THE DISTILLERY: NAB knowhow

National Australia Bank's tight margins have been under the microscope for some time. But was Cameron Clyne right to put NAB on this path of cheap loans with an underdone deposit book? That's the debate the business commentators are exploring this morning.

The Age's Eric Johnston says recent focus on NAB's UK operations is a distraction from the bank's real problem.

"NAB continues to notch fast-paced growth in mortgages, with expansion at about 2.2 times growth in the broader market. But with limited options on pricing of mortgages, questions remain whether its strategy of discounting on housing loans remains sustainable. While NAB was able to move ahead with mortgage discounting when it was the smallest player, as it increased market share it has found it needs to secure more funds to meet demand for mortgages. So this strategy comes at a cost. As turmoil in global credit markets pushes up funding costs and regulators take a dimmer view on wholesale funding, banks like NAB are finding the real pain sits on the competition for deposits.”

The Australian's John Durie puts the challenge into terms that mortgage holders would understand.

"Over the past 34 months, a NAB customer with a $300,000 mortgage would be $1650 better off than if he had a Westpac loan. That is a significant cost saving and Clyne argues while customers won't jump on rate cuts, in time the message becomes clearer. For his sake, that had better be the case because having increased his balance sheet by 60 per cent over that period for an 11 per cent increase in retail division earnings, the gains are to be made. NAB's loan book is funded just 51 per cent by deposits, which is well below his peers at an average of 60 per cent. And this puts him at a disadvantage. This will be magnified by the rollercoaster ride in Europe.”

The Age's Malcolm Maiden goes to the man himself about whether NAB's current strategy is still working.

"Clyne got the obvious question yesterday: is the strategy failing? His answer was that home lending was a source of balance sheet growth that underpinned growth elsewhere, and that the entire enterprise was being undermined when NAB was not growing deposits, and going backwards in home lending. My conclusion is that Clyne wants to recapture some profit margin by edging closer to his competitors. He is narrowing the interest rate gap between NAB and its competitors to do so, but will stay beneath CBA, Westpac and ANZ – to keep the divorce story alive, but also to ensure that NAB does not re-enter the box canyon it was in three years ago.”

Whether you agree with NAB's strategy today or not, The Australian's Richard Gluyas encourages readers to remember the state the Melbourne-based bank was in when Clyne put it on this path.

"For a start, back in 2009, there were few alternatives to NAB's "radical organic" strategy. The bank had tried everything else, and as Commonwealth Bank and Westpac swallowed BankWest and St George Bank, they benefited from the government cranking up the housing sector with big incentives to first-home buyers. The pressure was intensified because NAB was bumping up against loan concentration limits in business lending due to the personal bank's long-term underperformance. The bank had also hit rock bottom on customer satisfaction, wasn't attracting deposits and mortgage growth was about half that of the wider banking system. On those measures, it was a crisis that not only demanded attention but radical action to boot.”

And Business Spectator's Stephen Bartholomeusz keeps an eye on the coming battle for NAB and the rest of the banking sector.

"Like its peers, NAB has been very focused on building its defences against any new threat emerging from the instability in Europe, the volatility and fragility of funding markets and the toughening regulatory regime. It is now holding tier one capital of 10.2 per cent of risk-weighted assets and liquid assets of $90 billion. All four of the majors are building capital and liquidity as insurance against another meltdown in wholesale debt markets and in anticipation of the Basel III regulatory regime.”

Also on NAB, The Australian's Criterion columnist Tim Boreham finds the boffins at KPMG warning that shifts in capital requirements will shape banking results significantly, while The Australian Financial Review's Chanticleer columnist Tony Boyd gives some qualified attention to claims from Clyne of dangers in the local lending market.

Also in company news, The Australian's Damon Kitney says News Corporation's increased share buyback program reflects a change of heart at the top of Rupert Murdoch's empire. The SMH's Elizabeth Knight contemplates the likelihood that Gina Rinehart's concession to her children on the family trust will end up bankrupting them. And The Australian's Bryan Frith looks at the emerging legal battle between Switzerland's Pala Investments and Australia's Bradken Limited.

In the continuing budget washup, The Sydney Morning Herald's Jessica Irvine says Swan's fifth budget helped bust two myths about the mining industry. First, the mining industry is paying copious amounts of tax. Second, the broader economy isn't benefitting from the mining boom, just hurting from the Australian dollar. The Australian's Glenda Korporaal absolutely smashes the government for constantly tinkering the superannuation system, threatening the amount of savings that will be set aside to take care of our ageing population. And the same paper's economics correspondent Adam Creighton rallies against the meaningless phrase "working families,” something The Distillery certainly appreciates.