Two ticks for National Australia Bank’s Andrew Thorburn

The banks are being marked against two sets of criteria this year and NAB’s results meet the grade on both counts.

NAB chief Andrew Thorburn at the NAB George St Sydney Branch. (Pic Stephen Cooper)

This round of major bank results will be viewed through two lenses. One will be the financial performance of the individual banks and the other through the highly-politicised context of competition and consumer benefit.

The first of the majors to report, National Australia Bank, gets a reasonable tick against its financial performance and provides a more informed insight into the wider issues canvassed recently and aggressively before the House of Representatives economics committee.

While the “new” NAB is only just emerging, with the exits from the UK and the sale of 80 per cent of its life insurance to Nippon Life, there are some encouraging signs.

Cash earnings were up 4.2 per cent to $6.5 billion, the group maintained its dividend, capital levels are strong, there’s good cost discipline and the group’s cash return in equity has stabilised, at 14.3 per cent, even as its peers’ returns are edging down. Moreover, there are signs of developing momentum in NAB’s core business banking franchise.

The group’s charge for bad and doubtful debts is, however, rising, albeit from historically low levels, and its net interest margin continues to edge down.

If markets and treasury income (which can be volatile) is excluded, the group margin was down three basis points between the March and September halves, with a three basis point increase in the group’s lending margin not sufficient to offset a six basis point rise in funding costs. Including markets and treasury, the group margin was down 11 points between the March and September halves.

That would tend to indicate an intensity of competition at odds with those who see the major banks as a profit-maximising oligopoly. In NAB’s personal banking unit, the net interest margin was up two basis points year-on-year but down nine basis points in the second half.

In housing lending in Australia, the most politicised segment of the major banks’ operations, the margin was down seven basis points on a yearly comparison and 12 basis points between the March and September halves.

In the September half, NAB’s net interest margin on domestic lending for housing was a modest 1.28 per cent, which sits oddly with the accusations of big bank gouging of home loan customers.

Much of the controversy over major bank behaviour stems from their failure to fully pass on Reserve Bank rates cuts to their customers. Bank critics, the Australian Securities and Investments Commission and, in a more qualified way, the Reserve Bank, have argued home loan rates should shadow the RBA’s cash rate.

Over the course of the financial year, the cost of both NAB’s wholesale funding and its term deposits rose.

With 54 per cent of its funding coming from deposits and 39 per cent from wholesale funding — 22 per cent of it being long-term wholesale funding, most of which is raised offshore — funding costs have been inching up even as the cash rate has been trending down. NAB raised $36.4bn of term wholesale funds in the financial year.

Leaving aside some of the cultural failings in the banks’ mistreatment of some customers, primarily in their wealth management and insurance businesses, there is no obvious evidence of profiteering or of a lack of competitive intensity in NAB’s results.

From the 2016-17 financial year, NAB will be a simpler Australasian banking and wealth management business which, as its chief executive Andrew Thorburn said today, will be the first time in his 12 years at the group that its management will be able to focus entirely on the Australasian franchises.

There are already some signs of the benefits of that focus, with NAB’s market shares in its core small business lending franchise picking up and a steady increase in its home lending, which has been running above system growth levels in recent months after being well below system growth as NAB scaled back its property investment lending in line with an Australian Prudential Regulation Authority directive to the banks.

It would be particularly pleasing to Thorburn and his board that he has been able to stabilise the group’s ROE at a respectable level on a significantly expanded capital base and while selectively growing lending and revenue within what he said were the higher-returning segments of his business customer base.

He’d also be happy with the continuing improvements Andrew Hagger is wresting from the group’s previously returns-draining wealth management business, where cash earnings rose 13 per cent to $356m and were up nearly 24 per cent in the second half. The Nippon Life deal will significantly reduce the capital intensity of the business and boost returns on capital.

NAB is soundly capitalised, with a common equity tier one ratio of 9.8 per cent, and therefore reasonably well positioned for the further increases in major bank regulatory capital requirements that the markets anticipate or an acceleration of the modest pick-up in its bad debt experience.

Good cost control in the second half, where expenses fell 1.9 per cent, might point to the further savings that might be available from the simpler and more concentrated model Thorburn now has after the UK demerger and insurance selldown.

The next financial year will reveal more clearly whether the new smaller and more streamlined and distraction-free NAB can leverage the potential benefits of a simpler model into its performance with an external environment that remains challenging and risk-laden.

It’s also an extremely competitive environment, as the majors, their smaller rivals and aspiring competitors wrestle for a share of the relatively subdued demand for credit.