As competition intensifies for Australia’s biggest business lender, but Irvine appears unfazed
NAB’s full-year results published yesterday showed some promising growth in home lending but an easing of statutory profits under the weight of rising costs and funding pressures.
For the 12 months to September, the banking major reported a statutory net profit of $6.76 billion, down 2.9% on last year.
Operating income rose by nearly 3%, but expenses increased 4.6% to $9.85 billion, driven largely by technology spending and a $130 million payroll remediation program.
The drop in NAB’s bottom-line profits rattled investors, with the stock slumping more than 3% on the day, before reclaimed around 1.5% on Friday.
However, chief executive Andrew Irvine (pictured) said the lender is maintaining momentum in business and home lending while calling housing supply Australia’s “greatest societal and policy challenge”.
Irvine told investors the results showed “good progress” across NAB’s key priorities of growing business banking, attracting deposits and strengthening proprietary home lending.
“Targeted investments in front-line bankers and technology-enabled solutions” were helping to deliver “simpler, faster and safer outcomes,” he said.
But there are some concerns that the shine is beginning to dim on NAB’s golden business-lending goose amid intense market competition.
Business-lending competition intensifies
NAB’s business and private banking division – which accounts for nearly half of group-wide earnings – posted a 1.6% rise in cash profits to $3.33 billion.
Business-lending balances grew 9%.
In other words, NAB’s status as Australia’s number-one business bank appears to be safe for now.
But NAB’s solid increase in balances came with thinner margins and higher provisioning for credit losses.
In the business and private banking (B&PB) division, net interest margin (NIM) declined year-on-year from 3.09% to 3.01%, largely due to funding cost pressures and deposit mix impacts.
However, there was an ever so slight margin recovery in the second half, signalling improved pricing discipline and better returns on lending volumes.
Nonetheless, there is no denying that NAB’s rivals are beginning to circle the golden goose.
Commonwealth Bank and Westpac are aggressively stepping up their efforts to win SME and mid-market clients, while the alternative lending space is going from strength to strength, picking up customers that NAB and the other tier-one lenders don’t have the risk appetite for.
Westpac unveiled a multi-year strategy in September that couples aggressive banker hiring with digital investment, while insisting growth will not come at the expense of credit discipline.
The bank’s business and wealth division, led by Paul Fowler, now contributes nearly a third of group profit and is being positioned as a cornerstone for future earnings.
ANZ has a commendable commercial outfit and under Nuno Matos, it’s clear that the smallest of the Big Four intends to do anything it can to reclaim a larger slice of the credit market.
Meanwhile, competition from the second-tier lenders is also ramping up.
Dutch lion pounces
Take ING, whose head of business banking Hein Wegdam has made no secret of the Dutch multinational’s designs on the SME market.
“We have over two million retail customers (in Australia), many of whom are small business owners,” Wegdam told MPA earlier this year. “The demand is coming from them, they want to be able to do all their banking in one place and we want to support them.”
But it’s not just the customers making these demands on ING – so are brokers. “They have SME customers that are working with them for residential loans, but many are interested in commercial property too.” Wegdam said. “They want to work with one broker for all their needs.”
ING has adjusted its policy settings to make it easier for more SMEs to borrow with the bank, with loan-to-value ratios getting jacked up and sales and origination processes being remapped.
“We have had a commercial property portfolio for some time, but this has been limited to a subset of SMEs. We’re now broadening out our offering, meaning more brokers can take advantage of it,” said Wegdam.
The imitation game
Despite NAB’s business-lending margins feeling the pinch, Irvine seems to be taking all of this competition as a compliment.
“Returns are better in business banking, so everyone wants to be NAB,” he said. "Everyone wants what we have, we can defend and extend our position and not give away margins at the same time.”
At the end of the day, NAB’s group-wide NIM increased three basis points to 1.74% in the year, thanks to the strong showing in personal banking and home lending.
It’s hardly a cause for panic just yet.
