National Australia Bank : 2021 First Quarter Pillar 3 Report

800 Bourke Street Docklands VIC 3008 AUSTRALIAwww.nabgroup.com

Tuesday, 16 February 2021

ASX ANNOUNCEMENT

NAB 2021 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 330Public 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
2021
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

Introduction

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 theBanking Act 1959(Cth). This document has been prepared in accordance with the quarterly reporting requirements of APRA Prudential Standard APS 330Public Disclosure, which requires disclosure of information to the market to contribute to the transparency of financial markets and to enhance market discipline. 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 2020.

Credit Risk	Operational Risk	Non-traded Market Risk	Traded Market Risk
Advanced	Advanced	Internal Model	Internal Model
Internal Ratings-based	Measurement	Approach (IMA)	Approach (IMA) and
Approach (IRB)	Approach (AMA)	standard method
Scope of Application

APRA measures the Group's 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 120Securitisation. 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.

On 31 August 2020, NAB announced that it had agreed to sell MLC Wealth, comprising its advice, platforms, superannuation & investments and asset management businesses, to IOOF Holdings Ltd. On 16 December 2020, NAB announced that it had agreed to sell BNZ Life Insurance business to Partners Life. The subsidiaries subject to these agreements consist of both Level 2 and Level 3 subsidiaries, which remain part of the Group until completion of the transactions.

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

Capital

Capital

Capital Adequacy [APS 330 paragraph 49 and Attachment C, Table 3a - f]

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

Credit risk

Subject to IRB approach

As at

31 Dec 20 30 Sep 20 $m $m

Corporate (including Small and Medium Enterprises (SME))	130,096	132,922
Sovereign	2,010	2,143
Bank	8,257	8,856
Residential mortgage	108,268	106,269
Qualifying revolving retail	2,491	2,524
Retail SME	6,136	5,983
Other retail	2,241	2,281
Total IRB approach	259,499	260,978
Specialised lending	58,072	59,465
Subject to standardised approach
Residential mortgage	1,272	1,296
Corporate	4,443	4,355
Other	426	418
Total standardised approach	6,141	6,069
Other
Securitisation exposures	5,047	5,237
Credit value adjustment	12,238	12,703
Central counterparty default fund contribution guarantee	76	83
Other(1)	9,973	9,456
Total other	27,334	27,479
Total credit risk	351,046	353,991
Market risk	14,587	12,678
Operational risk	50,432	49,993
Interest rate risk in the banking book	9,746	8,485
Total RWA	425,811	425,147

(1)

Other mainly consists of RWA for other assets, claims and exposures and RWA overlay adjustments for regulatory prescribed methodology requirements. Other includes RWA of $54m for equity exposures (30 September 2020: nil).

The following tables provide the capital ratios and leverage ratio.

Capital ratiosCommon Equity Tier 1 Tier 1

Total

17.2 16.6

As at

31 Dec 20 30 Sep 20

%

%Leverage ratio

31 Dec 20 $m

Tier 1 capital Total exposures	57,905 976,034	56,131 960,575 56,189 51,761 964,854 988,245
Leverage ratio (%)	5.93%	5.84% 5.82% 5.24%

As at

30 Sep 20 $m

30 Jun 20 $m

31 Mar 20 $m

Credit Risk

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 4Securitisation.

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 20

3 months ended 31 Dec 20

On-balance sheet

Exposure type

$mNon-market related off-balance sheet $mMarket related off-balance sheet $m

Total exposure

Average total exposure

$m

$m

Subject to IRB approachCorporate (including SME) Sovereign Bank Residential mortgage Qualifying revolving retail Retail SME Other retail	157,998 84,895 23,412 1,509 10,310 266,305 110,865 33,033
95,319 1,795 13,751 21,214 338,681 51,777 -390,457 4,197 5,268 -9,465 12,180 4,819 -17,000 2,131 1,055 -3,186
Total IRB approach	631,720 151,118 47,473 830,311
Specialised lending	56,320 7,607 1,657 65,584
Subject to standardised approachResidential mortgage Corporate Other	1,546 4,782 1,075 117 688 2 -1,663 5,53411,004 -1,077
Total standardised approach	7,403 807 5,534 13,744
Total exposure (EaD)	695,443 159,532 54,664 909,639

266,213

102,519

34,008

388,615

9,429

17,026

3,207821,017 66,101

1,685 11,029 1,06113,775 900,893

As at 30 Sep 20

3 months ended 30 Sep 20

On-balance sheet

Exposure type

$mNon-market related off-balance sheet $mMarket related off-balance sheet $m

Total exposure

Average total exposure

$m

$m

Subject to IRB approachCorporate (including SME) Sovereign

159,620

83,412

79,999

817

Bank

22,562

1,604

Residential mortgage Qualifying revolving retail Retail SME

336,540

50,233

3,957

5,436

12,400

4,652

Other retail

Total IRB approach Specialised lending

2,141617,219 56,175

1,087147,241 8,538

23,089 13,357 10,816 - - - -47,262 1,905

266,121267,872

94,17384,896

34,98236,698

386,773387,617

9,3939,554

17,05217,143

3,2283,347

811,722 807,127

66,618 67,006

Subject to standardised approachResidential mortgage

Corporate

Other

Total standardised approach Total exposure (EaD)

1,589 4,900 1,0447,533 680,927

117 690 2809 156,588

- 5,464 -5,464 54,631

1,7061,732

11,05410,982

1,0461,046

13,806 13,760

892,146 887,893

Credit Risk

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

The following table provides information on asset quality.

Exposure type

Subject to IRB approachCorporate (including SME) Residential mortgage Qualifying revolving retail Retail SME

Other retail

Total IRB approach Specialised lending

As at 31 Dec 20

Impaired facilities

$m

1,048

319 -

86

41,457 215

Subject to standardised approachResidential mortgage

Corporate

Total standardised approach Total

Additional regulatory specific provisions

Total regulatory specific provisions

11 213 1,685

Past due facilities ≥90 days

$m

284 3,632 11 272 444,243 63

34 -34 4,340

General reserve for credit losses

Specific provision for credit impairment $m

525

109

-

60

3

697

93

4 8

12 8021,638

As at 30 Sep 20

Exposure type

Subject to IRB approachCorporate (including SME) Residential mortgage Qualifying revolving retail Retail SME

Other retail

Total IRB approach Specialised lending

Subject to standardised approachResidential mortgage

Corporate

Total standardised approach Total

Additional regulatory specific provisions

Total regulatory specific provisions

Impaired facilities

$m

1,228

314 -

86

41,632 221

11 213 1,866

Past due facilities ≥90 days

3 months ended

31 Dec 20

Specific credit impairment charge $m

Net write-offs

$m

(18) 17

11 14

21 20

6 6

9 10

29 67

(3) (1)

- -- 26

3 months ended

30 Sep 20

- -- 66

Specific provision for credit impairment $m

$mSpecific credit impairment charge $m

Net write-offs

$m

284 3,530

562

69 93

110 - 9

27 - 34 24

268 58 7 9

58 3 14 14

4,167 58

733 95

29 1

124 149

8 7

30 4,255

4 8

12 8401,648

- 11 133

- -- 156

2,488

General reserve for credit losses

3,888

Securitisation

Securitisation

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

There were no assets sold by the Group to securitisation special purpose vehicles in the three months ended 31 December 2020.

3 months ended 30 Sep 20

Group	Group	Group	Recognised
originated	originated	originated	gain or loss
capital relief	funding only	internal	on sale
RMBS
Underlying asset	$m	$m	$m	$m
Residential mortgage	-	-	18,000	-

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 20

As at 30 Sep 20

Securitisation exposure typeOn-balance sheet $mOff-balance sheet $m

Total

$mOn-balance sheet $mOff-balance sheet $m

Total

$m

Liquidity facilities Warehouse facilities Securities Derivatives	255 11,387 8,002 - 1,2681,523 6,42217,809 -8,002 9898
Total	19,644 7,788 27,432

170

1,5291,699

11,745

6,62618,371

8,123

-8,123

-20,038

106106

8,261 28,299

The Group had $903 million of derivative exposures held in the trading book as at 31 December 2020 (30 September 2020: $728 million).

Liquidity Coverage Ratio

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 147% for the three months ended 31 December 2020 as a result of higher high-quality liquid assets (HQLA) and lower net cash outflows. The increase in HQLA was primarily the result of increased funding, mainly from deposit inflows, which has resulted in increased holdings of Australian government and semi-government securities.

Lower net cash outflows was driven by increased cash inflows from performing loans combined with lower cash outflows from wholesale funding and other contingent funding obligations, partly offset by increased outflows related to derivative exposures and other collateral requirements.

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

3 months ended

unweighted value (average)

31 Dec 20	30 Sep 20
62 data points	64 data points
Total Total	Total Total

weighted value (average)

unweighted value (average)weighted value (average)

$m(1)

$m

$m(1)

$m

Liquid assets, of which:

205,270 199,275

1 2 3

High-quality liquid assets (HQLA)(2)(3)

Alternative liquid assets (ALA)(3)

Reserve Bank of New Zealand (RBNZ) securities(2)(3)

1,6332,164

138,751125,687

64,88671,424

Cash outflows

4

5

6

7

Retail deposits and deposits from small business customers of which: stable deposits of which: less stable deposits Unsecured wholesale funding

230,927

23,629

219,269 22,772

167,053

101,088 5,054

118,181 17,718

78,275

162,871 80,901

8

of which: operational deposits (all counterparties) and deposits in networks for cooperative banks(4)

9

10

of which: non-operational deposits (all counterparties)(4)of which: unsecured debt

70,717 17,680

79,918 50,985

12,236 12,236

11

12

Secured wholesale funding(3)Additional requirements

2,1622,924

13

of which: outflows related to derivatives exposures and other collateral requirements

14

15

of which: outflows related to loss of funding on debt products of which: credit and liquidity facilities

168,335

188,776 42,845

23,802 23,802

-

-

19,618

164,974 19,043

16

1718

Other contractual funding obligations Other contingent funding obligationsTotal cash outflows

1,314

622

1,612 986

58,273

3,998

65,830 4,545

153,128 154,973

Cash inflows

19 20 212223 24 25

Secured lending

Inflows from fully performing exposures Other cash inflows

Total cash inflowsTotal liquid assets Total net cash outflows Liquidity Coverage Ratio (%)

86,181 20,554 1,041107,776

1,543 11,149 1,04113,733

78,078 1,723

17,076 9,638

689 689

95,843 12,050

205,270 199,275

139,395 142,923

147%

139%

• (1)Unweighted inflow and outflow values are outstanding balances maturing or callable within 30 days.

• (2)Weighted values exclude New Zealand dollar (NZD) liquid asset holdings in excess of NZD LCR of 100%, reflecting liquidity transferability considerations. The amount excluded during both the three months to 31 December 2020 and 30 September 2020 was on average $6 billion.

• (3)APS 330 does not require unweighted amounts to be reported for these items.

• (4)Comparative amounts have been restated to reflect a reclassification of certain cash outflows from operational deposits into non-operational deposits with no impact to overall net cash outflows reported. Amounts previously reported for operational deposits were $70,937m unweighted and $19,969m weighted, and for non-operational deposits $79,698m unweighted and $48,696m weighted.

Glossary

Glossary

Term

Additional regulatory specific provisions	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 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	Additional Tier 1 capital comprises high quality components of capital that satisfy the following essential characteristics: - provide a permanent and unrestricted commitment of funds - 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-based Approach (IRB)	The process used to estimate credit risk through the use of internally developed models to assess potential credit losses using the outputs from the probability of default, loss given default and exposure at default models.
Advanced Measurement Approach (AMA)	The risk estimation process used for operational risk, combining internally developed risk estimation processes with an integrated risk management process, embedded within the business with loss event management.
Alternative liquid assets (ALA)	Assets that qualify for inclusion in the numerator of the Liquidity Coverage Ratio in jurisdictions where there is insufficient supply of 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 and Term Funding Facility provided by the Reserve Bank of Australia to ADIs are treated as ALAs in the Liquidity Coverage Ratio.
APRA	Australian Prudential Regulation Authority.
APS	Prudential Standards issued by APRA applicable to ADIs.
Banking book	Exposures not contained in the trading book.
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 risk-weighted assets.
Committed Liquidity Facility (CLF)	A facility provided by the Reserve Bank of Australia to certain ADIs to assist them in meeting the Basel III liquidity requirements.
Common Equity Tier 1 (CET1) capital	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, retained profits plus certain other items as defined in APS 111Capital Adequacy: Measurement of Capital.
Corporate (including SME)	Corporate (including SME) consists of corporations, partnerships or proprietorships not elsewhere classified and includes non-banking entities held by banks.
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 (EFC)	Under the standardised approach, EFC is the amount of cash collateral, netting and eligible bonds and equities. Under the Internal Ratings-based approach, EFC is limited to the collateral items detailed in APS 112Capital Adequacy: Standardised Approach to Credit Risk. Recognition of EFC is subject to the minimum conditions detailed in APS 112.
Exposure at default (EaD)	An estimate of the credit exposure amount outstanding if an obligor defaults. EaD is presented net of eligible financial collateral.
Extended Licensed Entity	The ADI and any APRA approved subsidiaries assessed as effectively part of a single 'stand-alone' entity, as defined in APS 222Associations with Related Entities.
General Reserve for Credit Losses (GRCL)	An estimate of the reasonable and prudent expected credit losses over the remaining life of the portfolio of non-defaulted assets, as set out under APS 220Credit Quality. The GRCL is calculated as a collective provision for credit impairment, excluding securitisation exposures and provisions for facilities in default but for which no loss is expected (which are reported as additional regulatory specific provisions). Where the GRCL (regulatory reserve) is greater than the 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 (HQLA)	Consists primarily of cash, deposits with central banks, Australian government and semi-government securities and securities issued by foreign sovereigns as defined in APS 210Liquidity.
Impaired facilities	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 - 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) - Non-traded Market Risk	The approach used in the assessment of non-traded market risk. The Group uses, under approval from APRA, the IMA to calculate interest rate risk in the banking book for all transactions in the banking book.
Internal Model Approach (IMA) - Traded Market Risk	The approach used in the assessment of traded market risk. The Group uses, under approval from APRA, the IMA to calculate general market risk for all transactions in the trading book other than those covered by the standardised approach.
Leverage ratio	Tier 1 capital divided by exposures as defined by APS 110Capital Adequacy. It is a simple, non-risk based supplementary measure 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.
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. For eligible COVID-19 payment deferrals granted in respect of otherwise performing loans, the counting of

Description

Glossary

Term

Probability of default (PD)	days past due is stopped when the repayment deferral is granted in accordance with APRA guidance. Past due facilities do not include impaired facilities. 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.
RMBS	Residential mortgage-backed securities.
Securitisation exposures	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 - 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 - securities: holding of debt securities issued by securitisation vehicles - derivatives: derivatives provided to securitisation vehicles, other than for credit risk mitigation purposes.
SME	Small and medium sized enterprises.
Specific provision for credit impairment	The provision assessed on an individual basis in accordance with Australian Accounting Standard AASB 9Financial Instruments.
Standardised approach	An alternative approach to the assessment of credit risk whereby an ADI uses external rating agencies to assist in assessing credit risk and/or the application of specific values provided by regulators to determine risk-weighted assets.
Standard method	The standard method for market risk applies supervisory risk weights to positions arising from trading activities.
Term Funding Facility (TFF)	A facility provided by the Reserve Bank of Australia to certain ADIs to support lending to Australian businesses.
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.
Trading book	Positions in financial instruments, including derivative products and other off-balance sheet instruments, that are held either with a trading intent or to hedge other elements of the trading book.
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.

Description