NAB warns of signs of stress for business customers

NAB business bank boss Andrew Irvine has warned of growing stress in parts of the national economy as shoppers pull back from discretionary spending.

The boss of National Australia Bank’s business lending operation has warned of growing stress in parts of the national economy, with Sydney and Melbourne tracking worse than the rest of the country as shoppers pull back from discretionary spending.

NAB business and private banking group executive Andrew Irvine said the bank was seeing “emerging pain”, with sectors exposed to rising interest rates performing worst.

Mr Irvine said while NAB’s business bank had performed well in its latest set of results, posting a $2.7bn profit, the dynamics had clearly shifted.

“We are starting to see pockets of hardship emerging among consumers and what that means is that those consumers start to pull back from discretionary spend,” he said.

“I think we’re starting to see a move from restaurant spend to grocery and then within grocery a little bit of movement of spend from branded goods to private label goods, which are generally cheaper.”

The Reserve Bank has lifted the cash rate 11 times since April 2022, from a low of 0.1 per cent to 3.85 per cent in May.

Mr Irvine said Western Australia’s economy was still performing well, supported by high earnings from mining, energy and agriculture.

But Sydney and Melbourne were “a bit tight” after a reduction in house prices and fall in consumer spending.

NAB’s business bank has assembled a list of at-risk clients, but Mr Irvine said it was a small part of the total customer book.

The bank recorded $230m of growth in collective provisions in its latest set of results, accounting for the impact of house price declines and business lending.

NAB recorded $43m in specific provisions against four large individual impaired exposures.

Several banks have been seriously stung by a string of home builders falling over.

But Mr Irvine said NAB’s book was “still performing very, very well”.

“We haven’t seen any large failures of note; doesn’t mean they won’t happen,” he said.

“We have been keeping a keen eye on our book. But you know, so far, I think our customers have proven to be resilient.”

Mr Irvine said the bank would work with clients who might breach covenants.

“We try to be very transparent with our customers and where we work best is when our customers are very transparent with us,” he said. “Hearing bad news early is always the best way to deal with it.”

Mr Irvine said NAB was concerned about customers who bought homes in the last few years.

“Young families, that’s the area where stress is maybe most emergent,” he said.

NAB boss Ross McEwan said at the bank’s recent results announcement he held concerns about 40 per cent of home borrowers who took out loans during the pandemic, amid fears they could not refinance.

But the business bank saw assets at 90 days past due fall to 0.87 per cent of the total book, down from 0.91 per cent in September.

Mr Irvine said NAB’s strategy was to “stay close” to its customers in stress. “We’re proactive, and we help them through challenging times. You saw that during Covid and we confident that we’ll do that again, if times do indeed get really challenging,” he said.

Mr Irvine said NAB’s business clients were all thinking about how they should respond to rising inflation, with many passing on higher costs. “We’ve seen that with restaurants where you know the costs of food, certainly wages and staff have increased,” he said.

Mr Irvine said businesses were raising prices if they thought they could “stick”.

“We’re seeing external factors reducing inflation. Shipping costs are down so input costs are down. I think that will help. But there’s also another pressure emerging which is around labour,” he said.

Mr Irvine said NAB’s business clients were reporting that staff were demanding higher wages to deal with the toll of inflation.

He said the challenge was that higher wage demands could lead to higher inflation.

“Interest rates will need to rise further and no one wants that,” he said.