NAB chief executive officer Cameron Clyne tells Business Spectator's Alan Kohler, Robert Gottliebsen and Stephen Bartholomeusz:
– Wholesale funding costs have come off as the market has stabilised, with retail deposit competition probably a greater driver of costs in the last year.
– The bank has complete clarity on specific and collective debt provisions.
Alan Kohler: Well Cameron, it must be frustrating. You got a decent result in Australia and New Zealand; 17 per cent ROE, but it was disfigured, as Stephen Bartholomeusz puts it, by the UK.
Cameron Clyne: Yeah look, I think it is frustrating, but I think the critical thing I’m trying to draw out today is that the Australian business wasn’t actually performing this strongly a couple of years ago and now it is and the problems in the UK haven’t distracted us from Australia.
So, yeah what we’re trying to do is take a very much a long-term view. This is a difficult operating environment in the UK. Shareholders don’t want to see us sold at a distressed price, so we’ve got to manage it through and that’s what we’re doing. But you’re right. It’s frustrating.
AK: It’s not just the bad and doubtful debts situation. Your cost to income ratio in the UK is up to more than 60 per cent as well. And you’re still employing seven thousand, eight hundred or so people there. It’s a huge operation. Can you put into run-off or something?
CC: Well, you know, we’re obviously looking at a range of options. Obviously the workforce is coming down substantially through the restructure we announced at the half year.
It’s a big business, but it’s very much subscale in the UK and we did rule out some years ago – although there was some suggestion that it might be attractive – we did rule out expanding.
And if you look at what’s happened, for example, with the RBS deal with Santander, I mean they’ve been at it for two and a half years and finally called it off a month ago. And to me that just vindicates that expansion would have been even more distracting and costly, so look we're a subscale business is difficult, but we’ve just got to operate it through until we get a better outcome for our shareholders.
Robert Gottliebsen: If ever bank prices in the UK get very, very low, would you think of changing that attitude?
CC: Well, I think we’re very much driven by our shareholders. At the moment we’re in alignment with them in that we think that although it’s difficult operating conditions, we want to see its return to something that’s better, towards historical values and it’s very hard to get a sense on precedent transactions in the market.
The only two transactions that have been done have been sort of branch carve outs, which have already been mandated by the European Union and they’ve been at very, very low prices.
So, you know, I think we’re always pragmatic, but I think shareholders don’t want us to short-term the business. And I think managers are behaving exactly as they should, which is to drive a better long-term outcome.
Stephen Bartholomeusz: Cameron, you’ve taken some big hits on that UK business and you’ve moved a huge chunk of their lesser quality commercial loans across to the parent bank. Is there further downside in the UK or do you think you’ve drawn a kind of line?
CC: Well, it’s going to depend a little bit on the economy. And obviously what really happened that cost these decisions, particularly over the course of this year, was three things that occurred at the back end of last year.
One was the three notch rating downgrade. That was actually a significant driver of the loss because we had to replace a lot of term funding with more expensive retail funding.
Now, we managed to do that very quickly because Clydesdale has got a good name in the market, but obviously it was costly.
The other thing was that the economy went into a double-dip recession and we started to see much more subdued economic activity.
And the final thing was that the large banks, which really aren’t operating with any commercial hard guidelines – being the fact they’re government or they’re in huge restructuring mode – were really just realising CRE assets at low prices, which obviously forced us to write the value of assets.
We had quite a number of significant impacts, so I think having taken the commercial real estate out and increased the provisions we did a couple of weeks ago, we are certainly feeling that we’ve isolated Clydesdale now to be a simpler and safer bank. But we did call out that if you strip out the CRE, Clydesdale actually made $49.5 million. So, the business we’ve got left there is a profitable business, but obviously we’ve got to run the CRE down.
SB: Those CRE assets that are on your balance sheet now as opposed to Clydesdale, they’re long tail, aren’t they? They’ll be with you for most of the rest of the decade.
CC: Well, it’ll depend a little bit. I mean there’s obviously the contracted run-off and then there’s the experience of the run-off and that can accelerate if a bit more liquidity comes into the market.
We started running CRE down in the UK when I took over. We ran it down from $7.7 billion to $6.2 billion. We called it out at the half at $6.2 billion. We’ve already got it down to $5.6 billion.
So, we’ve been on a march down. I’d call you back to the specialised group run-off. Now, when I shut down the NAB Capital business we had $25 billion in assets that were non-core and at the time there were great calls just to write that off.
Now, that would have cost shareholders $4 billion. We said no, we can trade out of this, it’s a better outcome. And now look, three years on we’ve got that from $25 billion to $7 billion and, as Mark called out today, we’ve eliminated virtually all the economic risk. It’s cost us $6.5 million. So, there is a case there to say that sometimes being patient running off can work and it’s a much better outcome for shareholders.
RG: Cameron, changing the subject, you’ve had extensive wholesale borrowing in the last half year as well as deposit raising. What’s the cost situation? The wholesale money, is that more expensive than the local money or about even?
CC: No. Well, it depends on the term for wholesale. Wholesale costs have come off as the market has stabilised a little.
It’s fair to say that probably more of the driver of costs in the last year has been the competition of the retail deposits and a lot of this is coming because people are now starting to focus in on the quality deposits.
Under the new regulatory regime if we all track towards a hundred per cent net stable funded ratio by 2018, not all deposits are counted equal and deposits that are seen by regulators as being less sticky or of lower quality will receive a haircut. So, that’s why there’s been particular competition in the retail space, the term deposit space and that has been probably a more significant driver of costs than the wholesale.
RG: But you bid up. Through UBank you actually bid up the market. You were the most aggressive offer of deposits of around a year or nine months of anybody.
CC: Well, you know, deposits come in many forms and I think what we found with UBank is that it’s been a very successful driver of new business for us. Still to this day about eighty-five per cent of money that flows to UBank is new to NAB, so that’s good.
It’s also been a fantastic test bed for our new technology platform because it’s increased, you know, a completely digital model. So, UBank fills many purposes.
You know, we’ve been happy to have an offering in the market, but that doesn’t suit all consumers. So look, UBank has raised $15-16 billion in deposits, but you know we’ve raised some $48 billion in deposits in the last couple of years beyond what we’ve leaked, so we’re seeking deposits from many sources.
AK: But Cameron, the analysts are very , very unhappy with you and the bank today. They seem to be particularly unhappy about what they see as the lack of clarity around provisions, specific and collective provisions. What’s your answer to that?
CC: Well, I think there’s complete clarity. You know, you can only provide for what you see. And we called out an increase in provisions at the half and a couple of weeks ago as we saw the economic daily coming through we immediately called out a provision as we think we should do under continuous disclosure. So, we’ve been very upfront around provisions. Now, we can’t control the economic downturn and on the specific provisions nor can we control what the realisation price of an asset is. And of course all those things are heavily scrutinised by external auditors and of course all our provisioning models are heavily scrutinised as well. So, there’s clarity around our provisions.
AK: You’ve said a couple of times that the shareholders don’t want you to do anything different to what you’re doing in the UK, but how do you know that? I mean how do you know that the shareholders would rather you didn’t take a more aggressive stance to reducing your exposure to the UK?
CC: Because I have spoken to the shareholders repeatedly for many years on this topic. And bear in mind of course the management team is putting a lot of effort into the UK and clearly if we could just focus on Australia, that would be a better outcome for us.
But we have to act in the long-term interest and we have been talking to our shareholders constantly and there’s been an overwhelming view that they don’t want to see that business sold in a distressed state.
Now, that doesn’t mean that they should be happy about the performance of the UK because the UK economy is suffering and we have a business there. But you know this is not a situation, Alan, where we’ve called out one strategy and shareholders have been repeatedly saying pursue a different one.
There’s certainly a legitimate case to say we wish the UK was performing better, but there’s certainly been no suggestion from the shareholders I’ve been speaking to repeatedly in the last three years that they wish us just to see this asset sold at a fire sale price.
SB: Cameron, within the retail bank the breaking up commitment to having the lowest home loan rate expires at the end of this year. It was very noticeable in the second half that as you narrowed the pricing differential between your mortgage rates and the rest, the retail bank profit actually really surged. Does that cause you to compete on a different playing field next year, something other than price?
CC: Oh look, we haven’t considered it. I mean we still maintained the market leading position on price. That hasn’t really affected our volume. And I think that the retail bank that turnaround has been a very interesting story.
When we initially went with price, we always had a lot of confidence in this strategy – and I think this is what I oriented towards long term.
When we started with price using the price lever to really generate some momentum, people said 'oh you can use price but volume won’t come'. Then the volume started to arrive and people said 'well the volume might come but you won’t be able to process a mortgage, NAB can’t process a mortgage'.
Then it turned out that we could process a mortgage. And then they said 'well you might get the mortgages but you won’t get transaction accounts, which is going to underpin the deposits'. Well, we’ve grown our transaction account to ten times what we were three years ago. And then they said 'oh well you won’t be able to do that without compromising asset quality'.
Well, actually asset quality is now better than the bank book. 'Oh you won’t be able to do that without closing the gap'. And here we are sitting with the gap closed.
So, this has been an ongoing story where I think we’ve proved the market wrong. On about six separate occasions this strategy is working, so we back ourselves no matter what we do in 2013 to have a very, very attractive offer. And we’ve done all that while lifting customer sat from a distant forth to a record first, so we back our credibility in the personal bank space.
AK: One more question from Bob, if you have one, Bob.
RG: Yes. In wealth management you’re seeing lapses in your policies. Is this because you’re squeezed between self managed funds and industry funds that are pressuring your business?
CC: It’s certainly a pretty dynamic environment in wealth at the moment. I think the market has been pretty unsettled for a couple of years now.
We’ve got the regulatory changes coming through. We’ve got obviously a lot of people not necessarily wanting to be in the investment market. So, there’s a whole range of things going on there.
I think what we’re focused on is trying to get our business model to be as sustainable as possible for the future and that’s why things like the launch of our NAB Trade platform to play into the self managed space are important and particularly because it’s the only wealth platform that’s completely integrated into our new technology and our core banking platform.
AK: Thanks very much, Cameron.
CC: Thank you.
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