Chronican, chairman-elect and acting chief executive, is trying to juggle the response to the banking royal commission and the waves of remediation-related costs it has generated, and executing an ambitious $1.5 billion, three-year transformation program that’s only half completed, while trying to hold the bank’s position in a market that is deteriorating.
He’s also got to respond to the anger among shareholders that the bank, along with its peers (and others) could have managed its risk and compliance functions so poorly and with such punitive financial consequences.
He, and the board, have responded to that by deciding that most of their 2018 executive leadership should lose their deferred remuneration (worth about $5.5 million, excluding the performance rights potentially worth about $21 million that former CEO Andrew Thorburn forfeited) and by taking a 20 per cent cut to their directors’ fees. That’s a sensible gesture.
The result could have been worse. NAB was able to generate growth in both its risk-weighted assets and in its income. Risk-weighted assets grew about 4 per cent and income about 1 per cent, reflecting NAB’s above-system growth in business and home lending.
That growth, however, came at a cost. The group net interest margin (NIM) was down 8 basis points to 1.79 per cent, with the margin in the consumer bank down 22 basis points, to 1.84 per cent, and the business bank margin down 3 basis points to 2.94 per cent.
Moreover, while NAB did experience lending growth, it also experienced deteriorating credit quality. The charges for bad and doubtful debts were up 20.4 percent to $449 million.
While that’s still at historically low levels – only 15 basis points of gross loans and acceptances, or less than half the historical average experience – it reinforces the view provided by the ANZ result earlier in the week that the credit cycle is now turning quite quickly against the banks. It was instructive that in NAB’s own summary of its performance, its New Zealand business was the only division where it didn’t refer to higher credit impairments.
The margin squeeze was most evident in the consumer bank’s contribution, which was down 20.6 per cent, with the business bank holding the decline in its cash earnings to 1.3 per cent. Wealth management – the source of more than 90 per cent of its remediation costs – contributed 10.2 per cent less.
The pressure on earnings, the question mark over the eventual cost of remediation – NAB has 350 people working on that process and expects to soon have 500 – isn’t the only factor behind the decision to cut the dividend.
Regulatory capital requirements keep rising. The majors have to meet the Australian Prudential Regulation Authority’s “unquestionably strong” benchmark by next year and the Australian majors face a doubling of their regulatory capital bases in New Zealand after a Reserve Bank of New Zealand pronouncement earlier this year.
As with ANZ, the only way to significantly fight the environment is through cost cutting.
If NAB wants to be able to meet those requirements while retaining sufficient capital to enable it to grow its loan books in a volatile and somewhat riskier environment, it couldn’t continue to pay out almost all its earnings. As it is, it will supplement the dividend cut with a partly underwritten dividend reinvestment plan that will generate about $1.8 billion of additional capital.
As with ANZ, the only way to significantly fight the environment is through cost cutting. While operating costs were up 1.7 per cent relative to the same period of last year (although down 2 per cent against the September half), the group’s cost-to-income ratio has fallen from 52.2 per cent to 47 per cent.
NAB is half way through its transformation program, aimed at vastly simplifying and digitising the group, and says it has achieved total savings so far of $512 million and is on track for cumulative savings of at least $1 billion by the end of next financial year. It expects expenses to be flat this year and next.
If it were not for that program and its apparently successful execution thus far, the outlook for shareholder returns over the next few years would be a lot bleaker than the 16¢ reduction in what remains a substantial (83¢-a-share) dividend.
Stephen is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.