National Australia Bank's chief executive Andrew Thorburn tells Business Spectator's Alan Kohler and Robert Gottliebsen:
-- The need to do something about getting better capital returns from the wealth business
-- The bank's plan to lift capital holdings irrespective of any mandated changes that might be brought in following the release of the Financial System Inquiry
Alan Kohler: Well Andrew, I think that Cameron Clyne could have sold the UK banks a couple of years ago, two or three years ago, virtually at any price, but it feels to me like that’s changed now, the cycle’s turned and really now, for you, it comes down to price. Are you going to have a hard reserve on the UK price below which you won’t sell?
Andrew Thorburn: Well, we are realistic, but we obviously want to return capital … or get capital out of the UK, so that we can improve the returns to the shareholders. So, that’s our goal, but clearly today I’ve indicated that we’re going to exit the UK business. We are going to work through methodically and in a disciplined way how we do that and when we do that, but I’ve signalled that I understand from shareholders’ viewpoint is that they wish to see this addressed. I agree with that and we have a plan underway to be able to deal with that sensibly.
AK: But do you agree that you can’t sell at any price?
AT: That’s correct. I mean we are realistic, but clearly, you know, we have to make sure that at all times we’re focused on the interests of shareholders and that’s about balancing a number of things, but the reality is that we’ve got capital in the UK that’s earning well below our cost of capital and we have businesses in Australia and New Zealand which need capital and are earning very positive returns that are competitive with other banks here, so we want to do more of the latter and less of the former.
AK: Right. But it is true that the cycle kind of has turned. The global economy is doing better and in the UK it’s certainly picking up. I mean, surely it would have been a possibility to decide to ride the cycle now.
AT: Well, what we’re indicating is the business is better and the economy and the markets are better, so we’re entering a phase now where we’re intending to exit, but how we do it and when we do it, that's what we’re going to have to work through. So, the key though is that we do need to be focused on this. I believe that is the case because it’s important that we invest more in the Australian and New Zealand franchise and we get better returns for shareholders and that we need our momentum and our people and shareholders to believe that that is our future. And until we address those legacy assets, including the UK, we won’t be able to do that. So, some of it is about momentum and focus and future execution that we need to acknowledge.
Robert Gottliebsen: Andrew, going back to Australia and looking at your core business of business lending, in the smaller business sector you’re being killed on market share, particularly the one to five million turnover area, which is core for your business. What on earth is going wrong?
AT: So Bob, you’re right. If you look at that graph, we are holding market share in a couple of important segments, but we’re under a lot of pressure and we have been losing share in others. However, if you also look at where two thirds of our revenue is, in what you might call SME, then we are seeing growth in that. This half we’re seeing revenue growth of 2.8 per cent compared with to the previous half. Where we’re really under pressure on revenue is in corporate and property and institutional lending where margins are really under pressure and you can see the revenue growth there is negative.
So, I think we still have a good business in this SME heartland. You know, it’s the NAB, long-standing NAB position, and we still have the number one business bank there, although it’s under threat and has been because competitors have targeted us. We have had some de-risking of our book. If you look at the asset quality, it’s better than it’s ever been.
And I do think, I’m acknowledging that we’ve taken bankers out. We’ve introduced a new service and fulfilment model that hasn’t worked yet. We’re going to fix that. So, we’re putting more people back in the front line and we’re fixing a number of things which I think, Bob, will help not just stabilise the business, but set us up for some growth in the future.
RG: It’s Mike Smith and Phil Chronican at ANZ who have really targeted you and I think they’ve actually lowered their credit standards a little bit, grabbed some people from you.
AT: Well, we’ve got all domestic competitors, Bob, who are aggressive and competent and you’ve got foreign banks as well at the mid-number end who have got lower cost of capital than us. To me, Bob, if we’re good enough, we are able to compete against anyone. And, you know, I want to go back to basics here and say this franchise is a good franchise. We’re number one still in most segments. We’ve got some very good people. We know what we need to do to improve and so we need to execute. I’m happy in a sense for the competition to be as good as they can be because then it’s going to bring out the best in us and I think we’ve got a will to win and we’ve got a competitiveness in our business which we can leverage as we go forward.
AK: Are you also thinking of selling or demerging MLC?
AT: So, what we’ve indicated today in the wealth business again is some important points. The first one is that the business is improving. This last half of last year it had improved profit by 10 per cent and the sales of superannuation products and insurance products into the bank continue to get better.
But what we have also acknowledged is that the capital we have in that business in the light area, the way it’s being treated from a regulatory perspective now and it looks like into the future, we’re not going to be able to get the cost of capital returns that we need. And I’ve got to go right back to the beginning of the story to say that my role is to ensure that we build not just a sustainable bank but we get satisfactory returns to shareholders. We need to improve that.
So, somehow I and the team need to address this issue. And what we’ve said is that we’re going to examine the options and we’re going to examine them again as a matter of priority, if I need a methodical and disciplined way to work out how do we achieve that goal.
RG: The MLC, until a year or so back, was banking with Westpac. The cultures remained totally different for a long time.
AT: Well, they’re banking with us now and I think Andrew Hagger and his team, who are leading the NAB wealth business now, including the MLC brand, are doing a lot to integrate processes and people and policies and capabilities back into, you know, the core NAB.
AK: Andrew, your focus on capital which is driving the UK reconsideration, the sale in fact in the UK, also what you’re talking about with MLC and the life business there, to what extent is that driven by what you expect to come out of David Murray’s review and do you think that Murray is going to require you to have more capital?
AT: So Alan, I think the capital position of banks and our bank is really important – it’s a very important part of making sure you’ve got a sustainable bank foundation. Also, the way we deploy capital in the business. As you say, we need to make sure we’re deploying into areas where we think we can get a more sustainable return, so we’re doing that.
And this whole topic of capital allocation, capital levels and deployment is really important for us. On the topic of the FSI, we’re going to await the outcome. When it comes, we’ll examine it. But I think what we have said is that our position today where we’ve got 8.63 per cent common equity Tier 1 and our commitment is to get to a ratio or a range of 8.75 to 9.25 by 1 January. We can see a way through to that and obviously we’ve got some tools to help us do that, not just capital generation, core capital generation, but potential, you know, sales of assets, but also the DRP (dividend reinvestment plan) that we’ve committed to and we’ve got underwriting for for this half.
So, I think we’ve got some levers, not just to get to the range that we’ve committed to but if there are changes, we think we’ve got the levers and the skill to be able to navigate there successfully.
RG: Andrew, it’s been a tough year, particularly given the whole UK situation, and yet your dividend has gone up. Why did you do that?
AT: So Bob, the dividend is 99 cents. It has been held. And we’ve done that partly because we’ve looked through some of these adjustments that we’ve announced on October 9 and because we believe that dividend at 99c is sustainable. And when you look at our capital position at 8.63 and the range, even at the bottom end of 8.75, we think that dividend is justifiable for those reasons and obviously important for our shareholders.
AK: Thanks very much for joining us, Andrew.
AT: Thanks, Alan. Thanks, Bob.