NAB’s radically simpler proposition as it plans for post COVID-19

  • By Christine St Anne

National Australia Bank will focus on four key business groups with the newly branded personal bank aiming to deliver a radically simpler propositions and experiences underpinned by a single mortgage operation for Australia.

The strategy has been part of a four-month project led by 20 of the bank’s senior team and the CEO meeting with staff around the country.

However, the focus on delivering better for its customers intensified over the last six weeks as COVID-19 impacted the bank.

To date the bank has had 650,000 enquiries for assistance from both business and individual customers.

NAB also approved more than 70,000 home loans and 34,000 business loan requests from customers to defer repayments.

“We have shown through our response to COVID-19 what it means to put customers and colleagues first. We need to do that always,” NAB CEO Ross McEwan said.

The bank’s “customers and colleagues” are part of NAB’s ‘twin peaks’ focus where it will seek to align its strategy.

Part of this strategy will be reverting to a traditional bank operating structure organised around four key business groups, McEwan said.

“What we want to make sure is that this bank is in great condition both for today and for the future so that we come out of this crisis in a very strong position, able to take opportunities on the other side of it” he said.

These business divisions include; Business and Private Banking; Corporate and Institutional Banking; Personal Banking and BNZ. The bank’s digital-only bank UBank will continue of focus on digitally acquiring customers.

Each unit will be responsible for its own profit-and-lost and customer outcomes.

“The business and private bank will remain a key differentiator as we aim to extend our market leadership by investing in our bankers, in our data and insights capabilities,” McEwan said in a briefing with investors.

The consumer bank will be renamed personal banking.

“We plan to deliver a radically simpler propositions and experiences underpinned by a single mortgage operation for Australia,” McEwan said.

It’s New Zealand business, BNZ will “take a material shift towards SMEs and personal segments reweighting away from capital intensive industries”.

McEwan said that new propositions driving customer acquisition were in the pipeline for UBank as well as an “ambition to expand into micro-business”.

“UBank provides us with more opportunities to differentiate. We will give it more focus as a customer acquisition engine”.

McEwan said the revised strategy - which was flagged in its trading update – does not represent “wholesale change” but instead it is “meaningful shift in focus and priorities”.  

At the same time he said the bank will work within its means and flagged that current investment spend levels are not expected to increase above $1.4 billion.
He noted that the bank needed to execute better for its customers and accountability needed to be clear.

“We've been too slow and we are far too complex. We have not invested enough in our bankers and the tools that they use.

“The result has been negative net promoter score engagement and engagement among colleagues. Nowhere near what it should be.”

By the numbers

On Monday, the bank brought forward the announcement of its first half results [originally slated for 7 May] reporting a 51.4 per cent fall in cash earnings to $1.4 billion.

It cut its dividends to 30 cents from 83 cents and also announced $3.5 billion capital raise from investors.

“Our first-half result has been materially impacted by the COVID-19 pandemic, with cash earnings driven by higher credit impairment charges,” McEwan said.

Net interest margin declined 1 basis point to 1.78 per cent reflecting repricing in the home lending portfolio offset by a lower earnings rate on deposits and capital given the impact of a low interest rate environment, combined with competitive pressures.  

Expenses rose 28.1 per cent with higher investment spend and restructuring-related costs partly offset by productivity benefits and lower performance-based compensation.

Credit impairment charges increased 158.6 per cent to $1,161 million, and as a percentage of gross loans and acceptances rose 23 basis points to 38 basis points.

The ratio of 90 plus days past due and gross impaired assets to gross loans and acceptances increased 18 basis points to 0.97 per cent largely due to increased delinquencies across the Australian mortgage portfolio.

Group Common Equity Tier 1 (CET1) ratio of 10.39 per cent, up 1 basis point on September 2019

The bank also upgraded its economic adjustments (EA) following the impact of the COVID-19 pandemic.

This included an $807 million credit overlay for COVID-19 based on the bank’s assessment over the uncertainty ahead.

For UBS analyst Jon Mott the number “appears slightly light” given the challenges of a V-shaped recovery and scope for a more severe downturn.

He expects further top-ups may be required in the second half.

He added that capital strengthening appears prudent, but we question paying a dividend to shareholders while simultaneously raising fresh equity below tangible book value.

In a note, S&P expects credit costs will also increase significantly for other Australian banks and other major Australian banks to also take similar capital management initiatives to prepare for adverse operating conditions.

The bank also made a number of announcements on productivity and transformation.

Its ‘cloud-first agenda’ has seen 33 per cent of its IT applications move to the cloud and it has achieved a 9 per cent reduction in IT legacy applications since fiscal 2017.

Sixty three per cent of simple product sales are now digital – against the bank’s target of 65 per cent.

NAB has also cut the number of key investment projects across the bank by two thirds.