National Australia Bank chief executive Andrew Thorburn has doubled-down in his criticism of the banking industry's long-running practice of offering lower interest rates for new mortgage customers, rather than their loyal clients.
As the bank delivered a 14 per cent drop in cash profits to $5.7 billion, dragged down by compensation and restructuring costs, Mr Thorburn took aim at the way in which banks tend to compete most aggressively on price for new customers or those willing to shop around, saying the practice did not make sense.
His comments come as some analysts predict one reason bank profits will come under pressure in the coming years is because this pricing strategy - which involves loyal customers subsidising the rest - will no longer be acceptable to the public.
Briefing investors, Mr Thorburn was asked about the banks' decision in September not to pass on this year's increase in funding costs to home loan customers, as rivals Commmonwealth Bank, Westpac and ANZ Bank have in recent months. At the time, Mr Thorburn said the aggressive "front book" discounting was "probably not a long-term economic model".
Mr Thorburn would not rule out NAB following its rivals, saying it faced the same funding markets. However, he said the rate decision was aimed at rewarding loyal customers, and explained his criticism of the industry's approach to discounting.
“Chasing new business all the time and discounting to get it, I know that’s been a practice in the home loan market for 20 years, but that doesn’t entirely make sense," Mr Thorburn said.
"Including from the client’s viewpoint, who takes a product like a home loan, which should be a 10 year product, and they leave after three to four because they’re getting a much better offer outside again.”
Mr Thorburn acknowledged the issue was complex, as there were commercial reasons why banks offered sharper prices on new loans. “People keep doing things that they sort of think.. are not economically sensible, but everyone’s doing it and we can’t afford not to,” he told Fairfax Media.
He did not support government intervention in the area, which he said would be "unfortunate." But he said that in the wider context of a deterioration in trust of banks, lenders needed to "challenge some of our long-term established practices".
CLSA analyst Brian Johnson said the signal from NAB that it was considering a different approach to mortgage pricing was important, given the industry's heavy skew to mortgage lending. Mr Johnson said the “most pivotal” question following the royal commission would be the extent to which they retained "pricing power" in the home loan market, which has been key to profitability in years following the global financial crisis.
“Every time they had a problem, they just tacked up their housing rate,” Mr Johnson said.
NAB's profits were broadly in line with analysts' expectations, and it said it would keep its final dividend unchanged at 99¢ a share, to be fully franked and paid on December 14.
Revenue rose 0.5 per cent, while expenses were up 17.8 per cent, due mainly to its major restructuring program, which has resulted in 1900 staff leaving the bank in the past year.
The result included $755 million in restructuring costs, and customer-related remediation costs of $360 million, which had been flagged by the bank. At the same time, charges for bad debts fell 3.8 per cent to $779 million as fewer customers defaulted on loans.
Mr Thorburn was more optimistic on mortgage credit growth than ANZ chief Shayne Elliott, with the NAB chief predicting growth would slow from about 5 per cent today to about 4 per cent.
With national house prices posting their worst annual fall since 2012, Mr Thorburn said the "fundamentals" of population growth and employment remained strong.
“They have come off very significant rises, there’s uncertainty about. I think that’s the key, and that’s why I think there’s more risks today than there were a year ago," he said.
Bell Potter analyst TS Lim said NAB's result was "decent", pointing to a lift in its common equity tier 1 capital, to 10.2 per cent of risk-weighted assets - an important gauge of bank strength.
NAB is seen by some in the market as the big four bank at greatest risk of cutting its dividend, and its dividend payments were 94.1 per cent of profits for the year, well above its target range.
But Mr Lim said he thought the dividend would be kept flat as earnings improved.This article was first published by https://www.smh.com.au
Author: Clancy Yeates