Old-school bankers need a refresh in capital management

NAB chief executive Ross McEwan Cartoon: John Tiedemann

NAB chairman Phil Chronican and chief executive Ross McEwan have failed capital management 101 with Monday’s $3.5bn capital raise at below book value while at the same time issuing $895m in dividends.

The justification given for paying 30c a share, or 61 per cent of earnings, is to support the market by helping the 48 per cent of its register who are retail shareholders.

Given the issue of 212 million new shares will dilute earnings per share for retail holders by about 7 per cent, denied the chance of maintaining their share weighting, the fact is mums and dads were dudded by the bank whichever way you look at.

The issue at $14.15 was an 8.5 per cent discount to market, a 25 per cent discount to book value of $18.91 and was below net tangible assets of $17.34 a share.

The capital raise was the right move to lift the tier-one capital some 81 basis points from its 10.4 per cent level, but without a dividend could have been $900m less and hence less dilutive.

The first-half cash net profit of $1.4bn came in slightly ahead of market estimates, but also underlined the dominating issue for the coming earnings season, being the level of provisions for bad debts that will grow sharply in the coming recession.

NAB is led by two old-school bankers, Chronican and McEwan, who have fought the big battles for decades, but the $807m increase in provisions based on the view there was an 87 per cent chance of a “V-shaped” recovery had analysts scratching their heads in wonder.

The analysts wanted the bank to be more conservative and paint a more gloomy outlook, and it remains to be seen who is correct.

The NAB result came earlier than expected because it wanted to beat the rush with its Macquarie-led capital raising and the market is expecting Westpac and maybe others will follow even after it raised $1.8bn last year.

McEwan is still looking for a new business banking boss, but said he was happy with Michael Saadie acting in that role after also appointing Rachel Slade as head of retail and promoting strategy chief Nathan Goonan.

The bad debt hit will come in three months after the initial ­period of post-virus goodwill and McEwan has the bank primed to execute better with more transparency and accountability.

Its internal projects will be cut to 150 in September, down from 467 a year ago, with just 20 as a major focus for the bank aiming to do less, only better.

Home loan truths

One of the roles of the ACCC is to empower consumers to help themselves, and this is underlined in its report on home loans.

It underlines three facts well known to those who watch banks closely: while RBA rate moves have only a marginal impact on home loan costs, they do serve to pressure banks to cut their rates; political pressure rather than actual competition is the main motivational force; and if you have held a home loan with the one bank for more than four years, the odds are you will be charged a ­penalty of 40 basis points for your loyalty. The solution is to ring your bank and ask the question and invariably the bank will ­willingly cut the home loan rate.

In today’s environment, the ­reality is the rate isn’t getting much lower but maybe you are paying more than you should.

The game will become easier in July, when the open banking regime starts giving you more access over your personal data to help you shop around.

Future Fund search

Former Future Fund chief David Neale is now well ensconced in his new role as IFM boss, but the fund is still to name his replacement.

Granted it’s a tough time to hire outsiders, particularly offshore hires.

The fund is actually performing well thanks to acting boss Cameron Price and chief investment office Raphael Arndt’s team.

In the first quarter this calendar year, returns were negative 3.4 per cent and the financial year to date including revaluations of its unlisted assets down 3.5 per cent.

This compares with AustralianSuper, which has $175bn under management compared to the fund’s $162bn and recorded negative 6.4 per cent for the first nine months.

The ASX 200 index was down 23.1 per cent for the first quarter this year and down 20.7 per cent for the financial year to date, while SuperRatings’ median fund was down 10.5 per cent and 6.5 per cent respectively.

The dollar’s fall has distorted asset allocation figures for the fund, but equity holdings are at 6.1 per cent for Australia and 19 per cent offshore, private equity is at 18.2 per cent and hedge funds at 14.7 per cent.

Reform on agenda

Scott Morrison’s national cabinet has raised expectations of genuine micro-economic reform in Australia and in the process offered some blue sky to those still stuck in the virus-led lockdown.

Incitec Pivot’s Jeanne Johns noted in an interview that “now is the chance for Australia to be bold and capitalise on our competitive energy advantage and support the industries we are highly com­petitive in, like resources and agriculture”.

Johns has a clear interest in some areas, noting: “Australia has some of the most expensive natural gas and electricity in the OECD crippling Australian industry and households.”

BCA boss Jennifer Westacott also stresses the need to reform skills training because a lot of people will now be out of work and needing skills to return.

She said the bias towards universities and away from TAFE colleges has to change and said Australia needed to grab microcredentials where qualifications were gained from short courses rather than full degrees.

Microcredentials are short-term courses that upgrade particular skills, as opposed to a full-blown three-year degree course.

The latter are of limited use to a 40-year-old wanting to upgrade skills so he or she can perform new tasks to stay in the workforce.

The skills bandwagon has been on the agenda for years, but with unemployment set to hit 11.7 per cent sometime soon, it’s time has surely arrived.

The national cabinet process has combined state and federal governments in a process of actual decision-making rarely seen in this country.

Its success is due in large part to the Prime Minister’s leadership along with Josh Frydenberg, but also through odd relationships like that between Victorian Treasurer Tim Pallas and his NSW counterpart, Dominic Perrottet.

Having established a platform for reform, the trick for Morrison is to actually deliver on it because sadly history is littered by predecessors who have failed.