NAB Group Executive Finance and Strategy, Craig Drummond, today delivered a keynote address at a Trans-Tasman Business Circle luncheon in Melbourne.
Craig spoke about how 2015 has been a year of new focus for NAB.
“NAB has been executing on its strategy of building a stronger Australian and New Zealand business, dealing with our low returning and legacy assets, and improving shareholder returns by closing the ROE gap to our peers,” Mr Drummond said.
“NAB is a very strong bank, and we’re focused on working to make it stronger. We know that the way to deliver outperformance is by investing in our Australian and New Zealand businesses. We have a very clear strategy and we are focused on executing that strategy flawlessly and relentlessly, for our shareholders, customers and employees.”
A full transcript of Craig’s speech is below.
Over the years I’ve hosted, sponsored, attended and admired the Trans-Tasman Business Circle for many years, and today is my first speaking engagement. So Phil and Johnny in particular, over the years, thanks very much for all the opportunities you’ve given me and the organisations I’ve represented over that period. Much appreciated. You have done an enormous amount for trans-Tasman business relationships and I wish you well in your endeavours going forward.
Good afternoon ladies and gentlemen, it’s an absolute pleasure to be here today to talk a little bit about the changes that are going on in National Australia Bank. 2015 has been a year of new focus. NAB has been executing on each strategy of building a stronger Australia-New Zealand business, and dealing – I think as many of you are aware – dealing with those low returning and legacy assets that we have, and improving shareholder returns by – we’ve given a promise to close the return on equity gap between ourselves and our peers. And it’s fair to say, over the past 12 months we’ve been particularly busy, and I think that was hopefully evident in the 7 May announcement where we announced our half year result, and I’m looking at our auditor over, Mr Andrew Price from Ernst and Young, he’s also been particularly busy. Good to see you, Andrew.
Our vision, clearly, is to become Australia and New Zealand’s most respected bank, and we believe we’ll deliver that outperformance through flawless and relentless execution of the strategy. By focusing squarely on the core Australian and New Zealand businesses, where we believe, over time, the best risk return trade-off is by focusing on the core Australian New Zealand businesses. We built a clear strategy through outperformance that I’m confident will deliver superior returns to our shareholders. And I wanted to go through today three components, because of my job spec, I’ll go through three financial components that are key to the strategy.
The first component is removing the legacy, low returning and what I’d call strategically inconsistent assets that exist within National Australia Bank. The second component is building a premier- what I call a premier balance sheet, or what David Murray might call an unquestionably strong balance sheet. Thirdly, to focus on what NAB does best for customers and shareholders, and do more of it by investing in the priority segments that we’ve identified, and I’ll talk about, inside our core Australian and New Zealand business.
Central to the strategy being effective, and Phil referred this in his comments, as did John, central to this strategy being effective is making sure that it’s very, very customer centric. And Andrew Thorburn has talked about it having a real passion for customers. So, ensuring the very customer centric strategy, ensuring that it’s driven by measurable, strong levels of accountability and what we would call cultural integrity. So let me go into a little bit more detail around some of those three financial components to the strategy going forward. There’s been a lot of attention around our low returning and legacy assets. We’ve sold 71.5 per cent of Great Western Bank in the past nine months, we now currently have an ownership of 28.5 per cent of that bank, and that will be sold in due course.
We’ve sold more than 5 billion pounds of distressed and low returning commercial real estate in the UK, and that business has now been closed. In the past 12 months, we’ve sold or run off about $7 billion of risk-weighted assets in what was previously the legacy business called Specialised Group Assets. They weren’t that special actually. But that business has now been closed.
We have also, in the past six months, I’m looking at David Hackett here – central to that strategy, David – project we called Project Crown, which was a reinsurance transaction where we have released about half a billion dollars of capital off the back of reinsuring 21 per cent of our in-force retail insurance business. And we’ve also announced clearly the plans to exit Clydesdale and Yorkshire Bank in the UK via a demerger and partial IPO. And we have announced that we expect to execute on that. I’m looking at Rick Sawers over there, central to the strategy, Rick, thank you for all the work you’re doing. We expect to have that executed by the end of this calendar year.
So all of this activity is critical. But the reason we’re dealing to these low returning and legacy assets is so that we can focus on where our strategic advantage is. And that is in the core Australia-New Zealand business.
The second component of the financial strategy is to build the premier balance sheet. Well we are a strong AA rated bank, as are our three peers, but the steps we’ve taken we believe will – have already – and will lead to a stronger bank in National Australia Bank. We do have a strong balance sheet today. We have a peer leading common equity Tier 1 ratio following our $5.5 billion capital raising, which was very well received by the market. We have peer leading liquidity metrics, as measured by our LCR – or liquidity coverage ratio – at just over 120 per cent. And something that we couldn’t have said as little as a year ago, we now have leading industry asset quality. Our asset quality, just a year ago, our impaired assets and 90 day past due loans were about one and a half per cent of our loan book. Today, they’re about 0.7. So this is a significant change in the shape of NAB’s balance sheet.
In the meantime, we’re obviously very focused on closing the ROE gap – the return on equity gap – to our peers. So balance sheet strength is something that we just will not compromise on. And we believe now is the right time in the cycle to ensure that we have a strong balance sheet.
The third component of the- the financial component of this strategy is to focus on what NAB does best. And there are two components to this. The first component is just the refining of the strategy back to Australia and New Zealand. And I just wanted to give you probably a little bit of thinking, and it’s not overly complicated, not overly sophisticated, but a little bit of thinking as to when we thought about refining back to Australia and New Zealand and where our competitive advantage was – some of the think that we had in mind.
Well, the economic growth outlook, and we believe the banking outlook, in Australia and New Zealand in the medium term we think is very favourable and amongst the best in the Western world. When you consider that clearly, and it’s a well run argument, that Australia has great proximity to some of the best growth regions in the world, that’s one reason, but frankly it’s a lot more than that. If you look at Australia’s medium term credentials, we have pretty fantastic demographics. If you look at forecast- various forecasts that have been done suggest the population in Australia will grow by about 60 per cent between now and 2050. Which is clearly a very important determinant of economic growth.
Within the G20 we have amongst the highest population growth currently. We’re currently been growing at around 1.7 per cent per annum. We have good demographics in the sense that we have one of the lowest ages – 38 years of age. And that’s clearly being aided quite substantially by immigration. Furthermore, the fiscal position of the country I think is well known. The recent budget shows that debt to GDP will peak certainly under 20 per cent, if one can believe the forecasts. And there is no question that the financial and institutional credibility that Australian institutions have do set us apart from many countries in the rest of the world.
These factors, in our view, will translate into sound medium term growth opportunities for the economy. And people often say, well where’s the growth coming from? Well, I think- look it depends on a range of things. Currency is clearly an important short and medium term determinant, but if you look at health, education, tourism, food production, the volume growth that we will get in exports, albeit pricing of certain commodities has taken a bit of a hit. And then you add the levering of those industries into the Asian growth story, I think the growth outlook for Australia will continue to be favourable. There will be ups and downs, clearly, in the medium term. But a three per cent sort of number I think in the medium term is quite realistic.
The story of New Zealand in many respects is just as compelling as Australia, despite the fact you’ve got a slightly narrower economy. The outlook for sustained growth, modest inflation, we have a favourable government financial position, perhaps not quite as favourable as Australia, but it’s still a very sound position. We have low public debt in New Zealand. That would be the envy of many countries that currently sit in the OECD. And interestingly, there is strong – as Johnny and Phil would know – there’s a strong and dynamic business connection between Australia and New Zealand. We have about 16,000 Australian businesses that are currently actively involved in trans-Tasman trade.
So, while the recent decline in commodity prices in New Zealand may take something out of short term growth numbers, we think a 2.5 per cent GDP environment in New Zealand over the medium term is very realistic. So 2.5 in New Zealand, three in Australia. That’s a pretty sound platform for a banking environment. So the macro picture in our view is supporting a refining of a strategy to Australia and New Zealand.
The second key component of that third point of the refocusing of NAB is a focus on priority segments. Looking deeper into the Australia-New Zealand strategy, we were very clear which segments of our business we have competitive advantage in, where we can win for customers, and generate sound returns for shareholders. At NAB, we’ve been refocusing our financial and human resources on five key segments which revolved around our business and consumer banking segments across Australia-New Zealand. In the consumer space, it is mortgages and what we call the debt-free customer. The debt-free customer important in terms of providing deposit funding, in terms of our wealth management products. And in the business segment, it is the micro, small and medium business which is really where the NAB DNA sits. In that micro, small and medium business segments. So there are five key segments that we are focused on. Three in business and two in consumer.
That’s not to say that we have diminished interest in other segments, rather that marginal investment and resourcing will be devoted to identified priority segments. While we have a long way to go, and we’re first to admit that, the focus- this laser focus on what we do well has started to have an impact. We did have good support with our first half result on May 7, and the market reaction as to how we’re dealing with our low returning and legacy assets, from our perspective, has been very pleasing. But it meant the strong performance in our core business at the half was overshadowed. We had one or two other announcements. Which is why, today, I do want to focus a little bit more back on the core business and what we’re doing, and talk to you about what our game plan is for delivering out performance going forward.
So looking at the core business. As I said our first half- 2015 result on May 7 that we released was solid. Solid is an interesting word. It’s not spectacular and it’s not terrible. It’s solid. And I think it was a genuinely solid result in the environment that we’re in, where all of our major businesses, including the business bank, personal bank, Welfare New Zealand, showed growth in earnings. But we need to continue to build on this, improving momentum. To build on the momentum we are reinvesting back into our Australian and New Zealand businesses in areas where we are good at. Where we have some competitive advantage. Like leveraging our position as Australia’s preeminent business bank, investing for growth in our priority business and consumer banking segments, and skewing our technology and human resources into these core markets.
The best examples of this reinvestment back into the core are in the business bank, where we have invested an additional 40 million over the past six months. We have hired 150 new business bankers, with plans to add another 70 in the current half. We’re improving our customer experience, investing in innovative products and solutions, and making it simple to do business with us. And we’ve rolled out a new fulfilment centre and service model to our business customers, resulting in a 24 per cent reduction in time to yes for our customers. This reinvestment also includes technology, where we’re making processes simply and quicker for our customers and our people. That’s why we’ve rolled out a new sales system, known as NAB View, to our 4500 bankers, which hold the details of 12 million customers and 135 million records. NAB View consolidates six different sales systems and information from three different sources, giving our bankers more time to spend with our customers.
And we’re investing also in our personal bank. A number of you will have known of the term next-gen, which we’re- we have now changed that term to NAB’s personal bank origination platform. This is a large technology investment that the bank has made over the last five years, and that will go into pilot in the current half. And this will make banking for our customers considerably more automated, which means one application process; it means acceptance of contracts and loan documentation online; it means that customers will be able to track progress of their applications via the internet, and via the internet banking portal. And in personal banking, we’ve also made some additional investment in frontline bankers. We’ve added just on 30 per cent more to our mobile banker numbers in the personal bank over the last six months.
So you can see hopefully that we are just from a handful of examples there we’re reinvesting in those five key segments back into the personal and the business bank.
But to outperform for our shareholders, we’ve obviously got to deliver a great customer experience, and our aim is to develop and support life-long customer relationships. We’ll do this by making banking simpler, reliable, and more efficient. This laser-like focus on the customer is not something NAB has had the luxury to pursue in recent years, been a odd distraction. This is changing. We are very focused on turning our customers into our advocates. This involves genuinely listening to the customer, fixing pain points – we have a program inside NAB called Pain Points where we identify three significant pain points that customers have said after feedback I’ve had a poor experience with NAB because of X. We’ve got a team that is going around and fixing these pain point issues. So genuinely listening to customers. So fixing pain points in our business and business process, and delivering what we say we will, without fail. Delivering what we say we will without fail. And again, that’s something we haven’t always done.
Look, we have made some progress internally, and that’s I think getting reflected in the way the market thinks of NAB. But I’m not going to stand here and say- we’ve got a heck of a long way to go. And to Phil’s point, some of the issues – and we’ll come onto culture in a moment – some of them are cultural.
Look, we have seen improvement in our key customer metric, net promoter system, as a result of a number of changes we’ve made to simplify the way we do do business with customers. Customer advocacy is a measure of success, which is why we’ve introduced Andrew Thorburn as CEO was very passionate about NPS. I’m not sure whether any of you had had exposure to NPS before. Telstra, under David Thodey, brought the NPS system in. We’ve seen Commonwealth Bank had NPS in, and these measures have had- I don’t intend to make it an NPS discussion today, but I suggest you have a look at it. It’s a Bain development process, and it really has had some quite significant shifts in behaviour in some of Australia’s largest companies, and it is beginning to have a real shift inside NAB.
We’re still early on the journey, but as a system of customer advocacy, you’re always a little sceptical when you see, excuse my quip here, but sometimes things that some consultants develop. And I’m not looking at anyone in particular. But I’d have to say that this system has got some demonstrated track record, and inside NAB it is changing behaviour. So that’s why we’ve introduced NPS, to get everyone at NAB focused and aligned on our passion for customers. Customer feedback is critical, and it’s critical you act on it rather than receiving it and not acting on it.
So the new NAB strategy of fortifying the balance sheet, refocusing back on the Australia-New Zealand business, and tilting resources to the five key segments is being embedded. The key to embedding this strategy is ensuring performance management is rigorously measured and reported on. Appropriate levels of investment are heavily targeted to our priority segments, and the leadership of NAB drives a customer-centric do-the-right-thing approach to the culture.
So, another key initiative to driving up performance at NAB is embedding a strong performance management system. We’ve developed, and excuse me for those of you who have heard this component of my speech before, but we’ve developed what we call performance units across our organisation. The performance unit framework delivers accountability, focus, and collaboration. It helps us understand where performance happens at a very granular level across 162 performance units, and gets to a deep understanding of the key business drivers. So across these 162 performance units, we have monthly metrics that look at things like return on equity, in our case cash earnings, risk, customer engagement metrics. And we monitor them very rigorously at a- therefore a very granular level. The level of transparency makes it difficult to hide a problem, and enables earlier attention to address any issues, giving us a relentless focus on improving the execution of our strategy. Performance goals are always focused on customer and shareholder outcomes, and helping us to deliver outperformance against them.
As I said, these metrics are monitored and reported transparently on a monthly basis. So for example, 162 business leaders get into a room, the majority of them do – we have some in Sydney, some in Melbourne, and a couple on the phone – we meet monthly. Joe’s or Annette’s performance can be seen by any of those 162 leaders. They know whether Joe is outperforming or underperforming, and what his manager or her manager thinks of Joe. Also, we know whether Joe is 5 per cent under or 10 per cent under on his monthly revenues or cash earnings, or whether he’s got a poor customer advocacy score. It’s all up on a screen, all colour coded, and we have a pretty transparent conversation every month about it. And so as I said, there’s not a lot of spaces to hide. We’re not looking to embarrass people, we’re just looking to understand why they’re performing well – and equally, there are a lot of good stories as to why they’re performing or why they’re not performing, and trying to share best practice.
The final key focus at NAB to driving outperformance is a real focus on getting the culture right in the organisation. In particular, driving as I’ve said a real passion for customers inside the organisation, something that has been fairly and squarely led by Andrew Thorburn and the executive leadership. And we’re driving it personally. Andrew has made sure that each of the executive leadership team have sponsorship of a number of major customers. So I have three ASX listed top 100 customers that I am accountable for. And you might say well I’m the bean counter, so bean counters sit in a room and don’t have customer exposure. Well, you know what? I do have customer accountability. I have also some SME customers that I have accountability for. So this is genuinely getting this into the DNA of our senior leadership, rather than just having them say yes I’m serious on customer centricity, and they’re not doing anything about it.
So while considerable work remains to be done on this issue, we are seeing substantial shifts in behaviour inside the organisation. And I’m certainly really encouraged, having spent the majority of my career in front of customers and pitching for customer business, I had no interest in being inside an organisation that had an internal-only focus. And I think many of the issues that NAB has had over a long period of time have driven, by necessity, more of an internal focus. Those issues are being cleared. As those issues are being cleared, and with a leader like Andrew, the focus is shifting very much from an internal focus to an external focus. So these changes are designed to turn the NAB story into one about performance for our customers, our people, and our shareholders.
So in conclusion, NAB is a very strong bank, and we’re focused on working to make it stronger. We know that the way to deliver outperformance is by investing in the Australian and New Zealand business, and we’re passionate about that. We have a very clear strategy, and we’re very focused on executing that strategy flawlessly and relentlessly. And I can tell you, Andrew is a relentless guy. If any of you have met him, he’s relentless and very focused.
We’re focused on the things we are good at and a much smaller number of priorities. You can imagine- I can tell you know, I’ve only been at NAB for 18 months, the distraction of dealing with international operations where they might be 1, 2, 5 per cent of our earnings, is significant. Glasgow is not Sydney when you’re sitting in Melbourne. It’s a day to get there, it’s a day to get back. It’s the wrong time of the day. So there are distractions. So, as I said, we are focused on doing and taking on a smaller number of priorities.
We have positive momentum in all of our major businesses, and a fully embedded and transparent performance management system, which is bringing about considerable change and, we believe, change for the better.
NAB is already a stronger bank than it was 12 months ago, and I think hopefully you got that picture from what I said about our balance sheet. And I’m confident the steps that we’re taking will improve our competitive position amongst our Australian and New Zealand customer base. We’re determined to outperform for our shareholders, our customers, and in particular for our people as well.
Thank you, and as I think our guest- our hosts have said, happy to answer any questions once we’ve enjoyed our main course. So thank you.