Sharing blame for bank’s faults

A former top National Australia Bank executive gives an insider’s view on why the lender was so accident-prone.

Judo Bank co-founder Joseph Healy has released a book, Breaking the Banks, about his time as a senior executive of both NAB and ANZ. Picture: Britta Campion

When I cite events critical of ­National Australia Bank in Breaking the Banks, some people might reflect that I was a senior executive there between 2007 and 2014, and ask what role I played and what responsibility do I take. These are legitimate questions.

During that period, I was on the group executive committee, the group risk management committee and the group asset and liability committee of the bank. I ran the business bank, NAB’s largest division which accounted for 50 per cent of the bank’s profits, in most of the years I was there.

During most of my time at NAB, I reported to chief executive Cameron Clyne, who I consider to be a person of high integrity.

I used to compare the NAB executive team’s banking experience to ANZ, which I knew well. There was no comparison. ANZ was headed by Mike Smith, an international banker who had spent much of his career at HSBC, and had within its ranks Phil Chronican, a career banker mainly at Westpac, Bob Edgar, who had been around the senior ranks at ANZ for decades, Shayne Elliott, who had extensive experience at Citibank and ANZ, and Graham Hodges, who was a seasoned banker.

NAB lacked that breadth and depth of banking experience after two outstanding banking executives, Peter Thodey and Michael Ullmer, left the bank.

When I looked at the senior ranks at Commonwealth Bank, another bank that is cited much in this book, under then-CEO Ian Narev, I felt that they were highly talented people, but had limited if any commercial banking experience, particularly outside of CBA.

The lack of substantial and broadly based banking experience within the senior ranks at NAB did accentuate a problem dating back to 1999 when Don Argus stepped down as chief executive officer.

The bank seemed plagued by an inability to get its succession planning at both CEO and board level right.

It thankfully dodged a bullet (a nuclear explosion) when it failed to appoint Fred Goodwin as chief executive.

The debacle in 2004 when the board imploded and six directors including the CEO, Frank Cicutto, resigned, was a huge embarrassment.

The fiasco that followed the release of the Hayne royal commission report in 2019 caused one newspaper commentator to sum up the situation: “Poor judgment and lack of common sense have been prominent features of NAB’s public profile over the past year.”

He could have added “indeed, over the past decade if not longer”.

The truth is that NAB had, to quote one commentator, “an unfortunate knack of ensnaring itself in traps of its own making”.

In my time there, a defining moment was when the bank’s executive committee met in London in 2010. I openly expressed to my fellow executives how disillusioned I had become over the chronic underperformance that had plagued the bank, particularly since 2007.

I felt then that this was only going to get worse given the internal consensus views that were emerging on strategy, technology platform transformation and other investment priorities.

I was concerned that the culture in the bank did not welcome realism and was very weak on ­accountability.

Two events brought this home. First, there was the hugely embarrassing IT mishap in late 2010 when a corrupt file was loaded into the system, resulting in hundreds of thousands of customer payments being misplaced and causing considerable distress to customers and staff.

This event was described as “one of the biggest failures in Australian banking history.” The ­accountable senior executive was subsequently promoted into ­another senior role.

The second event related to the senior executive being accountable for the $1.1bn collateralised debt obligation debacle in 2008. He was then transferred to NAB’s UK operation as deputy CEO.

The unwillingness to prioritise areas of chronic weakness contrasted with my time at ANZ.

At ANZ, John McFarlane would ­insist on a discipline that all businesses must first perform, then they could grow, and then they could make major investments in the future, which was known as breakout.

Apart from the well-publicised problems with NAB’s UK business, the retail banking/personal banking division was sucking the economics out of NAB and needed fixing before it needed investment. It was a chronic industry underperformer.

I had seen at ANZ, first through Elmer Funke Kupper and then Brian Hartzer, how top-class management can revitalise a flagging retail banking business. For some time, the market had been sending NAB a strong message on what it thought of its management. Why then, didn’t I leave?

There were several reasons. First, having convinced several talented executives to join the bank, I felt a strong sense of obligation to them.

Second, I was concerned that if I left the business bank, some of the experimental management thinking that was emerging elsewhere in the bank would filter into the business bank and damage it, more than the underinvestment already was.

My legacy would therefore be defined by a weaker business than the strong one that others had built and I had inherited.

Third, I felt a deep sense of responsibility to the thousands of employees who were passionate about looking after the bank’s customers and who had enormous pride in the bank’s brand.

Fourth, I genuinely loved working with the bank’s business customers. I saw a strong social purpose in supporting Australia’s small-to-mid-sized enterprise (SME) economy and this was something that NAB had excelled at.

Fifth, I was hoping that things would change for the better.

There was a sixth reason: it is hard to leave a role that can pay up to $3.5 million per annum and be exposed to the thin senior executive banking labour market that exists in Australia — a sense of frustration and disillusionment can, for a while, be tempered by money.

I do not feel good about the sixth reason, but it was a reality. All that said, I am not distancing myself from criticism levelled at the management team during my time there and the period that followed.

Many of the issues that NAB was criticised for by the royal commission were evident during the time I was a senior executive at the bank.

I deeply regret the decision to offshore the financial analysis of customers to an outsource agent in Jaipur, India.

It saved costs but was in essence an underinvestment in core capabilities — focusing on what is counted and losing sight of what counts. There were other aspects of the operation that, with hindsight, I should have made earlier interventions.

The chronically underperforming share price that has been a feature of the bank relative to its peers for well over a decade speaks volumes and requires little further commentary on how the bank has performed.

I accept my share of responsibility as a member of the leadership team. I made my fair share of mistakes and miscalculations.

Looking back, the major point of self-reflection was my inability to exert more influence.

The final irony was a 2014 discussion with the newly appointed NAB CEO in a private room at the Melbourne Crown Towers hotel.

Arranged and accompanied by his trusted adviser, Rosemary Rogers, he emphasised that his biggest priority as CEO was that of culture.

His intention to transform the bank’s culture and build a customer-centric bank.

The sense of frustration with the prevailing ethos did, however, inspire me and some others, in particular David Hornery, to establish Judo Bank.

While I had other career options, and already in my fifties when most people’s risk appetite modifies, I had become convinced in 2015, motivated by a strong sense of purpose, that there was a real opportunity to build a bank that specialised in SME banking.

Both David and I had also become convinced, as keen students of and experienced executives in the banking sector, that a fundamental change in culture and operations within the major banks was not going to be possible.

The cultural concrete was well and truly set and the protection of the industry structure meant that the pressure to change would wane as it had done so many times in the past.

The banks were locked on a path-dependent course and had become deeply indoctrinated in the importance of financialisation or productisation — that is that the banks were not there to serve the real economy, but to meet their own private interest needs, notwithstanding the nature of their social licence, the privileges bestowed on them and the quasi-nationalised nature of their risk.

The toothpaste would not go back into the tube of the current system.

The industrialisation process evident in the banks (the “sameness” is uncanny), resulted in a market gap opening in the way that SMEs were being served. When it comes to banking SMEs, a serious market failure was evident. The banks were largely presenting a “take it or leave it” one-size-fits-all proposition that took the SME economy for granted.

SMEs deserved better. Together with others, building Judo Bank, from the start-up, was driven by a passion in the importance of banking to the success of SMEs and that there was a strong public good in SME banking as it used to be, SME banking as it should be.

This is an extract of Breaking the Banks by former NAB executive and career banker Joseph Healy. The book is published by Impact Press and is available now. RRP $32.99.