03 May 2018

Transcript of 2018 Half Year Results Media Conference – NAB CEO Andrew Thorburn

ANDREW THORBURN: Good morning everyone, and thanks for joining us. Another big day, our half year results. Just in opening, just a few things I wanted to say to set the scene.

The first is: It is unprecedented times in banking. And, I think this presents a real burning platform for us, and an opportunity for generational change. I think we can really face into some things here, and make our bank and our profession really strong and respected again. And, that will happen when we own issues, and we fix them, and we develop our culture, and we act. That’s the first thing.

The second thing is: I think, at NAB, we’ve got the right plan. We are investing four and a half billion dollars over the next three years to focus on our clients, to make the bank simpler and faster, and to capture growth opportunities that we think are in front of Australia. The plan we’ve got, more than ever, I believe is the right one.

And, finally, in a good bank, you’ve got to get the foundations right. So, the balance sheet that we have – if you look at capital, asset quality, funding liquidity – all those, I think, are in a really strong position. So, we’ve got a foundation, we’ve got a good platform, from which to capture the opportunities that are ahead of us. On that note, I’ll pause, and I’d be very happy to go to questions.

JOURNALIST: Emily Cadman from Bloomberg News. Andrew, you talk about the opportunity for change in banking. It’s obviously been a pretty confronting week for the industry, with the report into governance at CBA. What are the lessons you take to NAB from the report into their culture and governance?

THORBURN: Yeah, I have had a chance to look at the report – not in detail. I think it’s a very well written report. It’s very thorough, it’s very balanced. I think we need to take reports like this, and really personalise them.

So, we had our board meeting on Monday and Tuesday; the report came out on the Tuesday. We got it immediately to the Board; we briefed the Board; we went through the Executive Summary. And, yesterday, I spent time with some of our leaders, particularly our Chief Risk Officer, because we want to go through a process of basically saying: ‘If we inserted NAB where it said CBA, would that be us, and what do we need to improve?’

I think we need to really take things like this and learn, and not reject them. I think this is the way we’re going to get better, and culture is so crucial. And, that report, which I think is balanced and fairly written, I think, really points to cultural aspects that we need to learn from as well.

JOURNALIST: Good morning, Andrew.


JOURNALIST: I wanted to ask about the divestment of MLC. Can you just talk us through the strategic thinking there, and to what extent that decision reflects any issues that have arisen during the Royal Commission, and the thinking of the bank around vertical integration.

THORBURN: Thanks, James. This is obviously an important announcement today for us. So, the first thing is: We are reshaping our wealth business. We are not exiting wealth management. We think that providing wealth advice, and wealth products and services to our clients, is fundamental to what we do. It’s just the nature of that, and the way we do it, we feel, needs to change.

In terms of our key clients, we will be retaining JBWere. We will be retaining nabtrade. They’re both excellent businesses and platforms – we’re going to invest in that. But, when we look at MLC, you know, we feel it’s a good business, and I think with some independent ownership and greater investment, it can really be a very sustainable and growing business in the whole superannuation field.

But, in the bank, we need to simplify the bank. The complexity in the bank is just killing us. We need to simplify. And, so what MLC divestment will do is enable us to have a simpler bank – and there’s huge opportunities in the bank. It’s worth noting that the MLC earnings are only four per cent of our total, so they’re quite small. But, once we divest it – and we intend to divest it by way of public market, so either a demerger and IPO, or maybe a trade sale – I think it will be a very significant business.

We started this work, James, nine months ago, as part of our thinking around how do we make a simpler bank, and where do we allocate capital, and where do we invest. And, we felt that very much had to be in the core of the bank – in our consumer business; in our business bank; in our corporate institutional bank; in our digital offerings. That’s where we really need to focus, and we can’t focus on everything. So, I think this was a consequence of that, and we pursued that over the following nine months.

It really has had nothing to do with what has come out in the Royal Commission on this piece. It’s been a very considered and deep piece of work. And we feel that, today, we’re announcing it because it’s a major decision, but, of course, we now need to enter a very important phase of working out how that would be divested, and what shape it might be. And, we’ve identified that we think it will take through to the end of 2019 to actually divest it. So, hopefully that answers your question.

JOURNALIST: Thank you.

JOURNALIST: Andrew, it’s Emily Cadman from Bloomberg again. You say that the revelations that have come out of the Royal Commission about wealth have nothing to do with your decision to divest the majority of your wealth businesses. Is that really true, considering that the reputational damage that has been done to the entire Australian advisory industry, not just specifically NAB, has that not weighed in the decision at all?

THORBURN: Well, as I said Emily, we started this work in June last year, and I think it really is consistent with our story of simplifying the bank. We announced that in November, and a big investment in the Bank. We obviously hadn’t completed that work to announce it then. But, if you go back and look at our record of looking at businesses that we’ve got in our portfolio, and making sure that we retain the ones that we can invest in to grow, and allocate capital to the bank, I think it’s consistent with that story that we have had over the last three years, and certainly the simplification theme that we announced in a major way in November.

Also, it’s worth noting that the financial advice piece, in terms of the issues in the Royal Commission from our perspective, were all known. Now, they’re not good. But they were known to us, and known to the regulator. So, there’s no new information that’s come out from our side. And, I think you have to make a deep long term decision. I think there’s a lot of buffeting at the moment, and I don’t think that we entirely have, in a broad sense, perspective.

So, we would not make a decision that’s this major based on a couple of weeks of evidence at the Royal Commission – respecting the Royal Commission’s importance. I think it’s a much, much bigger … We purchased MLC in 2000. This is a major decision of the bank, and we would not make it on the space of some noise and some shameful things that have happened. I think we have to take a much longer term view, and we have to focus on our clients. So, I think it’s been a considered, thoughtful process that’s got us to today.

JOURNALIST: Hi Andrew. Thanks for putting aside the time. Just a further follow up on the MLC divestment. You’ve highlighted that independent ownership will be better for MLC’s future. Is that – and I realise you’re not making this decision based on two weeks of Royal Commission hearings – but concerns around vertical integration have been there since the Murray Inquiry. So, that’s, what, four years. To what extent did those conflicts around vertical integration, and the bank owning financial advice and wealth management play on that decision, separate to the Royal Commission?

THORBURN: I think that it’s a good question, and I think it’s something that the whole industry needs to keep thinking about – about independent advice and how that should be delivered, and what a client needs and expects. I do acknowledge that.

But, I think vertical integration in and of itself, to me, is not the issue. The issue isn’t ownership – who owns it – it’s the conduct, the capability, and, in particular, whether there’s conflicted remuneration. In other words, people are incentivised to advise certain products or platforms to be used. I think that’s the key issue. Because what we can see is that, where there’s been wrong advice – and it’s happened outside just the banks, so it’s not about vertical integration – we’ve had poor advice from people who just do advice – it’s often about the character and conduct of people. That’s one. Two, their capability, competence, and professionalism. And then three, the incentives they’ve had that have skewed them to recommend certain products and services.

So, I think the vertical integration piece – you’ve got to unpack that. And, that’s the way I unpack that. Because I think, in and of itself, I don’t think that’s the driver. I think these other two or three points I make are the ones that create the problems when they happen.

JOURNALIST: OK. If it’s OK, just a quick follow up question on business lending. Some of your rival banks have pointed out that, since the Royal Commission scrutiny, they’ll probably take a tighter approach to some of their lending in the mortgage market – they’re tightening up on checking of expenses and that sort of thing. Would you expect a similar thing to occur in the SME sector, where NAB is the biggest?

THORBURN: Well, I can understand, again, the nature of that question, given the scrutiny of it. And, we will continue to learn and get better. But, I believe, we’ve got a good approach to mortgage lending in terms of income verification and the approach we take there and expenditure – the 12 different categories we have; we always use the higher of HEM or stated expenses. So, I think we do do lending right, and I think we will continue to lend to our clients where it is appropriate to lend.

On the business one, this is clearly an important market for Australia. Small businesses, medium businesses are the biggest employers in Australia. And, when you look at some of the fundamentals of Australia, there’s growth opportunities for those businesses, and we’re the largest bank. So, we are very disciplined. I think we have a high degree of competence in our people. And, if you look at the growth in SME lending today, we’re growing at about five per cent – the market’s growing at about two. So, we’re continuing to lend, and we will continue to lend.

I don’t think we are going to back off because of scrutiny or noise. If we believe what we’re doing – and we do – then we will continue to lend to our clients based on their strength, their cash flow, and the principles that we’ve held dear for decades.

JOURNALIST: Hi, good morning, thank you. My question is around stricter conditions to assess mortgages, and mortgage applications. I think NAB will still reduce that lending ratio to 7 times the normal ratio, down from 8 times, which is still pretty high. Do you believe that is going to have an impact, or is that having already an impact to your revenues? That’s the first question. The second one is around: can you talk about funding costs and how you expect that to impact, and what would move the number higher than just a couple of basis points – I think you say that you expect two to three basis points to be the effect, but what is the scenario here?

THORBURN: On your first question, Paulina, the market is very competitive. You can see if you look at our housing margins, they have reduced in the half. And, housing credit growth has slowed. I think that’s because of a number of factors, but it’s come back to four or five per cent. I think the pressure on our housing revenue and housing growth, which was your question, is mainly going to come from those factors: slower housing credit growth and continued competition for clients in the marketplace, and therefore margin compression. I think that will be the major impact, rather than this loan to income piece.

Now, this loan to income piece, we continue to look at. We’re working with APRA on that, and they’re working with the industry. But, the number that are over 7 times is very small – it’s 3 per cent of our flow. And, clearly what we’re doing with those clients is we’re going through a very rigorous process, like we would for anyone. So, that’s the first point.

Then, on the funding costs piece, we do have a slide in there because we knew it would be a question. So, rather than answer the question without data, or using data in different ways, we just thought we would be very clear around that, and we have put that on Slide 13 of the pack. And we’ve just said short term funding costs have risen, and, if they were to be sustained, the impact on the bank would be two to three basis points in the second half if those funding conditions were sustained. We’re really just stating that as a matter of fact. It’s obviously not appropriate or right for us to say how we’re going to deal with that, but we’re just putting that out to make it clear to investors.

JOURNALIST: This time six months ago, the market was a bit surprised about the restructuring process, and the shares fell pretty steeply on that. It looks to me, just a quick reading, that you’re recommitted to all of the expense targets that you gave six months ago – is that right, and what’s your message to shareholders given a little bit of the sensitivity about whether you can make the cost savings?

THORBURN: Yeah, James, we put that acceleration plan out in November at our Full Year Results. We believed it was important to invest more in the company and put out a longer term plan – and the longer term plan went out three years. I think a bank needs to plan out a lot longer than three years, but it’s the window that we put out there.

We didn’t just put cost targets out there. We put a simpler bank, less people, and we automate, but, also, we put in some scores around NPS, our client experience, and we also put that we need to reduce the complexity of the bank – less products, and less IT applications, and we have given up dates on that today.

We also said, the other part of the coin – you need to flip the coin over – was growth. We talked about the best business bank. We talked about new and emerging growth, ranging from UBank to Western Sydney, to infrastructure financing. So, our story here is not a narrow one. It is not just about cost. It is about growing the bank, and growing it sustainably for the long, long term.

But, in relation to your question, I don’t think ‘recommitting’ would be the word. We committed to do it, and we’ve given an update of that today. And, look, it’s the first six months, James, it always takes a lot to mobilise. But I’m quite pleased with the progress that we’ve made, and we will continue to give the market an update every six months. Overall, I think we’re on track.


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