THE DISTILLERY: NAB scrutiny

Jotters pore over NAB's third-quarter results, while one spies a shadow over Nathan Tinkler's bid for Whitehaven Coal.

National Australia Bank’s third quarter results reinforced the perception that the Australian economy is in a bit of a funk. While some business commentators focused on mortgage growth as Australia’s barometer, others dove into the race for deposits between the big four and a potential problem on the horizon.

Starting with Fairfax’s Eric Johnston, the banking writer concludes that NAB is getting a commendable amount of success securing mortgages when you consider the market conditions.

"Banks are under increasing pressure to take a knife to costs as mortgage lending across Australia runs at the slowest pace in more than 30 years. The slowdown has occurred despite 1 percentage point worth of official interest rate cuts since last November. Compounding the problem of revenue growth for banks, business lending has been persistently sluggish since the global financial crisis. Some signs of increasing demand have, however, emerged in recent months. Still, NAB continues to notch fast-paced growth in mortgages, helped by its strategy of discounting loans. Expansion of its mortgage book is running at 1.3 times growth in the broader market.”

Indeed, Business Spectator’s Stephen Bartholomeusz writes that if the banks are a reflection of the broader economy, then NAB’s third quarter results indicate that not much is going on.

"That there is no earnings momentum within the bank isn’t surprising. Demand for credit is weak, with businesses and consumers highly defensive, funding pressures are still there as the majors’ compete for deposits and market-related income isn’t as easily generated as it has been in the past. The subdued conditions explain why all the majors are focusing intensely on costs – NAB has managed a three percentage point reduction in its costs over the past two years – as the earnings lever that they at least have some control over. Within NAB’s results there does, at least, appear to be continuing progress within its personal banking franchise, where the ‘Breaking Up’ campaign continues to drive improvements in customer satisfaction and revenue.”

The Australian’s John Durie was full of praise for NAB chief executive Cameron Clyne – actually, most commentators express solid respect for him when NAB is in the news – but hastens to point out that Melbourne bank’s slide in the fourth position of Australia’s big four banks will be difficult to reverse.

"The People's Bank yesterday reported its sixth consecutive quarter of $1.4 billion cash earnings, which is consistent but underlines its position at the bottom of the banking oligopoly. Cameron Clyne has pulled all the right levers and deserves plaudits for the cultural change he is leading, but is finding it all but impossible to shake off the sins of his predecessors. Today the market figures CBA boss Ian Narev will report earnings of around the $4.35-a-share mark, and Clyne later in the year will report something close to $2.52 a share. Back in 1999, when Frank Cicutto was running NAB, it reported $1.98 a share against $1.58 for CBA. In the 13 years since, CBA has steadily increased, with the exception of 2009 when it trashed earnings per share with a panicked rights issue, while NAB has never topped the $2.68 a share reported in 2007.”

While Johnston and Bartholomeusz have spoken of mortgages as a litmus test for the Australian economy, two other commentators have focused on the other end of the banking spectrum – deposits.

What inspired the discussions are comments from NAB chief financial officer Mark Joiner. Here’s The Australian’s Richard Gluyas.

"One of the reasons for the white-hot competition for deposits is the 2018 introduction of the net stable funding ratio under the Basel III accord on capital and liquidity. The NSFR promotes the industry's resilience by requiring banks to fund their activities with more stable sources of funding, such as retail deposits. The question posed by Joiner, which is also one for any financial system inquiry, is how should the industry respond if there's a strong recovery in credit growth. NAB, as the nation's biggest business bank, would want to help fulfil this resurgent demand, but to what extent given its NSFR obligations?”

The Australian Financial Review’s Chanticleer columnist Tony Boyd says the comments are unfortunately timed for investors, who were just starting to warm to the banks again.

"Joiner is flagging an issue that was a top priority for policymakers in the two years after the global financial crisis but has since slipped into obscurity. The issue can be summed up with the following questions: is Australia content to keep funding the economy through the big four banks in offshore markets? What needs to be done to encourage market-based financing of business investment? How can banks lock in deposit funding? What impact will new capital rules have on the ability of banks to fund credit growth?”

Fairfax’s Malcolm Maiden says not one, but three releases from NAB indicate just how abnormal conditions are for the banks.

"If Europe can get up off its knees, the rest of the world can get on with business, it seems, and NAB's third release yesterday, of revised economic growth forecasts for Australia and the rest of the world, showed why a European recovery matters. The bank trimmed its forecast for global growth this year from 3.1 per cent to 3 per cent. China is still the world's main growth engine, with growth of 7.7 per cent this year and 7.8 per cent next year. But the United States, Japan and the rest of Asia are also expected to grow moderately. Europe, in contrast, is expected by the NAB to be worse than a dead weight this year. The bank was predicting a gross domestic product contraction of 0.6 per cent, and now thinks it will be 0.8 per cent. And if NAB is right it will be a passenger in 2013, growing by just 0.1 per cent.”

The other two releases were of course the bank’s third quarter results and a survey on domestic business conditions.

In other company news, Singapore-owned Optus also released quarterly results yesterday and Fairfax’s Elizabeth Knight argues that the numbers support the thesis that mobile revenue growth is slowing.

In mining company news, The Australian Financial Review’s Matthew Stevens says the inability of Nathan Tinkler’s Mulsanne Resources to raise a few million dollars on time has cast a legitimate shadow over the coal tycoon’s ability to pull off a $5.2 billion privatisation of Whitehaven Coal.

And Fairfax’s Insider columnist Ian McIlwraith takes a look at the share price surges at Sabre Resources and Prairie Downs Metals.

Meanwhile, The Australian’s Barry Fitzgerald looks at the close attention that Papua New Guinea is getting from the resources sector, beginning his piece with a line that’s in terribly poor taste.

The Australian’s economics editor David Uren rallies against the calls for intervention on the dollar.

And finally, with the help of Perth-based statistician Brian Dawes Fairfax’s Michael West has concluded that a fair analysis of the London Olympics shows that Australia finished first.

The method employed is perfectly sound and readers should not feel the need to investigate further. Australia won, down with England.

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