NAB must meet the rising tide of expectations

Despite NAB's solid performance in a soft environment, the market and shareholders will be impatient for progress on the bank's structural challenges.

Given the context of a softening and volatile environment, National Australia Bank’s first-quarter performance was, as Andrew Thorburn described it, "solid". He would be acutely aware, however, that as he increasingly owns the group’s results, the market and his shareholders’ expectations will rise.

The 6 per cent increase in cash earnings for the quarter, to $1.65 billion, was a respectable performance and one without any unpleasant surprises, but the market is impatient for progress on some of the more structural challenges NAB faces.

Thorburn, appointed CEO in the middle of last year, said the group was making good progress against its strategic priorities. Note the plural. The NAB he inherited has a number of major legacy issues that he is expected to resolve.

The obvious and long-standing one is NAB’s UK presence.

While Thorburn has overseen a massive reduction in the group’s exposure to what was once a very large and troublesome commercial property portfolio, which has been reduced by sales to near-insignificance, he has created an expectation that NAB will exit the UK market in the near term. This was a challenge that his predecessor, Cameron Clyne, was unable to overcome in the aftermath of the financial crisis and one which won’t be made easier by the fresh instability emerging within Europe.

Almost as obvious as getting out of the UK is the need to fix the group’s underperforming wealth management and protection businesses, which will probably entail quitting some segments.

Andrew Hagger has been re-engineering wealth, but he and Thorburn have made it clear that there are no short-cuts to a significant improvement in returns. Success will be measured in terms of the division’s incremental progress over several years.

NAB said today that NAB Wealth’s cash earnings had improved in the December quarter, benefitting from higher insurance premiums, stable claims and lapses and higher funds under management.

Less obvious, but probably the key priority among the range of priorities Thorburn has on his plate is to address the creeping erosion of NAB’s core and dominant business banking franchise, where a focus on cost-reductions and excessive conservatism has seen NAB’s lending growing at less than the system’s growth rate for some time.

The franchise has been the subject of a major assault from Westpac, which has been growing its lending to business at twice the system’s rate and, towards the end of last year, from the other majors as they searched for volume growth in the face of relatively weak demand for credit.

Thorburn said NAB had continued to grow its home loan book at above-system rates but said volume growth in business lending had only recently returned to system levels. Improvement in the business banking franchise would take time, he said. NAB has been busily hiring new business bankers to replace those it let go earlier.

Regaining lost ground will be made harder by the fact that all the majors are more focused on lending to business, particularly after being lectured about their mortgage lending and threatened with macro-prudential measures by the Australian Prudential Regulation Authority and the Reserve Bank. There’s also something of a technology war being waged in the market for lending to small- and medium-sized businesses, one in which CBA is perceived to have an advantage.

Longer term, if the Murray inquiry recommendations are accepted, the majors are also probably going to have to hold more capital against their mortgage books and will face more competitive pressures from smaller banks and non-bank lenders, making business lending relatively more attractive than it has been in the past.

Thorburn noted the intense competition for business lending that is occurring and cited it as the major influence over a lower net interest margin in the Australian bank. More positively, asset quality metrics are continuing to improve from an already strong base, which is a good position to be in as the economy continues to deteriorate.

While none of the issues Thorburn is confronted with are easily or quickly resolved, he has brought a sense of urgency into his new role, heightening market expectations. He and NAB need to continue delivering solid results but he would be well aware that, as this first year for which he is fully accountable progresses, those expectations of fundamental change will continue to intensity.