Bank culture put profits before people, NAB CEO Andrew Thorburn concedes

NAB chief Andrew Thorburn blames short-termism, bonuses and a “profits-before-people” approach for the industry’s woes.

NAB CEO Andrew Thorburn at the House of Representatives Standing Committee on Economics hearing. Picture Kym Smith

National Australia Bank chief executive Andrew Thorburn has blamed short-termism, a bonus-driven culture and a “profits-before-people” approach for the industry’s woes, while warning that the global economy has passed its peak.

In his opening statement to the House economics committee, Mr Thorburn again apologised for NAB’s failure to display care and respect for its customers.

He blamed four significant changes in the industry over the last 30 years.

Firstly, the industry’s focus had shifted away from customers, leaving it open to the challenge of “profits before people”.

The planning horizon had moved from long-term to short-term, he said.

“Given the risks and nature of our business, we should be planning over a five to-10 year horizon, not just one to two years,” Mr Thorburn said.

The move from base pay to a greater proportion of incentive compensation also hadn’t been managed carefully enough, and banks had become bound by internal rules, policies, regulation and legacy systems, Mr Thorburn said

“This has led to inertia and, as a result, losing the local connections we previously had with customers when our people were more empowered,” the NAB chief said.

Mr Thorburn told the committee that more than 10 people had been terminated as a result of evidence heard by the financial services royal commission and investigated by the bank.

Over the last year, 1200 people had been questioned about compliance with NAB’s code of conduct.

All of those matters had been investigated, with 700 people having their variable pay cut.

A further 300 people had either been terminated or had left the bank.

Not all internal investigations had been completed.

Mr Thorburn said the royal commission had caused him to reflect on “why I do what I do”.

He said the right governance systems were in place, but beneath those systems there had been a drift away from “what we should have been, to what we are”.

The NAB chief invited customers who were aggrieved about their treatment by NAB to make direct contact. Like his ANZ counterpart Shayne Elliott, he disclosed a personal email address: [e-mail].

On Thursday, Mr Thorburn met with some customers who had not had the opportunity to appear before the royal commission. He said many of the cases were complex and had not been resolved for up to 20 years.

NAB had committed to review many of these cases.

Resolution, he said, was easier in standard cases involving the retail bank.

But business and farming cases often involved multiple entities, making a resolution much more difficult.

Mr Thorburn agreed that NAB had been “overbearing” and taken a legal or technical approach in some disputes.

“I’d like to step into that,” he said.

On the NAB introducer program highlighted in the royal commission, where third parties are paid commissions for introducing customers to the bank, the NAB boss agreed it was wrong to have paid $480,000 to an introducer.

He said the program had grown too fast, with the focus on volume instead of appropriate controls.

This had led to fraud committed by staff inside the bank as well as external third parties, with all relevant files handed over to the police.

The introducer program had been dramatically overhauled.

The number of introducers was now just over 1000, down from 8000 previously.

Mr Thorburn said the feedback from investors was that the core of NAB remained strong.

However, there was concern about the increasing cost of customer remediation and penalties.

Last week, NAB announced $314 million of further remediation costs, with Mr Thorburn revealing $200m of costs previously incurred.

“My view is the (the number) is what it needs to be,” he said.

“We have overcharged and we have to give it back.”

To suggestions that the bank’s profits remained too high, Mr Thorburn said the industry’s return on equity (RoE) had declined to 13-14 per cent, which remained a premium to its 10.5-11 per cent cost of capital.

The RoE was now less than Canadian banks, but it remained important for equity holders to support the industry.

Asked about criminal penalties for bankers, these were a matter for politicians to consider, the NAB boss said.

“If you had less laws but enforced them more rigorously and they were clearer, that would be a good outcome,” Mr Thorburn told the committee.

He did not disagree with Tim Wilson’s suggestion of increasing penalties.

But he warned against penalties that were “so severe” that they deterred banks from extending credit.

He said the bank moved on the most serious cases such as the “introducer” program.

“If it’s fraud, we immediately terminate people and hand files to the police,” Mr Thorburn said.

The NAB boss said the group had lifted the intensity of its reviews and governance of bad behaviour, and had added more resources to its efforts.

The bank said it was getting faster at remediating customers.

The global economy was growing, Mr Thorburn said, highlighting the US tax cuts, but he warned of headwinds particularly in Europe.

The chance of a global economic slowdown has gone up, he said, adding that he does not expect a global economic recession.

He warned of uncertainty over trade and geopolitical risk.

“What we don’t want is that disruption or risk causing a greater disruption in the cost of funding,” he said, adding that would affect the bank’s clients here in Australia.

Tim Wilson asked about the state of the housing market.

Mr Thorburn noted there was not just one housing market, saying his daughter was working in Swan Hill where houses were quite cheap.

Housing prices had risen strongly particularly in the east coast capitals, before falling slightly, meaning even if they fall “another 5 per cent” homeowners would likely still be ahead on the equity in their homes.

“We should be a bit more sanguine about the housing market, particularly in Melbourne and Sydney,” he said, adding that unemployment is low as evidenced by the 5 per cent jobless rate published yesterday.

Mr Thorburn also faced questions from Senator Matt Thistlethwaite about a customer of 46 years treated poorly by the bank as a result of issues arising out of the global financial crisis. The customer was in the hearing room.

The bank had broadly done a “very good job” of helping clients through the GFC and extending credit to them, but in some cases the bank had got it wrong, Mr Thorburn said.

“Can you understand why the world is frustrated with banking at the moment?” Mr Thistlethwaite asked.

“We haven’t treated customers well full stop. It’s not because of the GFC,” Mr Thorburn said.

He also explained that Australia’s mortgage market was different to the US because the banks kept mortgages on their books.

Mr Thistlethwaite indicated he was worried that the Trump administration reviewing the Dodd-Frank regulations. “I can’t keep up with the tweets,” he says. “I don’t run a bank there,” Mr Thorburn responded, saying it wasn’t his job to comment on developments in other countries.

Increasing regulation would not be the answer to Australia’s banking problems, Mr Thorburn told the inquiry. “Regulation isn’t the panacea,” he said.

Member for Brisbane Trevor Evans raised the question of competition during the hearing.

Business lending had shrunk as a proportion of NAB’s loan book. But housing lending has consolidated and about 85 per cent of all home loans are held by the major banks.

Mr Thorburn said there was still competition because customers were going to mortgage brokers, and fintechs were on the rise, suggesting that perhaps the banks were simply proving to be better competitors.

There is switching in the mortgage market, which is why NAB kept variable interest rates on hold when the other three banks recently pushed through out of cycle rate hikes, he told the inquiry.

NAB was growing its business lending book and now had almost 30 per cent of the market, he said.

Meanwhile, international investors in the bank had been surprised by the misconduct that had been revealed by the royal commission, Mr Thorburn said. Investors were reassessing the risk premiums they required, he said.