National Australia Bank CEO Ross McEwan is the only one of our bank chiefs who has had to manage a broken bank.
He took control of the Royal Bank of Scotland when it was virtually bankrupt and he learned that when you see danger ahead, raise capital while you can.
On the last day of the 2019-20 financial year the US Government’s Centre for Disease Control and Prevention dramatically declared that in the world’s largest economy the virus was spreading too rapidly to be brought under control.
At the same time areas of Melbourne were put under lockdown and our second largest state was isolated from the rest of the nation. Australia is now in its worst economic slump since the depression and it is not alone.
And so on June 30 McEwan raised another $215 million in equity via a long term subordinated loan issue which converts to shares. It duplicates a similar issue weeks earlier.
And, of course NAB last month made a major share issue, albeit at a price that now looks too low.
NAB might not be expecting a further major deterioration in the economy but the Victorian and US situations look grim. Europe is crippled and to our north serious infection outbreaks are taking place in India, Indonesia and other areas. There is danger all around.
McEwan’s advice to the NAB board a couple of months ago was that the balance sheet was key from a banking perspective and so making sure that NAB was in a strong capital position leading into this crisis was vital.
In a strange way the banking royal commission, in forcing the removal of chairman Ken Henry and CEO Andrew Thorburn, did NAB shareholders an incredible favour.
It is true that Henry and Thorburn were on the right track as they sought to focus the NAB activities and get the bank prepared for the technology revolution. But Thorburn had not tackled what many argued was the biggest problem at the bank – its flawed basic decision-making structure.
People like the then retail head Mike Baird and the then business banking head Anthony Healy never had the authority they needed to run their operations. The decision-making mess was one of the reasons David Hornery and Joseph Healy left NAB and started Judo bank.
NAB had separate marketing operations, product development operations and human resources departments controlling parts of the retail and business banks—so creating a bureaucratic maze.
This crazy management structure had grown up from the post-Argus era when NAB had a series of chief executives who discovered that by centralising many activities they could reduce costs. They didn’t realise that in the process it made key operations too bureaucratic and unable to move forward quickly because there was no clear responsibility.
In the COVID-19 world, where most of the NAB administrative staff is operating from home, such a structure would almost certainly have destroyed the bank because it couldn’t have been run “via Zoom”.
Changing that structure was one of McEwan’s first priorities when he took office. So the new head of the retail bank Rachel Slade and the recently-appointed head of the business bank Andrew Irvine (from Canada’s Bank of Montreal) will have proper control of their total operations, in stark contrast to Baird and Healy.
NAB, like all the other banks, has a mountain of customers who asked for loan deferrals and in the case of NAB that total reached some 120,000 customers, including both business and home mortgage loans, or about 10 per cent of the loan book.
Most banks have reported that the rate of new applications for loan deferrals has slowed substantially and somewhere in the vicinity of 20 per cent of those who asked for the deferrals have gone back onto repayments.
But there is still a majority of holders of deferred loans who have not yet gone back onto payments and they will need to be sorted out in the current half year. Some will fail or never restart their business.
Before the second wall of infection hit Victoria the path forward looked much smoother than in the March/April crisis. All states but New South Wales now have shut their borders to Victorians and NSW is discouraging travel between the two states. But there is little doubt that if the Victorian infection rate continues to rise it will seep into New South Wales, which will affect the national outlook.
The nation has to hope that the new suburban lockdown measures will be sufficient.
Meanwhile McEwan, like the other bank CEOs, is running the bank “via Zoom” and so far it has been working.
However McEwan has in front of him a substantial program of culture change and a refocusing on the core banking business. It is very difficult for a newcomer to implement culture change “via Zoom”.
And to make it more complex some 20 per cent of the reports to Slade and Irvine and most other McEwan direct reports will come from outside the bank.
Radical reform normally needs a lot of face-to-face contact, although the shock of the royal commission plus the strategies of Andrew Thorburn primed the NAB staff for that much-needed major change.
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