NAB 2018 Full Year Results – NAB Group CEO Andrew Thorburn


ANDREW THORBURN: Good morning everyone. Well, a big day today of course at NAB – the release of our FY18 Results. I just thought I’d cover a few key points, and then we’ll go to your questions.

It’s certainly a challenging operating environment. If you look at the play through of the Royal Commission, and the trust and reputation impacts; you look at regulation; you look at the economy – it’s still moving forward, but, certainly, there is more risk today than there was a year ago, generally, in the Australian economy, and in the world economy.

But, I think, given that backdrop, what we’ve produced here is a credible underlying result. If you take out the restructuring charges we signalled a year ago and put a number next to it for the first half, and the customer-related remediation, the underlying result is pretty good. Profit is down 2 per cent, ROE is above 13 per cent, and, importantly, we’ve grown revenue – if you look at revenue growth over the year, it’s at 1.8 per cent. We’re growing home loans; we’re growing particularly in SME – that is NAB’s heartland. We want to build the best business bank – it’s growing share, it’s holding margins, and, importantly, we’re investing in it.

I believe the investment program the bank’s got – where we’ve got $1.5 billion more that we’re investing in the bank over three years – you need to do that if you want to transform a company like a bank. And, that is absolutely what we’re doing.

And, the Business & Private Bank is doing well. We’re seeing some other growth opportunities, whether it’s JBWere in the Private Bank, or UBank, or the growth corridors in Melbourne and Sydney. The asset quality position is strong. Our collective provision is strong. We’re not seeing any increase in impairments. And, we can see a clear path to CET1 of 10.5 per cent by January 2020.

But, the important thing is that we’re investing in the bank to transform it. The Year One of a transformation is always hard – it has been hard – but, actually, you can see some of the benefits coming through in terms of less products, less layers in the bank, better IT systems, and growth in market share.

So, whilst it’s a challenging environment – and I don’t think that’s going to change in the next year … I think it will continue for a little while yet – I think we’re setting ourselves up for what’s beyond that, and a strong, customer focussed, sustainable bank. With that, I’m happy to go to your questions.

JOURNALIST: Hi, Andrew, thanks for the call. Forgive me; I haven’t had much time with these results. I just wanted to ask you – how long do you think you can hold back on lifting rates? Is this something that you can do indefinitely?

THORBURN: Thanks, James. So, what we said when we made the announcement is that we would have our SVR on hold for now. The broader backdrop is that we’ve shown over the years that we can manage our margins very well, and if you look over the half, or the year, our margins are flat, or down one. I think we’ve given ourselves, with that discipline, some flexibility that others don’t have.

But, the bigger and more strategic point is – if you read things like my opening statement to Parliament at the House of Representatives a couple of weeks ago – banking does need to change. We need to focus back on customers, and building loyalty and appreciation with them.

And, to me, it doesn’t make a lot of sense when you’ve got a long-term product like a mortgage product that the churn is after three or four years. And, that’s because they’re getting more aggressive discounts and cheaper prices if they go back into the market. So, what we’re trying to signal here is that we value our existing customers – we’ve got almost a million home loan customers at NAB, and we’re signalling to them that we appreciate your loyalty, we appreciate your business, and we want to keep this rate on hold for as long as we can to acknowledge that.

So, I think it’s a broader point around loyalty and recognition of existing clients. It falls back on our disciplined margin management. But, we’ve got some of the same funding costs pressures that others banks have got, but, certainly, that is our position at this point.

JOURNALIST: Good morning, Andrew. I just wanted to ask on expenses, including the restructuring, they’re up about 18 per cent, which is obviously a very big increase. What is your outlook for the future? How many of those restructuring expenses are likely to be repeated next year, and how many of these are genuine one-offs that people can look through?

THORBURN: Thanks, Emily. The restructuring charge of $750 million, and the after tax customer remediation charge of $300 (million) after tax – they’re what we would call material, lumpy, one-off items. Both of those have been signalled well before today. So, really, you just have to look through that, and the underlying expense growth is 6.4 per cent for FY18. That is, sort of, the best number to look at. Now, that too, though, is higher in FY18, because we have invested more money as part of our three year transformation program. So, you are seeing some of that come through to the operating expenses line – that was to be expected.

What we said is that we will be between 5 and 8 per cent for the year, and we’re at 6.4 (per cent) – so, we’re right in the middle there. But, importantly, what we are signalling is, in the next two years, we will have flat costs. So, we have invested a lot this year. But, you can see some of the productivity benefits we are driving in third party spend, or restructuring of the workforce, or less products – taking IT applications to the cloud … all of that is giving us – and, you’ve got to invest to do that – is giving us a confidence that these efficiencies are sustainable. So, the six and a half is the best number, and we’re guiding to flat costs in the next two years.

JOURNALIST: Hi, Andrew. I just wanted to just touch on what James asked previously about the Standard Variable Rate. How often does – I don’t want to go into too much detail – NAB review where the Standard Variable Rate is sitting? Is it a fortnightly or a monthly review? And, secondly, you talked about keeping flat – sorry, keeping costs flat – can you give us a run rate on the job cuts, and what you’re expecting in the current financial year?

THORBURN: Thanks, Joyce. On your first point, all our rates are really under constant review. Because what you’ve got is funding costs, which are changing all the time because you’re issuing more offshore debt; you’re raising shorter term commercial paper; term deposit rates are changing – so that deposit cost is moving daily, weekly, really. So, we have people every day who are looking at that, and we review it on a regular basis as part of our pricing disciplines, through a pricing committee. So, I would say it’s a formal thing all the time that we do, because you have to do that. But, you’ve also got to try to take a long term view in building your business. So, it’s a constant review – that’s the first point.

The second point on flat costs – going back, what we said is we were going to invest to make the bank simpler and faster. We’re going to invest in our Business Bank, invest in our people. We see a significant reshaping of the workforce as we invest in automation and process improvement, and there will be less people needed in those roles than previously. And, that’s started to happen. Our reduction this year is about 1,900, so that’s the first year towards 6,000. So, if you like, we’re on track for that. And, as we invest more I think those numbers will gradually flow through.

The important thing is that we’re investing to make the bank more efficient, and, as you make the bank more efficient, you need less people to do certain things. Having said that, we are reshaping the workforce – you can see we’re bringing in new skills – there’s 700 or 800 new people we have brought in either from insourcing activities or for growth. A lot of those technology people, data people, architects – so, there is a good reshaping going on…

JOURNALIST: Are you going to have to ramp up the rate of cutting – for want of a better phrase – if you’re at 1,900 in the first year

THORBURN: No, I don’t think so, because you can’t…

JOURNALIST: Is that the right assumption to be making?

THORBURN: No, I don’t think it is. We never thought it was going to be 2, 2, 2, because it just doesn’t work like that. You’ve got to invest, and then you will gradually move it through. And, it will happen as we automate the business. I am comfortable we are working towards the number over three years that we will get.

As changes are made, I am very conscious of the impact on people and their lives, and this is where ‘The Bridge’ comes in to really help people with career planning and resumes and interviews skills. We’re investing a lot in that, and there’s been good take up, and I think we have really helped people. A lot of these people have been in the bank a long period of time, and they don’t have the confidence and the detail that some people would have, and I think we are really making a difference to them, to help them into the future.

JOURNALIST: Thank you.

THORBURN: Thanks, Joyce.

JOURNALIST: Hi, Andrew. You mentioned the remediation costs – they’re obviously a feature. To what extent do you see those customer remediation costs as a result of the Royal Commission continuing for years to come, or do you see these as a one-off or something to take now rather than in the future?

THORBURN: Thanks, Clancy. Well, there’s always been some remediation costs in the underlying BAU cost of the bank, but, of course, over this year and last year, there’s been higher customer remediation required, mainly in the Wealth business. That’s really the essence of where it is. Obviously, the $314 million after tax we have taken, that’s a very significant item – that’s our best estimate, but, obviously, it’s a significant provision. A lot of that – well, not a lot of it – $100 million or so is the cost to do it, and then there’s some debit to revenue, you know, fees that we’ve charged that we’re going to refund customers.

So, we’re comfortable with where we’re at. I mean, it’s a disappointing outcome, there’s no question about that, because we’ve charged customers for fees and services that we didn’t provide them, so that’s just not good enough. But, I think we’re investing to prevent it and fix the issues and remediate as quickly as we can, so I think we’re going to just have to keep this as a watching item as we go forward.

JOURNALIST: What’s your response to some comments from the Reserve Bank earlier in the week that there would be a permanent increase in banks’ cost base due to changes to their business models caused by the Royal Commission? That it could hurt profits in a permanent kind of way?

THORBURN: I didn’t read the detail of all of that, Clancy, but, just taking up what you said there, I think it’s a lumpy item this year, and there’s going to be obviously more regulatory and compliance costs probably in the next year or two. But, on the other hand, you can see we are investing in new technology and processes which are going to make the bank a lot more efficient as well. I think I would back that over the medium term to have a very significant impact.

We believe the bank has to get a lot more efficient in order to be fit for the future, to face existing competition, and new competition that are not here yet. We’ve got to continue to be disciplined, not just to drive costs out, but efficiency. And, I think the technology tools, and the technology team, and the investment we are making that is very significant. So, I think, over the medium term, that is going to make a very considerable impact on the efficiency and cost base of the bank, and I think that will offset any of these other items that you are referring to.

JOURNALIST: Good morning, Andrew. I just had a question on the transformation process. Specifically, just on skills – you said you’ve hired 195 new FTEs, sort of heading towards the target of 2,000. So, it’s a little less than ten per cent, one year into three. I just wondered is that part of what you initially thought? What skills have you found in that 195, and do you think it’s actually going to get tougher to find the rest? And, what are you still looking for?

THORBURN: Good question, James. This is of course a complex picture. You also have to look at … there’s a chart in there that says we’ve insourced, I think, 542 – that column, you need to add, in a sense, to the 195. So, going back a year, what we said is that we think that, with the investment and the reshaping of the workforce which needs to happen, we’ll be six (thousand) down, but we’ll have two (thousand) in, so a net of four (thousand). But, what we said is we think 2,000 will be the number where we’ll grow, and you can see we’ve got a couple of hundred of those, and those are mainly bankers, home loan specialists … core skills to help grow the bank.

Where we found the insourcing helpful – we did flag this in a conversation at the last Full Year Results – we said, look, we’re getting insourcing capability from existing third party suppliers, or just bringing people in. Because it does de-risk the bank, it gives us the capability we need, and, actually it’s a lot more cost efficient. So, you have to add that number back in, because a lot of those people are core technology people – architects, people specialising in infrastructure, people in data. So, you have to look at that number – the 540 – as well as the 195.

JOURNALIST: So, when you’re talking about insourcing, what do you mean? Do you mean you’re hiring from your consultants to become NAB staff?


JOURNALIST: … or are you just using more consultants?

THORBURN: We have about $4 billion of third party supply spend – a big chunk of that is what you might call IT or operations-type services from large IT or procurement or services companies. So, what we’re doing is we’re selectively looking to bring some of those skills that we’ve outsourced back inside the bank, in a targeted way, to lower the risk – in other words they’re employed by us – to bring capability back into the bank that we probably think we need to change given the future. And, it’s lower cost. So, yes, we are doing that. In some cases it’s not the same people. So, we’re taking the capability back in, we’re bringing some of the people from the third party supplier, but then we’re bringing in others from outside – we’re upgrading our talent. But, in essence, what you’re saying is what we’re doing.

JOURNALIST: Thank you, Andrew. I just was going to ask you about one of the slides in the pack. So, your housing lending provisioning’s gone from 0.05 to 0.17 – at the Half Year, I think it was $515 million compared to about a quarter of that a couple of years ago. Could you just tell us, are you noticing a deterioration in the quality of credit in the housing market?

THORBURN: No, we’re not really, Tony. We have made a lot of changes to our policies over the last two years, in areas like income and expenditure checking, and the buffers we require. You’ve got to remember, today, any new customer to the bank, we have an expectation of 7.25 per cent being the interest rate that they’re expected to pay, and principal and interest. And, they’re still required to have a healthy surplus. So, I think we’ve made changes – we’re probably more conservative than what we were one or two years ago in terms of acquiring new credit, and we’re more disciplined in that process. And, I think that’s a good thing.

So, what we’re doing is probably taking less risk today than what we were a couple of years ago, in that sense. But, if you look at the chart above that one you’re referring to, which is the arrears number, you can see that’s slowly trending up. But, these are coming off very low bases. Apart from Western Australia, I mean, yes, Victoria and NSW which are big states, are drifting upwards, but they’re only slightly drifting up. So, that’s probably a more reliable number in terms of stress in the book.

The collective provisioning below – we have continued to lift and make forward looking adjustments. In other words, adding some top up provisioning just really to be conservative. And, in the bank as a whole, that number’s $581 million – over and above what our models say we need for the risk we’re carrying. So, that’s just an additional provision we’re making. If you look at that bottom chart, the dark box is the model requirement, and the one above is pop ups or model changes or forward looking adjustments we’re making. So, we’re trying to be more conservative in doing that.

I think the housing market – you can see some reductions in prices in Sydney and Melbourne, but they’re coming off significant increases over the last five or six years. We still think housing credit is going to grow at 4 or 5 per cent, low rates, unemployment at 5 per cent – it’s underpinning reasonable expectations, I think. So, I think there’s more risk in the overall economy today than there was a year ago, but I still think there’s opportunities for selective growth.

JOURNALIST: Hi, Andrew. I just wondered have you made any preparations at all to cope with Brexit? Are you going to move any functions out of London, or are you going to apply for any licences? And, have you thought about any contingency plans for financial disruption to the markets if there’s a No Deal Brexit?

THORBURN: So, on the second point, Jamie, obviously this is a very significant issue for the UK and for Europe, but, because of the size of London as a market maker, obviously that’s another uncertainty to add to a list of uncertainties in the global economy and the geopolitical space. So, I’m not sure where it stack ranks, but you’d certainly put it in that list. As a bank where we raise offshore funds to finance our clients and the Australian economy, yes, I think that’s a concern but I think it’s in a basket of other things that are also collectively of concern.

On the first point, we have a branch in London – obviously important for our Corporate and Institutional type clients. We are reviewing what steps we might take at this point – we haven’t made a decision. Obviously we’re wanting to see how it unfolds, but we’re certainly taking quite detailed investigative steps about what the options might be if we needed to move it. But, obviously it will be far less significant for us than it would be for a major UK domiciled institution.


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