His lender overwhelmingly dominates business banking, the market that everyone else is determined to get a slice of – including the two big banking gorillas, Commonwealth and Westpac.
Irvine doesn’t just want to play defence on business. “We want to grow it,” he tells The Australian.
However the force Irvine faces is gravity: As a rule, being the largest in a defined market makes it harder to meaningfully get bigger.
The battle for small and medium-sized business customers is intense. Banks are flocking there given margins and returns on business loans are much higher than mortgages. Even throughout Australia’s cycle of interest rate hikes, this segment has been growing at a much faster pace than home lending.
However, the segment is volatile and comes with much higher risk, specifically with large loans going bad more often.
To manage these risks, you need a small army of specialist bankers that have a deeper relationship with business customers. This is a significant investment, NAB added another 150 business bankers during the past six months to hold its ground.
This hasn’t deterred nearly every other bank and a string of highly-focused operators including Judo and a cashed-up Macquarie from going after the business market.
To get a sense of the prize on offer, in the past six months Australia’s small business lending market is up 3 per cent, medium size-business up 4 per cent and large business – mostly companies outside the top 100 – is growing a whopping 12.7 per cent.
That growth is easily outpacing a flattish mortgage market.
When Irvine took charge from Ross McEwan at the start of last year, the new chief executive set himself three goals: Firstly, to remain number one and grow in business banking. Second, tackle NAB’s historical weakness with it underweight in deposits.
Finally, Irvine wanted to direct more home loan sales through NAB’s own channels and rely less on costly mortgage brokers.
In business banking, NAB is holding the line. In fact, it grew market share slightly in the six months to the end of March, particularly as it outpaced the market growth in the mid-sized end of banking.
It was able to do this with a modest five basis point loss in its business net interest margin in the past six months, suggesting it’s resisting using discounting to keep customers onside. By comparison, rival Westpac this week posted a double-digit loss in business margins.
Irvine acknowledges the competitive intensity on business banking has continued to heat up.
“Everyone else wants what we have, and we’re not going to give it up without one hell of a fight,” says Irvine, who built his career in business banking in Canada before joining NAB.
He says NAB’s longer-term share in business banking since he first came to Australia in late has remained broadly steady, despite a parade of new entrants coming into the market.
Irvine’s challenge is real – how to grow the top line while everyone else is attacking your bottom line. NAB has almost 28 per cent share of the small to mid-sized business market and a 21 per cent share of the big business market, ahead of the next biggest player, Commonwealth Bank at 19 per cent.
NAB is expecting a pick-up in business lending with the June quarter traditionally its strongest period, while the prospect of further official interest rate cuts from later this month will add to momentum.
Top line
Irvine was speaking as NAB on Wednesday posted a 1 per cent increase in closely-watched cash earnings, which came at $3.58bn for the past six months. The result was helped by more volatile treasury earnings on the back of global trading stresses, while lower overall bad debts helped profit. The dividend increased 1c to 85c a share from a year earlier.
Growing the business banking top line is important for NAB’s own performance. Business lending generates 46 per cent of earnings, with the retail bank accounting for 16 per cent.
For Westpac, retail banking makes up 31 per cent of group earnings.
In the March half business cash earnings were up 1.4 per cent, where personal, or retail banking, was down nearly 7 per cent on margin squeeze.
Irvine is making progress in his other targeted areas. For the first time in years, NAB has claimed the top spot for business deposits. Some 84 per cent of its lending book is now funded by deposits. This is up from 70 per cent four years ago, although this is partly a factor of slower overall growth in the mortgage market.
The NAB boss also says it’s early days on generating more loan sales through his branches and digital channels. There was a 25 per cent increase in own channel mortgage drawdowns over the past year. This is the first time in more than six years NAB has achieved growth. However, six in every 10 new home loans are still sold through brokers.
‘Tailwinds’
It’s not all smooth sailing for Irvine, he had a shock departure of his chief financial officer last month who jump to Westpac, where there was a vacancy for the top finance role. Irvine also edged out Rachel Slade, once a potential chief executive candidate, who he had tapped to run the business banking operations. Irvine made a captain’s pick of putting in Andrew Auerbach, a former top business banker Irvine worked with in Canada.
NAB exposure to business means it faces a longer tail in lending losses, with a lag effect of businesses feeling the squeeze from cashflow pressure. Non-performing loans remain dominated by defaults, and are expected to drift higher, but Irvine is confident they are well-secured by underlying assets and many impacted businesses will get back on track.
Irvine says NAB’s relationship approach means it stands by its customers during tough times, and this approach means it minimise losses over the cycle.
NAB’s economists are tipping the RBA will go much harder than many expect on interest rate cuts. They see the cash rate falling to a “more neutral” 2.85 per cent by next year, including a 50 basis point cut this month, given Trump’s trade uncertainty.
Whether the RBA gets there with the full 1 per cent or not, Irvine said it is good the central bank has the “firepower to go hard if they need to protect the domestic economy”.
The banking boss has called the turning point for the domestic economy. “I think households and businesses should start to feel that they’re coming out of what has been a really difficult couple of years.”
NAB shares staged a strong recovery under the tenure of former boss McEwan, who drove a turnaround with a steady hand. The recent management upheavals and perennial questions about its earnings momentum has kept NAB’s shares under pressure over the past year. Going into Wednesday’s result, NAB had underperformed its big four rivals on both a one-year measure and over the past three months.
However, with the Irvine holding the line, particularly on NAB’s most important business, there is some early encouragement. If the entire market grows, NAB can grow with it. If it can do this at a faster rate then that would be a bonus.
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