Clyne's brave new digital world

NAB chief executive Cameron Clyne told analysts at his strategy update on Wednesday morning that there had been so much speculation about it, one might have thought NAB was announcing the new pope.

White smoke didn't issue from the chimney of the Vatican's Sistine Chapel, but Clyne did confirm senior management changes, and a continuing push onto digital platforms that is no less important for not being unique.

The big four local banks are all reconfiguring for a world where customers prefer to do their business digitally, and usually online. They are investing more than average as they put systems in place, but will be lower-cost operations when the process is complete: even after some of the savings are redeployed elsewhere, the digital shift will be a key driver of productivity and profit growth in a post-global crisis environment of low credit demand and heavier capital support for lending.

Clyne began the briefing by reprising the strategic plan he unveiled in March 2009, when the world was still in the grip of the financial crisis. He said at that time the tasks were to ensure that NAB was safe, and then to make it a noticeably different, more efficient and more customer-friendly business, and while he remains under pressure to resolve NAB's UK mess, he has made ground.

The group's tier-one core capital ratio has risen from 5.6 per cent in September 2008 to 8.4 per cent. It has boosted its collective bad loan provision to move from an 18 basis points discount to the big four average to a 16 basis points surplus, and its standard variable home loan rate has been below its big three competitors since the middle of 2009 (it famously announced that it was breaking off a cozy relationship with the other three two years ago).

Earnings excluding the underperforming UK banking division have risen by an average of 11 per cent a year in the past three years, and NAB has also grown its housing lending market share up from a parlous 12.8 per cent in September 2009 to 15.1 per cent.

Clyne is holding the UK assets rather than selling them at fire-sale prices. That is the right decision long-term, but the UK problem is the main reason NAB's shares are 1.8 per cent lower than they were on September 30, 2009, when the bank shares in the S&P/ASX 200 Index were up 16 per cent overall.

The work Clyne has been doing is showing up in NAB's share price this year, however. Even after falling 59¢ or 1.9 per cent on a day when the bank index fell almost as heavily, NAB shares are up 21 per cent in 2013, ahead of the bank index's 15 per cent gain.

Like its big bank competitors, NAB will press on with its migration to digital platforms, and self-service. The group's portfolio of retail and business banking products has already been cut from around 500 in 2009 to 237 today, and Clyne wants to cut it to 100. They will be backed up by standardised, centralised information technology that has Oracle's new banking platform at its heart. NAB won't be cutting the number of branches, but it will be downsizing the average size of the branches, by about 25 per cent.

As part of a raft of senior management changes, Clyne confirmed that the group's chief financial officer, Mark Joiner, will be standing down after an internal and external search selects a replacement. Joiner and Clyne have borne the brunt of investor unhappiness about the way the UK franchise has weighed NAB down and in the wake of a 17 per cent protest vote at last year's annual meeting. The new CFO is unlikely to inherit Joiner's board seat.

A new job has been created - group executive, product and markets - and NAB's head of business banking, Rick Sawers, gets it. He will be in charge of simplifying and consolidating NAB's range of products.

The group's personal banking boss, Lisa Gray, has moved to an expansive new role steering technology transformation across the group, and NAB's highly rated HR, marketing and communications chief, Andrew Hagger, will replace the departing Steve Tucker as boss of NAB Wealth, the business that includes MLC.

Capital costs are rising as the digital build occurs. NAB invested about $1 billion a year in the past three years, and will be investing up to $1.3 billion a year in the next half decade.

Clyne says, however, that at the end of the fifth year the group will have locked in annual cost savings of $800 million. Charges including depreciation and amortisation of new systems will erode some of that gain and Clyne isn't providing guidance on a net number, but around $400 million is an aspirational target.

Some customers won't like this heavier push by the banks into digital platforms and self-service. As Clyne observes, however, the numbers are with those who want it: more than 40 per cent of internet banking log-ins are, for example, now made with mobile devices, and that connection only became available in 2009.

mmaiden@fairfaxmedia.com.au