Rivals are starting to build a bridge over NAB’s moat
There’s no doubt the new battleground in Australian banking has shifted to small-to-mid sized business, with each of the big four now planting their flag: they are determined to target the market NAB has largely had to itself for decades. They’re throwing everything to attacking NAB’s fortress – hiring more business bankers, deploying more capital into the space, and prepared to use pricing as a lever. (Banks regularly blame others for discounting at the same time insisting they are the ones being disciplined).
Banks are chasing business lending for three reasons. The loans are more complicated than mortgages, and that often means the profit margins are higher. The specialist nature means smaller players and non-bank lenders don’t chase it as aggressively. At the same time, growth in business lending has been running at a much faster rate – 9 per cent than housing’s 6 per cent – and this is likely to continue for the next few years.
However, there are two major downsides. The nature of business lending comes with more risk, which means the rate of lending losses is often higher than mortgages, particularly at the tail end of an economic downturn.
And compared to mortgages, business lending consumes much higher levels of capital generated by the bank. In periods of higher growth, there’s less surplus funds, which means less left over for shareholders in the form of dividends.
NAB has a 21.7 per cent share of the business banking market. CBA is nearby at around 19 per cent and Westpac is a little further behind at just over 16 per cent and ANZ at 15 per cent. However, the rate of change is significant.
NAB’s market share has increased slightly over the past year (up from 21.5 per cent) while notching up lending growth of 5.8 per cent. Both CBA and Westpac have been growing twice as fast and are rapidly closing the gap. Westpac’s numbers this week show it is paying for that growth through profit margins, suggesting its been pulling the discounting lever.
NAB chief executive Andrew Irvine says he doesn’t just plan to defend business banking, he intends to grow his position even further.
“We know competitors are coming into this space, and competitive intensity is increasing, but we’ve got strong relationships, and we know this business well,” Irvine says.
“To be increasing market share in a highly competitive environment and maintain a strong margin performance at the same time, shows a business that’s executing well”.
Some 70 per cent of NAB’s business loan growth is to existing customers.
“Obviously, we know those customers. Those customers are looking to expand, and we’re here to battle but also we’re open for business as a bank,” Irvine says.
‘Negative jaws’
Irvine was speaking as NAB posted a $7.1bn cash profit for the year to end-September, mostly flat on the same time last year. Revenue for the year was up 4.3 per cent, although costs were up 4.6 per cent, including a one-off $130m charge for historical underpayments.
This gave it negative jaws, although NAB’s second half posted the strongest revenue momentum in two years, which also suggests the economy is finally picking up after this year’s round of interest rate cuts.
Underscoring the demand for capital as business lending grows, NAB’s full year dividend which was up just 1c to $1.70 a share, although the second half dividend was flat at 85c. The underwhelming dividend and steady-as-it-goes earnings performance and worry about capital cushion available, were partly behind NAB’s sharp share price fall on Thursday.
NAB shares ended the session down 3.3 per cent, trimming gains that had seen the bank up 20 per cent so far this calendar year.
With nearly half of his earnings coming from business and private banking, Irvine can’t afford to lose momentum.
Irvine made a tough call on this front earlier this year, edging out business banking boss Rachel Slade from the role and putting in his trusted executive Andrew Auerbach. Irvine previously working with Auerbach in banking back in Canada. This remains Irvine’s most significant executive appointment to date and will be closely watched.
For Irvine, there’s plenty at stake. As a career business banker, he doesn’t want it to be on his watch that NAB loses leadership, in a market it has dominated for decades.
However, this risk for the bank boss is while he is throwing everything at defending his lead in business banking, he takes his eye off the ball in areas where he is weakest: retail banking.
NAB has the smallest share among the majors and is drifting further behind, particularly given ANZ is in the process of absorbing Suncorp Bank’s nearly 1.2 million customers. As well as providing the engine room of low-risk mortgages, retail banking is important for gathering deposits – critical for providing cheap funding. NAB has lifted deposit funding, which is now running at 84 per cent of the lending book.
Irvine insists there’s plenty of focus on his retail bank and points to his commitment to lift the proportion of loans sold directly by the bank compared to costly mortgage brokers. However, NAB’s overall mortgage growth is lagging behind the broader market.
The level of competition in business banking is only a good thing. Small to mid-sized businesses previously had limited options when it came to securing funds to grow. But investors are wary: When a race is on, Australian banks have a habit of also moving up the risk curve. That’s all well, until the economy turns.
Wings clipped
Irvine was awarded 92 per cent of his targeted bonus for the past year, taking home $5.62m in total remuneration. This was up sharply from $2.98m a year earlier, although that reflected only a part-year in the CEO role (Irvine took charge in April 2024). The reason he missed the full 100 per cent bonus was for missing his return on equity target. NAB’s ROE target was 11.5 per cent; they achieved 11.3 per cent – a near miss.
NAB’s board, led by chairman Phil Chronican, signed off on the bonus payments – a significant signal given claims about Irvine’s management style, including drinking at lunches, raised by a fund manager earlier this year.
The claims surfaced when Irvine was on annual leave and discussed at an informal board meeting. Irvine and his management team had already been receiving executive mentoring – not uncommon for first-year chief executives – although the board did provide feedback to Irvine about drinking at client events. According to NAB’s annual report, Irvine’s performance was assessed as “achieved”, including on individual conduct and demonstration of NAB’s values. The board noted Irvine showed “growth and maturity in the role while maintaining momentum on strategic initiatives”.
Still, the level of executive turnover under Irvine has been high, and this will be one to watch in the coming year. The CEO has lost his chief financial officer Nathan Goonan (to Westpac) and replaced his business banking head Rachel Slade. More recently, chief legal officer Sharon Cook has flagged her retirement. Turnover often follows a new CEO appointment, but for NAB, stability will be critical, particularly around business banking.
Meanwhile, NAB’s executives had bonuses clawed back for three regulatory failures: a $15.5m Federal Court penalty for failing to respond to hardship notices; an ATO administrative penalty for tax reporting failures; and a hefty $130m remediation charge for historical underpayments of staff. NAB’s annual report said the bonus hits were applied to current and former executives directly involved. However, the bank’s board declined to disclose who was penalised or by how much. This raises the question: were the clawbacks material or merely symbolic?
johnstone@theaustralian.com.au
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National Australia Bank’s lead in business banking looks comfortable until you realise rivals Commonwealth Bank and Westpac are growing twice as fast and starting to close the gap.