NAB invests $1.5bn to get back to basics

Andrew Thorburn will persist with his plan to transform NAB by investing an extra $1.5bn over three years.

NAB chief executive Andrew Thorburn. Picture: Hollie Adams

Andrew Thorburn has vowed to persist with his plan to transform National Australia Bank by investing an extra $1.5 billion over three years, even if it comes at the cost of slower revenue growth.

The NAB chief yesterday unveiled an interim cash profit of $2.76bn, down 16 per cent from a year ago, amid concerns of a weaker revenue outlook and suggestions that the restructure unveiled last November might not yield the expected benefits.

Mr Thorburn played down the concerns. “The outlook is certainly difficult, with the economy, competition, regulation and the royal commission, and trying to accelerate rapid change,” he told The Australian.

“But I think we have to do it and I’m so pleased we’ve started.

“We need to zoom up and see this as a three to five-year exercise, not just three to five months, and if revenue growth is a bit slower, then so be it — we won’t be cutting back on the (extra) investment.”

NAB was the only bank of the big four to finish lower yesterday, down 19c at $29.39, after hitting an intraday low of $29.09.

ANZ, Commonwealth Bank and Westpac all firmed by about 0.7 per cent.

NAB interim cash earnings $ bn

UBS analyst Jon Mott said in a note that underlying revenue trends at NAB were “soft and are deteriorating”.

“With a weaker revenue outlook, the benefits of the large restructuring may be less than NAB anticipates,” he said.

NAB’s aggressive plan is to invest an extra $500 million a year over the next three years to simplify the bank and achieve more than $1bn in cost savings.

As part of the process, the bank will halve its product line from 600 to 300, and further whittle down the number beyond 2020, as the switch to automated ­processes and digital delivery ­accelerates.

Mr Thorburn is aiming to eliminate 6000 roles and create up to 2000 new jobs with specialist skills in the new economy.

Expenses are expected to grow by 5-8 per cent this year, excluding restructuring costs and large one-off expenses, and then remain broadly flat over 2019 and 2020.

The expense line surged 25 per cent in the first half, or 5.4 per cent excluding restructuring costs, mainly due to increased investment. NAB booked $755m of restructuring costs for the half, including $540m for redundancies and project management.

About 1050 full-time employees had left the bank by the end of April, as the bank collapses the number of layers between the CEO and frontline staff to seven.

NAB hired 93 new staff on the way to the targeted 2000.

art work for NAB share price

While the bank’s result was broadly in line with expectations, concern rippled through the market over the lower-than-expected, 0.7 per cent increase in half-on-half revenue.

NAB also noted that funding cost pressures were emerging, and if conditions persisted the net interest margin would be eroded by 2-3 basis points in the second half.

Announcing ANZ’s interim result on Monday, chief executive Shayne Elliott said revenue pressures had intensified, partly because of frontline staff becoming more cautious due to concerns about responsible lending aired in the royal commission.

Mr Thorburn agreed this could be one of the unintended consequences of the royal commission.

“Everything (in the royal commission) is high intensity and exaggerated,” he said. “People don’t want to make decisions but we don’t them to become timid; we have to fight against that.”

NAB, he said, had a good approach to mortgage lending, and the need to properly verify income and expenses. The bank was also a “disciplined” lender to its engine room of small to medium-sized businesses, where it was growing at 5 per cent compared to 2 per cent for the wider banking system.

“I don’t think we’re going to back off because of scrutiny or noise,” Mr Thorburn said. “If we believe what we’re doing — and we do — then we will continue to lend to our clients based on their strength, their cash flow and the principles we’ve held dear for ­decades.”

On top of the royal commission, the industry has also had to absorb the review of CBA’s culture and risk frameworks released by regulator APRA on Monday. Large banks have to conduct a self-assessment against the report’s 35 recommendations.

Mr Thorburn said the board had examined the report at its pre-result meeting on Tuesday.

“We briefed the board and went through the executive summary,” Mr Thorburn said.

“I spent some time (on Tuesday) with our leaders, particularly our chief risk officer because we want to go through a process of basically saying: ‘If we insert NAB where it says CBA, would that be us and what do we need to do to improve?’

“I think we need to really take things like this and learn, and not reject them. I think this is the way we’re going to get better, and culture is so crucial.

“And that report, which I think is balanced and fairly written, really points to cultural aspects that we need to learn from as well.”

NAB finished the half with 10.2 per cent of common-equity tier- one capital, and will achieve APRA’s unquestionably strong benchmark of 10 per cent “in an orderly manner” by 2020.

Cash return on equity slumped 260 basis points to 11.4 per cent due to higher capital requirements and restructuring costs.