National Australia Bank treads middle ground, committing to half steps in move to decarbonisation
National Australia Bank’s new oil and gas policy occupies the middle ground between climate conservatives and environmentalists, which is why chief executive Ross McEwan thinks he’s got it right, or thereabouts.
NAB, however, is no different to any mainstream financial institution – if it becomes clear that more rapid decarbonisation will be needed to avoid the more severe effects of climate change, the bank will have a lot of ground to make up.
At its annual result on Tuesday, the lender said it would cap its oil and gas exposure at $US2.4bn ($3.2bn) until 2026, and then reduce it in alignment with the International Energy Agency’s net-zero emissions scenario by 2050.
NAB said it would only consider direct funding of greenfield gas extraction in Australia where it supports national energy security, and would not directly finance similar projects offshore.
It would continue to support integrated LNG projects in Australia, New Zealand and Papua New Guinea under the new cap, and select LNG infrastructure in other regions.
The policy was designed to support a “measured reorientation of client activity”, helping customers to execute their net-zero transition plans.
It would have been a lot easier for NAB to sit out this pre-election period and announce its policy after the next federal election.
The board should at least earn some plaudits for having the courage of its convictions.
Having said that, there are immediate, real world consequences of laying it all out there.
As this newspaper revealed on Tuesday, NAB is believed to be arranging a debt package for the proposed $US3.5bn purchase by US-based Global Infrastructure Partners of a 49 per cent interest in Woodside’s Scarborough gas project in Western Australia.
While other local banks could also play a role, all eyes are on NAB because of its new oil and gas policy; even more so because McEwan said on Tuesday that the bank is about $US300m short of its $US2.4bn cap.
With the self-imposed cap greater than its current lending, the door is ajar for the bank to increase its exposure to the sector.
McEwan declined to comment when asked by this column if NAB could lend to the Scarborough project under its new policy.
“I can’t and won’t comment on individual customers,” he said.
Hypothetically, NAB would be interested in supporting a customer with an existing project, which was backed by a compelling net-zero transition plan.
If it were a new gas project, the bank “wouldn’t be there”, although a carve-out existed for developments which were vital for energy security.
“The area we’ve said we won’t be participating in is new activities in the oil and gas area, but we are there to support the transition of businesses,” McEwan said.
“We can’t just turn the lights out and expect everyone to be renewable overnight; we’ve got to help industries change.
“You’re seeing that in Europe at the moment, with real difficulties because prices are going through the roof due to lack of capacity so we need to make sure there’s capacity here.”
Dan Gocher, director of climate and environment at the Australasian Centre for Corporate Responsibility, said NAB had made some progress with its oil and gas policy.
“It’s a small step forward but does it go far enough?” Gocher said. “I don’t think so because it’s not aligned with limiting global warming to 1.5C – they’re still leaving the door open for some new gas expansion.”
Good business
NAB’s business banking engine room is humming along nicely, validating the argument that the market can support outperformance by two of the majors – the other being CBA.
Several times, CEO Ross McEwan dished out praise to his head of business banking Andrew Irvine for the neat trick of simultaneously lifting lending volumes, mostly from existing customers, and the net interest margin.
Loans to NAB’s heartland of small and medium-sized businesses rose $6.7bn – or 1.4 times the banking system – in the second half, as the margin firmed by 2 basis points to 2.85 per cent.
As a result, cash earnings gained 3.9 per cent in the September half to $1.3bn, and it wasn’t as though the bank was slimming down, with 550 business bankers added in 2021 as 200 roles were no longer needed due to process and policy changes. Underlying profit was also up by 2 per cent.
All this demonstrated that the result wasn’t a one-off.
McEwan took the opportunity to remind everyone he had been optimistic about the growth pipeline at the half-year, and he pretty much repeated the same line on Tuesday.
The NAB chief said he’d be “disappointed” if loan growth were to dip below the system average in the March half-year.
As for the margin performance, he put it down to good old relationship-led banking.
“Others have forgotten how to do business banking well,” McEwan said. “We’re on the march and we’ll continue to grow.”
McEwan aims to maintain the momentum as the composition of investment spending switches away from compliance initiatives to growth.
The mix in 2021 was 61:39 in favour of improvement in systems, processes and the control environment. The targeted spend in the new financial year is $1.3bn, with the mix tilting back to 50:50.
Business lending transformation and enhanced use of data and analytics will be among the key areas to benefit.
gluyasr@theaustralian.com.au
Twitter: @Gluyasr