By Tim O’Shannassy

Acknowledgement

Introduction

As NAB Chairperson Mr Philip Chronican and Chief Executive Officer Mr Ross McEwan contemplated their morning coffee at a favourite Docklands café near Melbourne head office – they were quite chuffed with the stability of the Group in 2021 despite all the challenges of the COVID-19 pandemic and a weaker net profit result (Gluyas, 2021). The impact of the COVID-19 pandemic has been much gentler on NAB than was predicted in early 2020, but there is much work to do in 2021 and beyond (Gottliebsen, 2021).

The “big four” banks have a big influence on the Australian and New Zealand economies; for example, NAB, ANZ, CBA and Westpac make up approximately 25 per cent of the weight of the Australian Stock Exchange (ASX) Top 200 by market capitalisation (Neiron, 2020).  NAB’s common equity Tier 1 ratio stands at 11.7 per cent with predictions for the overall Australian economy optimistic for the future, with the implication that these favourable economic conditions will not place stress on NAB’s capital situation. Funds from settlement for the NAB sale of the MLC wealth business to IOOF will further strengthen capital (Gluyas, 2021).  The two Melbourne based “big four” rivals National Australia Bank (NAB) and ANZ Banking Group Limited (ANZ) are weaker in retail banking operations than their Sydney rivals Commonwealth Bank of Australia (CBA) and Westpac Banking Corporation (Westpac) (Fullerton, 2021), in what is an intensely competitive industry. NAB needs to address this and a slip in its cost to income ratio in 2020.

Chronican and McEwan reflected on this cost to income ratio issue, and the status of NAB’s play for Australian neobank 86 400 – a transaction that will give NAB access to more millennial and young customers. Information technology and the technology experience was now a key competitive issue in banking and NAB need retail market share, and must give their customers a quality customer experience – including a quality technology experience that rivals the technology experiences of customers on social media (Yeates, 2021). They discuss how UBank can help with that.

The Business Environment in the 2020-2021 Pandemic

The “four pillars policy” was developed by the Hawke Labor Government in 1990 with the objective of preventing further mergers between The Melbourne-based NAB and ANZ and the Sydney-based Westpac and CBA. The “four pillars policy” is not regulation but a formal policy from the politicians. Motivation for the “four pillars policy” at the time in the 1990s was the difficult task confronting ANZ, Westpac and CBA coping with significant credit impairments following the share market crash of 1987 and the high interest rate environment of the early 1990s. The view of the Australian Government at the time was that four strong banking rivals acting as “pillars” for the Australian economy would help prevent the risk of a round of takeover activity allowing the animal spirits of the sharemarket to potentially destabilise the provision of credit and the protection of savings (Ellis, 2016).

The Australian economy is doing better than expected in 2021 after a difficult 2020 in which Gross Domestic Product (GDP) fell 3.8 per cent (Australian Bureau of Statistics, 2021). The Reserve Bank of Australia (RBA) cash rate is at an historic low of 0.10 per cent (Australian Treasury, 2021) with Australian Federal Government debt at $811 billion (Wright, 2021). Australia’s GDP is forecast to grow 3.5 per cent per annum in 2021 (International monetary Fund, 2021). NAB economists expect the Australian economy to recover its pre-pandemic March 2020 level in the March quarter of 2021 (Gluyas, 2021), despite the likely withdrawal of JobKeeper which has been a lifeline for many small, medium and large enterprises – and their employees (Gottliebsen, 2021).

Australia has a comparatively high corporate tax rate at 30 per cent, compared with the 28 per cent rate for New Zealand and 21 per cent in the United States. In New Zealand overseas corporates are taxed on what they earn in New Zealand, while New Zealand based corporates are taxed on their global earnings.

Social media is having an impact on the banking sector, with millennial and more youthful customers expecting their banking experience to be comparable to their other experiences on social media, and also having a greater preparedness to change their bank than their parent’s generation (Yeates, 2021). COVID-19 has accelerated customer use of digital banking putting at risk bank branches in smaller country towns around Australia; politicians continue to lobby the “big four” not to close these regional bank branches in the face of an overall 11 per cent reduction in country bank branches over the past four years (Lynch, 2021)

Technology is evolving with a number of impacts in this industry (Wade et al., 2020), including the importance of technology systems and online platforms which can give players such as NAB an edge   competing for market share (Yeates, 2021). There has also been a greater frequency of attempted fraud and cyber-attacks (ANZ, 2020).

The Australian Securities and Investment Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) and oversee the financial scene, the ASX and merger and acquisition activity. The Australian Competition and Consumer Commission oversees trade practices.  The Corporations Act 2001 sets out the laws in Australia that apply to corporations and duties of directors. The Competition and Consumer Act 2010 sets out law in relation to competition and fair trading, and consumer protections.

Climate change and emissions targets are an important focus of attention for many corporations in a range of industry sectors including the banking sector. The Business Council of Australia (BCA) is encouraging the Morrison Liberal Government to make a statement of goals on emissions and with focus on new technologies including hydrogen, electric cars and grid reliability (Gluyas, 2020). President Biden’s election in the United States may result in a policy revisit from the Morrison Government (Kehoe, 2021).

Banking and Finance Industry Trends

Banking and finance is about being an intermediary with money. The industry recipe for success is business growth in loans and deposits, credit quality, cost control and superior margins. It is possible for disruptive technology to appeal to a particular market segment (e.g. millennials) however endeavours in this area alone may not deliver comprehensive impact in all market segments (Yeates, 2021).

There is strong rivalry in the banking and finance industry in a number of areas including customer demographics, product, customer service, information technology and social media applications. The “big four” banks are significant economic entities that make a substantial contribution to Australia’s GDP and the composition of the ASX Top 200.

There is an information technology race in progress in banking and finance with significant financial budget committed by industry players (ANZ, 2020). Providers to the banking and finance industry include software developers, systems engineers, human resource contractors, providers of legal services, providers of accounting services. real estate valuers and brand valuers. The “big four” have due to their scale of operations significant market power including the ability to negotiate price and specify a level of product and/or service quality.

The Australian economy – and the New Zealand economy – obtain significant benefit from the stability and strength offered by the “four pillars” NAB, ANZ, CBA and Westpac that in the view of policy makers outweigh criticism of governance protections and what is seen by sum of duplication of competition  (Ryan, 2018). This criticism needs to be carefully balanced by the rich lessons of boom and bust in economic history – including Australian economic history – in moments when the “animal spirits” of capitalism have been allowed to run free (Ellis, 2016).

A number of smaller new entrants have emerged recently in the Australian banking and finance industry usually associated with a particular technology; players here include NAB’s recent acquisition 86 400 and also Douugh, Judo, Revolut, Volt and the failed Xinja.  The buy now pay later (BNPL) market has drawn the interest of millennials with Afterpay a leading emerging business (Yeates, 2021). CBA recently purchased 5 per cent of Klarna the Swedish BNPL provider which has enjoyed favourable growth in the United States market (Yeates, 2021).

The millennial customer is providing an interesting challenge for the “big four” banks as millennials have a higher propensity to switch banking relationship than their parent’s generation. The BNPL trend and the popularity of Afterpay has also shaken up the industry. It is not only innovative solutions servicing a particular demographic or offering a particular technology having an impact here but also innovative philosophies – the Australian neobanks domain. Interest from institutional investors in bitcoin is currently on the rise, which presents an interesting challenge for ASIC and the “big four” (Eyers, 2021). Blockchain is in early developmental stages (Pollock, 2019).

Different market segments (e.g. retail, business banking, institutional) have different buyer power. Millennials and Generation Z consumers do not have the same customer and brand loyalty to the “big four” banks exhibited by their parents. Younger bank customers compare their online banking experience to their other online experiences and this informs their expectations (Yeates, 2021). Institutions including CBA are aware of these social trends and in response and spending heavily on their online offering while setting out to personalise this online offering for their customers (Yeates, 2021).

National Australia Bank Strategic Situation

The National Australia Bank Strategy

In 2020 NAB updated its strategic ambition stating:

Our customers and colleagues are where we’ll focus our investment. Serving them well means being:

• • • Relationship led: building on market-leading banking expertise, data and insights.
    • Easy: an easier, more seamless and digitally enabled bank that gets things done faster.
    • Safe: protecting customers and colleagues through financial and operational resilience.
    • Long term: delivering sustainable outcomes for our customers, colleagues and communities (NAB, 2020a: 11).

Strategic priorities include deepening relations with our current customers, attracting new customers, improving the customer experience, improving colleague engagement, improving the digital offering, controlling costs and improving shareholder returns (NAB, 2020a). NAB does not intend to make changes to the portfolio of businesses beyond possibly adding smaller acquisitions, or divesting non-core activities (NAB, 2020b).

Key measures of success include return on equity, cash earnings per share and strategic net promoter score as NAB strives to be innovative, fast and decisive for the customer, delivering personalised experiences and realising great value for the customer (data, analytics, expertise). UBank is seen as an important vehicle for new customer acquisition (NAB, 2020b).

Functional Level Insights at National Australia Bank

NAB operates a network of greater than 850 branches, with nine million customers and greater than 639,000 shareholders (NAB, 2020b).

The operational structure of the Group was redesigned in 2020 to reflect the restating of strategic ambition and the greater focus on the digital offering, increasing emphasis on UBank and Strategy & Innovation (NAB, 2020a).

NAB operates the following divisions:

• Personal Banking service and support network providing home loans, personal loans, term deposits
• Business and Private Banking focusing on servicing small and medium size businesses
• Corporate and Institutional Banking including specialised product and industry relationship teams
• New Zealand Banking across the consumer, small and medium size business, corporate and institutional markets including wealth and insurance business under the Bank of New Zealand brand
• Corporate Functions and Other business including UBank, Strategy & Innovation, Technology and Enterprise Operations, Treasury, Support Units and Eliminations (NAB, 2020b).

NAB has worked hard to assist its customers during the 2020-2021 pandemic deferring over 110,000 home loans and over 38,000 business loans. Further support has been provided including financial coaching, courses to help customers set their businesses up online, and free counselling services (NAB, 2020b).

During the pandemic uptake of internet banking has increased with over 90 per cent of customers active in this medium (NAB, 2020a).

In the period since September 2017 the number of products offered to customers has declined to 411 from 600 previously, while over the counter transactions are down 47 per cent. In the same time period digital consumer product sales increased to 65 per cent from 31 per cent (NAB, 2020b).

NAB is Australia’s biggest agribusiness lender and has recently commenced closing regional bank branches as COVID-19 has influenced customers to do their banking online (Lynch, 2021).

NAB was one of the first banks to sign on to Bank@Post which requires a $22 million fee or a community representation fee for access to 3500 post offices (Lynch, 2021).

NAB’s strategic objective is simple products and customer experiences. Innovation will play a key role in this outcome given the importance of the digital experience for the customer. The Group has recently made a strategic investment in 1,697 jobs to employ capability in workplace technology and network services (NAB, 2020b). Over the past three years NAB has invested approximately $300 million in managing financial crime risk with more than 1,000 employees working in this area (NAB, 2020b). NAB is conscious that its rivals are spending strongly in this area and that this is an important competitive space (Moullakis, 2021).

Summary financial information extracted from the 2020 NAB Annual Financial Report is provided in Table 1 below. It has been a difficult year for NAB with a deterioration in other income, operating expenses and credit impairment. Statutory net profit is down 46.6 per cent at $2.56 billion (2019 $4.80 billion) with dividend per share well down at $0.60 in 2020 (2019 $1.66). Cash earnings were $3.71 billion down 36.6 per cent on 2019. There has been a clear deterioration in the cost to income ratio during this difficult time impacted by COVID-19, bushfires and severe drought.

Table 1: NAB Group Financial Summary Years 2019 and 2020 (NAB, 2020b)

*These results include large notable items (refer NAB 2020b, Financial Report, p. 14)

NAB has over 34,000 employees. NAB is currently taking action to address weakness in its employee culture identified in the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and the APRA self-assessment; this is ongoing (NAB, 2020b).

This workforce moved fast to adjust to working from home during the pandemic within a period of three weeks; employees received up to 10 days pandemic leave as well as support for carer responsibilities and wellbeing (NAB, 2020b).

NAB endeavoured to keep as many branches open wherever possible with employees available to help customers when possible (NAB, 2020b). Closure of rural bank branches has created community concern for job losses, however NAB has indicated they will work with their staff on new opportunities including online, phone or video customer service (Lynch, 2021). The branch footprint will likely receive further refinement in 2021.

There were a number of changes to the Board and Senior Leadership Team in 2020 including the high profile resignations of Mr Mike Baird the former Chief Customer Officer – Consumer Banking and female director Ms Geraldine McBride. New recruits to the Board and Senior Leadership team include Mr Nathan Goonan who started as Group Executive Strategy & Innovation in June 2020 (NAB, 2020b).

Since September 2017 the Group has set out to reduce 6,000 existing jobs and create 2,000 new jobs in areas that reflect the greater emphasis on technology and the customer. In total 1,638 new jobs have been created in areas including compliance, data, analytics and customer service (NAB, 2020b).

The Future Strategy Challenge

This is a crucial moment in the evolution and history of NAB with its current focus on accelerating its strategy in a highly competitive and challenging context. NAB has a delicate strategy balancing act, needing to consider the long term and short term needs of shareholders plus the needs of customers and communities (NAB, 2020b).

There are a number of critical strategy questions to consider. Does NAB have its strategic ambition right? Is the accelerated strategy enough in 2021 and beyond in the medium term? Is strategic investment in information technology enough? Are the higher credit impairments in 2020 a short term concern or a medium term concern? Is NAB doing enough to address weaknesses in its culture identified in the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and APRA self-assessment? How does NAB’s cost to income ratio compare with rivals ANZ, CBA and Westpac? How can the cost to income ratio for NAB be improved?  What changes will be made to the branch footprint of NAB? What will be the fate of rural NAB branches? Is NAB doing enough in climate change and sustainability?

References

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