The decision by NAB chief executive Andrew Thorburn to stop chasing new business with aggressive discounts and to reward loyal customers has put the bank in uncharted territory after delivering a result that revealed further deterioration in its net interest margin.
The bank faces a tough assignment in convincing the market that the strategy of discounting mortgages for new business has passed its use-by-date, as it faces up to a future of lower margins and higher regulatory and compliance costs, with the bank revealing more than $1 billion in restructuring and compensation charges.
Mr Thorburn outlined the long-term benefits for the bank as it unveiled a 14 per cent fall in cash profit to $5.7 billion.
He said the practice of banks falling over each other to deliver discounts to new business was only exacerbating the cycle of customer churn and was not in the best interests of the customer or the bank.
“The discount for the standard variable rate has continued to go up and up and up and up and so as the housing cycle has slowed that increases the pace and increases the intensity, it’s been a long-term trend and its got worse in the last two or three years,” Mr Thorburn said.
The decision not to chase new business aggressively dovetails with the Productivity Commission’s finding that loyal bank customers who don’t seek out better rates are worse off than those who shop around by 30 to 40 basis points.
NAB’s results however show the bank’s net interest margin – the difference between the rate at which it borrows and the rate at which it lends – fell to 1.84 per cent from 1.87 per cent in the first half and 1.88 per cent year on year.
Mr Thorburn said it was ridiculous to lose a customer after three or four years on a 30-year product and said it felt like “stepping into uncharted waters” but was the right thing to do.
“We’ve got to start to re-examining our business model … if we get this right we are only going to grow the business,” Mr Thorburn said. He said that it would take some time for customers to begin trusting the bank again and it would take 100 actions, not one.
‘Certainly a challenging operating environment’
NAB’s CEO elaborated on the shift as he unveiled a 14 per cent fall in cash profit to $5.7 billion as restructuring costs and customer compensation payments ate into profits.
“It’s certainly a challenging operating environment, if you look at the play through of the royal commission, the impact to trust and reputation … certainly there is more risk that there was a year ago in the Australian economy and the world economy,” Mr Thorburn said.
The bank said it was facing $530 million in restructuring costs as it pursued a sleeker and more streamlined version of itself. The bank said one year into its transformation that 94 per cent of its staff were only seven layers away from the CEO.
It also confirmed it was facing $348 million in costs relating to repayments which mainly flowed from wealth management. “We charged people for fees and services that we didn’t provide, and that’s not good enough,” Mr Thorburn said.
Mr Thorburn also said the prospect of appearing at the Hayne royal commission did cause him some anxiety, however but he was not worried about his reputation.
Chief financial officer Gary Lennon said the provisions for misconduct were from the wealth management division but could not rule out the need for provisions from the banking division in the future.
“We have had conduct issues on the banking side however they have not been of the size and scale and significance we have seen on the wealth side … the overall caveat is that it’s pretty interesting times, so who knows what can happen on that front,” Mr Lennon said.
Business and Private Banking was among the stronger contributors to the result with cash earnings up 2.5 per cent to $2.911 billion with the New Zealand banking business up 6.7 per cent to $1.004 billion.
Corporate and Institutional Bank was flat or up 0.4 per cent to $1.541 billion and Consumer Banking and Wealth was down 5.8 per cent to $1.539 billion.
UBS analyst Jon Mott noted that the bump some expected from business bank had not emerged but said the result was “broadly in line”.
Credit Suisse analyst Jarrod Martin said the it met expectations at both a headline and line-item level and “should be well received by the market”.
Mr Thorburn was optimistic about the outlook despite the external environment of low growth and enhanced regulatory scrutiny.
However at the same time he saw continued growth in the small-to-medium enterprise segment, its digital offering Ubank, its private bank JBWere and the growth corridors in Melbourne and Sydney.
The bank revealed that costs were down $320 million over the year as it pushes toward its goal of $1 billion in cost savings by 2020.
Expense growth – which excluded restructuring and compensation costs – was up 6.4 per cent and within guidance of 5 per cent to 8 per cent. The bank maintains cost growth will be flat in 2019 and 2020.
Mr Thorburn said it had been a hard year for the bank, with many distractions, however it remained focused on the job of right-sizing the workforce with 1900 of the targeted reduction of 6000 achieved one year on. The number of products on offer had fallen by 16 per cent and the number of IT applications by 4 per cent.
“It’s been hard, year one is always hard, costs going to be flat, that’s going to be tough,” Mr Thorburn said. NAB shares ended the day 14¢, or 0.56 per cent, higher to $25.35.