Traded Market Risk
Advanced	Advanced	Internal Model	Standardised
Internal Ratings-Based	Measurement	Approach (IMA)	and Internal Model
Approach (IRB)	Approach (AMA)		Approach (IMA)

Scope of Application

APRA measures capital adequacy by assessing financial strength at three levels as illustrated below.

Level 1 comprises NAB and its subsidiary entities approved by APRA as part of the Extended Licensed Entity.

Level 2 comprises NAB and the entities it controls, excluding superannuation and funds management entities, insurance subsidiaries and securitisation special purpose vehicles to which assets have been transferred in accordance with the requirements for regulatory capital relief in APS 120 Securitisation. Level 2 controlled entities include Bank of New Zealand and other financial entities such as broking, wealth advisory and leasing companies.

Level 3 comprises the consolidation of NAB and all of its subsidiaries.

This report applies to the Level 2 Group, headed by NAB, unless otherwise stated.

1

Capital

Section 2

Pillar 3 report

2020

Capital

Capital Adequacy [APS 330 Attachment C, Table 3a - f]

The following tables provide the risk-weighted assets (RWA) for each risk type.

		As at
		31 Dec 19	30 Sep 19
		$m	$m
	Credit risk
Subject to IRB approach
	Corporate (including Small and Medium Enterprises (SME))	126,792	127,049
	Sovereign	1,408	1,407
	Bank	9,888	10,430
	Residential mortgage	106,552	106,209
	Qualifying revolving retail	3,342	3,494
	Retail SME	6,380	6,467
	Other retail	3,116	3,104
	Total IRB approach	257,478	258,160
Specialised lending	58,602	58,320
Subject to standardised approach
	Residential mortgage	1,495	1,560
	Corporate	4,806	4,798
	Other	475	472
	Total standardised approach	6,776	6,830
Other
	Securitisation exposures	4,964	4,865
	Credit Value Adjustment	12,956	15,006
	Central counterparty default fund contribution guarantee	131	306
	Other(1)	9,084	8,159
	Total other	27,135	28,336
Total credit risk	349,991	351,646
Market risk	9,327	10,023
Operational risk	49,934	47,698
Interest rate risk in the banking book		6,404
5,885
	Total RWA	415,137	415,771

1. Other includesnon-lending assets and RWA overlay adjustments for regulatory prescribed methodology requirements.

The following tables provide the capital ratios and leverage ratio.

	As at
	31 Dec 19	30 Sep 19
Capital ratios	%	%
Common Equity Tier 1	10.6	10.4
Tier 1	12.7	12.4
Total	15.3	14.7

		As at
Leverage ratio	31 Dec 19	30 Sep 19	30 Jun 19	31 Mar 19
Tier 1 capital ($m)	52,761	51,388	50,409	50,185
Total exposures ($m)	937,042	925,973	927,846	915,138
Leverage ratio (%)	5.6%	5.5%	5.4%	5.5%

2

Pillar 3 report

2020

Credit Risk

Section 3

Credit Risk

Information presented in this section excludes credit risk information in respect of certain securitisation exposures and non- lending assets. In particular, it excludes information on third party securitisation exposures and own asset securitisations with capital relief which have separate disclosures in Section 4 Securitisation.

Exposure at default throughout this section represents credit risk exposures net of offsets for eligible financial collateral.

Credit Risk Exposures [APS 330 Attachment C, Table 4a]

The following table provides a breakdown of credit risk exposures between on and off-balance sheet. The table also includes average credit risk exposure, which is the simple average of the credit risk exposure at the beginning and end of the reporting period.

				As at 31 Dec 19
			On-balance	Non-market	Market	Total
			sheet exposure	related off-	related off-	exposure
				balance sheet	balance sheet
Exposure type	$m	$m	$m	$m
	Subject to IRB approach
Corporate (including SME)	159,816	78,277	22,725	260,818
Sovereign	60,493	491	4,445	65,429
Bank	25,459	2,925	10,702	39,086
Residential mortgage	339,240	48,143	-	387,383
Qualifying revolving retail	5,280	5,210	-	10,490
Retail SME	13,078	4,316	-	17,394
Other retail	2,860	1,144	-	4,004
Total IRB approach	606,226	140,506	37,872	784,604
Specialised lending	57,032	8,424	1,451	66,907
Subject to standardised approach
Residential mortgage	1,832	130	-	1,962
Corporate	5,181	557	5,607	11,345
Other	1,141	2	-	1,143
	Total standardised approach	8,154	689	5,607	14,450
Total exposure (EaD)	671,412	149,619	44,930	865,961
				As at 30 Sep 19
			On-balance	Non-market	Market	Total
			sheet exposure	related off-	related off-	exposure
				balance sheet	balance sheet
Exposure type	$m	$m	$m	$m
Subject to IRB approach
Corporate (including SME)	160,879	76,500	24,609	261,988
Sovereign	55,072	394	5,199	60,665
Bank	24,600	3,743	10,990	39,333
Residential mortgage	338,277	47,741	-	386,018
Qualifying revolving retail	5,170	5,370	-	10,540
Retail SME	13,385	4,196	-	17,581
Other retail	2,924	1,129	-	4,053
Total IRB approach	600,307	139,073	40,798	780,178
Specialised lending	57,027	7,840	1,643	66,510
Subject to standardised approach
Residential mortgage	1,917	133	-	2,050
Corporate	5,028	532	7,286	12,846
Other	1,120	1	-	1,121
Total standardised approach	8,065	666	7,286	16,017
Total exposures (EaD)	665,399	147,579	49,727	862,705

• months ended

31 Dec 19

Average total exposure

$m

261,403

63,048

39,209

386,700

10,515

17,488

4,029

782,392

66,709

2,006

12,096

1,132

15,234

864,335

• months ended

30 Sep 19

Average total exposure

$m

256,782

61,397

38,990

387,260

10,675

17,709

4,210

777,023

67,279

2,074

12,371

1,130

15,575

859,877

3

Credit Risk

Credit Provisions and Losses [APS 330 Attachment C, Table 4b - c]

The following table provides information on asset quality.

			As at 31 Dec 19
		Impaired	Past due	Specific
		facilities	facilities ≥90	provision for
			days	credit
					impairment
Exposure type	$m	$m	$m
Subject to IRB approach
Corporate (including SME)	1,325	307		534
Bank	-	-		-
Residential mortgage	363	2,967		114
Qualifying revolving retail	-	39		-
Retail SME	87	195		51
Other retail	4	56		2
Total IRB approach	1,779	3,564		701
Specialised lending	163	69		63
Subject to standardised approach
Residential mortgage	9	30		4
Corporate	2	2		8
Total standardised approach	11	32		12
Total	1,953	3,665		776
	Additional regulatory specific provisions				1,282
Total regulatory specific provisions				2,058
	General reserve for credit losses				2,091
			As at 30 Sep 19
		Impaired	Past due	Specific
		facilities	facilities ≥90	provision for
			days	credit
					impairment
Exposure type	$m	$m	$m
Subject to IRB approach
Corporate (including SME)	1,389	247		562
Residential mortgage	333	2,981		99
Qualifying revolving retail	-	42		-
Retail SME	81	185		49
Other retail	5	58		3
Total IRB approach	1,808	3,513		713
Specialised lending	156	59		59
Subject to standardised approach
Residential mortgage	7	29		4
Corporate	1	2		6
Total standardised approach	8	31		10
Total	1,972	3,603		782
Additional regulatory specific provisions				1,256
Total regulatory specific provisions				2,038
General reserve for credit losses				2,104

Pillar 3 report

2020

3 months ended As at 31 Dec 19

Specific Net write-offs credit

impairment charge

$m$m

4574

1. (2)

2118

3833

1212

2424

138159

• 1

--

2-

• -

148160

3 months ended As at 30 Sep 19

Specific Net write-offs credit

impairment charge

$m$m

6830

2518

4839

1817

2529

184133

• 1

--

-1

• 1

187135

4

Pillar 3 report

2020

Securitisation

Section 4

Securitisation

Recent Securitisation Activity [APS 330 Attachment C, Table 5a]

There were no assets sold by the Group to securitisation special purpose vehicles in each of the three months ended 31 December 2019 or 30 September 2019.

Securitisation Exposures Retained or Purchased [APS 330 Attachment C, Table 5b]

The following table provides the amount of securitisation exposures held in the banking book, broken down between on and off- balance sheet exposures.

		As at 31 Dec 19
	On-balance	Off-balance	Total
	sheet	sheet
Securitisation exposure type	$m	$m	$m
Liquidity facilities	115	1,996	2,111
Warehouse facilities	10,267	3,931	14,198
Securities	9,435	-	9,435
Derivatives	-	103	103
Total	19,817	6,030	25,847

	As at 30 Sep 19
On-balance	Off-balance	Total
sheet	sheet
$m	$m	$m
113	2,183	2,296
10,196	3,411	13,607
9,355	-	9,355
-	114	114
19,664	5,708	25,372

The Group had $547 million of derivative exposures held in the trading book subject to IMA under APS 116 Capital Adequacy: Market Riskas at 31 December 2019 (30 September 2019: $485 million).

5

Liquidity Coverage Ratio

Section 5

Pillar 3 report

2020

Liquidity Coverage Ratio

The Liquidity Coverage Ratio (LCR) presented in the disclosure template below is based on a simple average of daily LCR outcomes excluding non-business days.

The Group's LCR increased to 129% for the three months ended 31 December 2019. Average liquid assets have increased from the prior quarter with a marginal decrease in net cash outflows. NAB adopted changes in credit rating agency criteria which lowered the modelled liquidity risk exposure in the event of a three-notch downgrade of NAB's long-term credit rating. This was the primary driver of the reduction in net cash outflows and was partially offset by additional outflows associated with the Group's deposit portfolio.

Liquidity Coverage Ratio Disclosure Template [APS 330 Attachment F, Table 20]

				3 months ended
			31 Dec 19	30 Sep 19
			63 data points	66 data points
			Total	Total	Total	Total
			unweighted	weighted	unweighted	weighted
			value	value	value	value
			(average)	(average)	(average)	(average)
			$m(1)	$m	$m(1)	$m
	Liquid assets, of which:		146,050		143,382
1	High-quality liquid assets (HQLA)(2)	n/a	90,726	n/a	87,967
2	Alternative liquid assets (ALA)	n/a	52,055	n/a	52,048
3	Reserve Bank of New Zealand securities(2)	n/a	3,269	n/a	3,367
Cash outflows
4	Retail deposits and deposits from small business customers	201,966	24,065	195,686	23,394
5	of which: stable deposits	61,274	3,064	59,646	2,982
6	of which: less stable deposits	140,692	21,001	136,040	20,412
7	Unsecured wholesale funding	131,055	66,280	128,840	64,529
8	of which: operational deposits (all counterparties) and deposits in networks	56,047	15,579	54,995	15,064
for cooperative banks
9	of which: non-operational deposits (all counterparties)	62,575	38,268	61,954	37,574
10	of which: unsecured debt	12,433	12,433	11,891	11,891
11	Secured wholesale funding	n/a	1,589	n/a	1,155
12	Additional requirements	167,579	30,122	171,033	33,457
13	of which: outflows related to derivatives exposures and other collateral	14,564	14,564	18,220	18,220
requirements
14	of which: outflows related to loss of funding on debt products	-	-	-	-
15	of which: credit and liquidity facilities	153,015	15,558	152,813	15,237
16	Other contractual funding obligations			1,273	801
1,157	638
17	Other contingent funding obligations	71,377	4,879	71,438	4,849
18	Total cash outflows	n/a	127,573	n/a	128,185
Cash inflows
19	Secured lending	70,782	2,126	65,162	1,342
20	Inflows from fully performing exposures			21,243	12,306
19,624	11,433
21	Other cash inflows	1,008	1,008	583	583
22	Total cash inflows	91,414	14,567	86,988	14,231
	23	Total liquid assets		146,050		143,382
24	Total net cash outflows		113,006		113,954
25	Liquidity Coverage Ratio (%)		129%		126%

1. Unweighted inflow and outflow values are outstanding balances maturing or callable within 30 days.
2. Weighted values are calculated after applying caps to the New Zealand dollar (NZD) liquid asset holdings in excess of NZD LCR of 100%.

6

Pillar 3 report

2020

Glossary

Section 6

Glossary

Term	Description
Additional regulatory specific	In line with APRA's July 2017 guidance "Provisions for regulatory purposes and AASB 9 Financial Instruments", regulatory specific
provisions include collective provisions for facilities in Stage 2 with identified deterioration (that do not meet the two exception
provisions
clauses per the APRA guidance), and Stage 3 in default. All other facilities are classified as general reserve for credit losses.
	Additional Tier 1 capital comprises high quality components of capital that satisfy the following essential characteristics:
	- provide a permanent and unrestricted commitment of funds
Additional Tier 1 capital	- are freely available to absorb losses
	- rank behind the claims of depositors and other more senior creditors in the event of winding up of the issuer
	- provide for fully discretionary capital distributions.
ADI	Authorised Deposit-taking Institution.
Advanced Internal Ratings-	The process used to estimate credit risk through the use of internally developed models to assess potential credit losses using the
Based approach (IRB)	outputs from the probability of default, loss given default and exposure at default models.
Advanced Measurement	The risk estimation process used for operational risk, combining internally developed risk estimation processes with an integrated
Approach (AMA)	risk management process, embedded within the business with loss event management.
	Assets that qualify for inclusion in the numerator of the Liquidity Coverage Ratio in jurisdictions where there is insufficient supply of
Alternative Liquid Assets (ALA)	high-quality liquid assets in the domestic currency to meet the aggregate demand of banks with significant exposure in the domestic
currency in the Liquidity Coverage Ratio framework. The committed liquidity facility provided by the Reserve Bank of Australia to
	ADIs is treated as an ALA in the Liquidity Coverage Ratio.
APRA	Australian Prudential Regulation Authority.
APS	Prudential Standards issued by APRA applicable to ADIs.
Central Counterparty (CCP)	A clearing house which interposes itself, directly or indirectly, between counterparties to contracts traded in one or more financial
markets, thereby insuring the future performance of open contracts.
CET1 capital ratio	CET1 capital divided by RWA.
Committed Liquidity Facility	A facility provided by the Reserve Bank of Australia to certain ADIs to assist them in meeting the Basel III liquidity requirements.
(CLF)
Common Equity Tier 1 (CET1)	The highest quality component of capital. It is subordinated to all other elements of funding, absorbs losses as and when they occur,
has full flexibility of dividend payments and has no maturity date. It is predominately comprised of paid-up ordinary share capital,
capital
retained profits plus certain other items as defined in APS 111 Capital Adequacy: Measurement of Capital.
	Credit derivatives include single-name credit default and certain total return swaps, cash funded credit linked notes and first-to-
Credit derivatives	default and second-to-default credit derivative basket products. ADIs may also recognise many more complex credit derivatives that
	do not fall into the list above, that have been approved by APRA.
Credit Value Adjustment (CVA)	A capital charge to reflect potential mark-to-market losses due to counterparty migration risk for bilateral over-the-counter derivative
contracts.
Default fund	Clearing members' funded or unfunded contributions towards, or underwriting of, a central counterparty's mutualised loss sharing
arrangements.
Eligible Financial Collateral	Under the standardised approach, EFC is the amount of cash collateral, netting and eligible bonds and equities. Under the IRB
approach, EFC is limited to the collateral items detailed in APS 112 Capital Adequacy: Standardised Approach to Credit Risk.
(EFC)
Recognition of EFC is subject to the minimum conditions detailed in APS 112.
Exposure at Default (EaD)	An estimate of the credit exposure amount an ADI may be exposed consequent to default of an obligor. EaD is presented net of
eligible financial collateral.
Extended Licensed Entity	The ADI and any APRA approved subsidiary entities assessed as effectively part of a single 'stand-alone' entity, as defined in APS
222Associations with Related Entities.
	An estimate of the reasonable and prudent expected credit losses over the remaining life of the portfolio of non-defaulted assets, as
General Reserve for Credit	set out under APS 220 Credit Quality. The GRCL is calculated as a collective provision for credit impairment, excluding
securitisation exposures and provision on default no loss assets. Where the GRCL (regulatory reserve) is greater than the
Losses (GRCL)
accounting provision, the difference is covered with an additional top-up, created through an appropriation of retained profits to a
	non-distributable reserve.
Group	NAB and its controlled entities.
High-quality Liquid Assets	Consists primarily of cash, deposits with central banks, Australian semi-government and Commonwealth government securities and
(HQLA)	securities issued by foreign sovereigns as defined in APS 210 Liquidity.
	Impaired facilities consist of:
	- retail loans (excluding unsecured portfolio managed facilities) which are contractually 90 days past due with insufficient security to
	cover principal and interest
Impaired facilities	- unsecured portfolio managed facilities that are 180 days past due (if not written off)
	- non-retail loans which are contractually past due and / or sufficient doubt exists about the ability to collect principal and interest in a
	timely manner
	- off-balance sheet credit exposures where current circumstances indicate that losses may be incurred.

Internal Model Approach (IMA) - The approach used in the assessment of non-traded market risk. The Group uses, under approval from APRA, the IMA to calculate

Non-traded Market Riskinterest rate risk in the banking book for all transactions in the banking book.

Internal Model Approach (IMA) - The approach used in the assessment of traded market risk. The Group uses, under approval from APRA, the IMA to calculate

Traded Market Risk	general market risk for all transactions in the trading book other than those covered by the standardised approach.
	NAB and the entities it controls excluding superannuation and funds management entities, insurance subsidiaries and securitisation
Level 2 Group	special purpose vehicles to which assets have been transferred in accordance with the requirements for regulatory capital relief in
	APS 120Securitisation.
	Tier 1 capital divided by exposures as defined by APS 110 Capital Adequacy.It is a simple, non-risk based supplementary measure
Leverage ratio	to supplement the RWA based capital requirements. Exposures include on-balance sheet exposures, derivative exposures,
	securities financing transaction exposures and other off-balance sheet exposures.
Liquidity Coverage Ratio (LCR)	A metric that measures the adequacy of high-quality liquid assets available to meet net cash outflows over a 30-day period during a
severe liquidity stress scenario.
Loss Given Default (LGD)	An estimate of the expected severity of loss for a credit exposure following a default event. Regulatory LGDs reflect a stressed
economic condition at the time of default.
NAB	National Australia Bank Limited ABN 12 004 044 937.

7

Glossary

Pillar 3 report

2020

Term	Description
Net write-offs	Write-offs, net of recoveries.
Past due facilities ≥ 90 days	Well-secured assets that are more than 90 days past due and portfolio managed facilities that are not well secured and between 90
and 180 days past due.
Probability of Default (PD)	An estimate of the likelihood of a customer defaulting or not repaying their borrowings and other obligations in the next 12 months.
Qualifying revolving retail	Revolving exposures to individuals less than $100,000, unsecured and unconditionally cancellable by the Group. Only Australian
retail credit cards qualify for this asset class.
Risk-weighted Assets (RWA)	A quantitative measure of risk required by the APRA risk-based capital adequacy framework, covering credit risk for on and off-
balance sheet exposures, market risk, operational risk and interest rate risk in the banking book.
	Securitisation exposures include the following exposure types:
	- liquidity facilities: facilities provided to securitisation vehicles for the primary purpose of funding any timing mismatches between
	receipts of funds on underlying exposures and payments on securities issued by the securitisation vehicle or to cover the inability of
	the securitisation vehicle to roll-over securities due to market disruption
Securitisation exposures	- warehouse facilities: lending facilities provided to securitisation vehicles for the financing of exposures in a pool. These may be on
	a temporary basis pending the issue of securities or on an on-going basis
	- credit enhancements: protection provided against credit losses to parties holding a securitisation exposure
	- securities: holding of debt securities issued by securitisation vehicles
	- derivatives: derivatives provided to securitisation vehicles, other than credit derivatives.
SME	Small and medium sized enterprises.
Specific provision for credit	The provision assessed on an individual basis in accordance with Australian Accounting Standard AASB 9 Financial Instruments.
impairment
	An alternative approach to the assessment of credit, operational and traded market risk whereby an ADI uses external rating
Standardised approach	agencies to assist in assessing credit risk and/or the application of specific values provided by regulators to determine risk-weighted
	assets.
Tier 1 capital	Tier 1 capital comprises CET1 capital and instruments that meet the criteria for inclusion as Additional Tier 1 capital set out in APS
111Capital Adequacy: Measurement of Capital.
Tier 1 capital ratio	Tier 1 capital divided by risk-weighted assets.
Tier 2 capital	Tier 2 capital includes other components of capital that, to varying degrees, fall short of the quality of Tier 1 capital but nonetheless
contribute to the overall strength of an ADI and its capacity to absorb losses.
Total capital	The sum of Tier 1 capital and Tier 2 capital.
Total capital ratio	Total capital divided by risk-weighted assets.
Write-offs	A reduction in the carrying amount of loans and advances at amortised cost and fair value where there is no reasonable expectation
of recovery of a portion or the entire exposure.

8