Given the huge inflow of deposits, NAB is now 80 per cent deposit-funded, so it’s less of an issue for the bank, but still one McEwan is mindful of amid a string of regional bank collapses in the US and the takeover of Credit Suisse by UBS.
The latest concerns in the US have centred on PacWest Bancorp, which has seen its shares tumble and announced a strategic review to assess options, including a sale. McEwan was courtside during the Global Financial Crisis and its fallout during his time at Royal Bank of Scotland, so his insights are certainly pertinent.
He says the speed with which banks in the US have been brought to their knees is the big difference this time round, as contagion gets hold of depositors.
“It took days and days and weeks and weeks and then you knew you had a real problem. Today, this happens digitally, online, no queue, money moves and that’s what has changed when you’re seeing what’s happening in the US,” McEwan told this column.
“If a bank is sensed to be weak people move very, very quickly, even though there’s a deposit guarantee up to a level.”
While Australian banks have tougher capital requirements and are well-capitalised, they do rely on global wholesale funding markets.
McEwan says NAB used to source about 30 per cent of its funding from wholesale markets, but the Covid-19 savings bonanza has seen that decline to 20 per cent.
“Less reliant but still a heavy reliance on the wholesale funding market and you need them open at the right price to get in and out of … People want to lend you money when things are going a little strange in banking over in the US. (They) want more for the funding, it becomes a risk premium.”
NAB is taking a cautious approach to its capital in the current slowing macroeconomic environment. The bank boosted its common equity tier one capital ratio to 12.21 per cent as at March 31, from 11.51 per cent six months earlier, as it prepares for rising levels of loan defaults and more pockets of stress across the economy.
Analysts quizzed McEwan on why the bank was holding higher levels of capital and when it may start to reconsider buying back its own shares again. NAB completed a $2.5bn buyback in the last half.
NAB’s financial chief Gary Lennon said the bank wanted to assess internal and external data over the next three months, before reassessing whether to restart any capital management plans.
“As we are now seeing some of those early signs of stress, and seeing how that does start to translate through over the next three months, is the trajectory … and we expect it to be manageable,” he added.
“It’s really just testing that, that’s the hypothesis that’s our view … we really just want to wait and see that the data that starts flowing through, say, over the next three months supports that proposition. That it doesn’t look like there’s a rapid deterioration.”
Part of that has to do with a lag between when rate hikes are announced and when they actually hit consumer’s mortgage repayments and then demand. That will also be exacerbated by the rolling off of mortgage customers on fixed-rate loans that will move to markedly higher variable rate mortgages.
NAB and its peers are attempting to keep close tabs on this transition, but so far customers are managing.
Airlie’s key man woes
Airlie’s mandate losses are continuing, with funds under management sliced in half since February to $4.5bn in April.
The wave of money leaving is linked to succession at Airlie – which is owned by Magellan Financial – as industry stalwart John Sevior steps down from the manager in June.
Sources told this column Hostplus’s decision to desert Airlie had something to do with the close relationship its investment chief Sam Sicilia has with Sevior.
Key man or woman risk can bring businesses unstuck, and Magellan is a company that is acutely aware of that, given the abrupt exits of former CEO Brett Cairns, and chairman and chief investment officer Hamish Douglass. Douglass’s departure was mired in controversy and followed a period of bad bets on US tech stocks.
The turbulence and huge mandate losses that followed that period should have been a wake-up call to Magellan around key man risk, and preparing well for key personnel changes or attempting to stem any fallout.
The challenge for new Magellan CEO David George is immense and it’s unclear whether the damage done to the company can be repaired or whether it may be swept aside if the fund manager is acquired or seeks out a merger.
At Airlie, Williams and the crew must be alert to the fact that profitability will be difficult to achieve as the fund’s scale declines. Then there is the issue of retaining other staff as the business shrinks in size.
Williams will be hoping that the bulk of the damage has been done and he can cauterise the remaining funds under management.
Across the funds management universe, rivals are watching the Hostplus transition flow to see where it lands.
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National Australia Bank’s chief Ross McEwan says the severe ructions in the US banking market this year will see banks here grappling with higher funding costs, given contagion risks remain elevated.