NAB CEO Ross McEwan sees Australia booming in COVID recovery

National Australia Bank CEO Ross McEwan meets his senior executive team during the coronavirus lockdown

National Australia Bank CEO Ross McEwan is unique among Australian bankers. He believes that this nation is headed for a boom. And that belief is causing NAB to keep afloat a large number of enterprises that are currently in deep trouble.

Before discussing the “McEwan boom” I need to alert NAB stakeholders that there is a danger for all banks should McEwan prove to be wrong.

McEwan’s boom scenario is based on a simple proposition: two major developed countries have emerged as the best places on earth to live – Australia and New Zealand.

Their performance in controlling COVID-19 is vastly superior to any other major country in the world apart from China, so this is where people will want to live and visit. Living in China under the current regime is a lot more hazardous than living in Australia or New Zealand.

McEwan says the first stage of greatly increased economic activity will come as the barriers at Australia’s domestic borders are lowered.

Australians spend more money on overseas tourism than that spent by inbound tourists, so next year when international travel is still restricted there will be a strong rise in national activity. In 2022, when international travel is made much easier, the “best country” status of Australia and New Zealand will boost tourism and the desire of people to migrate to Australia.

Australia has a series of infrastructure projects on the drawing board which will require large numbers of skilled and unskilled workers that are not available in Australia. Given our desirability status we will be able to restore and enhance our migration programs to fill these vacancies.

On its books NAB has a large number of enterprises that are dependent on overseas students or tourism and gain only marginal benefit from increased domestic activity. They will continue to suffer in 2021 and some will fail.

But a large number were very prosperous in former years and NAB hopes to nurse them through the current crisis so that

They are ready for the McEwan boom. So is he right?

How it might work

Our dominant source of international students and tourists is China and we don’t know whether in two years’ time Chinese will still be allowed to visit and study in Australia.

There is a better chance that people from Hong Kong with British passports will look to come here. On the other hand, people in both Europe and the US are feeling very disillusioned with what is happening in their countries. They look at Australia and New Zealand with great envy.

Victoria will need to go through the process of discovering how our industrial occupational health and safety rules were broken, causing so many deaths. That will cause community disruption but is necessary given that there could have been a Watergate-style cover-up.

Victoria’s systems will need to hold up as more virus infections are discovered but the recent string of low infections as given the southern state a good chance and boosted confidence both in Victoria and around the nation.

I have to agree with McEwan that when we compare Australia to other nations we have performed extremely well, so we have an opportunity that currently looks too good to be true.

In NAB’s official projections they use much more conventional GDP forecasts and they leave the boom to the CEO.

Bet your house

But I think there is a weakness in NAB’s base security structure that is duplicated in all major Australian banks. In one of the vulnerable areas of lending — office, retail tourism and leisure — NAB proudly says that only 6 per cent of its $35bn exposure is unsecured, with the vast majority fully secured.

NAB, like the other banks, does not differentiate between the security that comes from property owned by the enterprise and that where the family home has been pledged.

Indeed, in the vast majority of commercial small enterprise loans the family home has been an essential security component. But in the current environment where banks have nursed broken enterprises along, the bankers’ option of selling up the family home and putting the entrepreneurs on the street is one that will create enormous political and community backlash.

Family home security contributes to the low bad provisions that the banks have struck in their small enterprise loans. But I think it’s akin to a mirage and those family home securities are not going to be easy to exercise.

Australian banks have not sufficiently developed their systems to be able base a majority of their small enterprise lending on cash flow. As it now stands the smaller lenders are now setting the pace, including Judo and Airwallex.

The technology to do this is now fully available and the Australian banks will need to move much faster. And the whole process is going to be the subject of great debate, as the Commonwealth government mandates much faster creditor payments and so greatly speeds up the flow of cash in the economy. I believe that will be one of the great economic boosts to Australia and will actually support McEwan’s boom.