NAB chief calls for interest rate debate

National Australia Bank Ltd (NAB) has called for a public debate on how interest
rates are set after spiralling funding costs and bad debts driven by the global
economic crisis dragged down its first half earnings.
NAB on Tuesday reported bad and doubtful debts rose to $1.8 billion in the first six
months of its fiscal year, from $700 million in the previous corresponding period.
This combined with a $1.2 billion jump in collective provisions resulted in a raft
of bearish statements from the bank and little guidance on its outlook.
"The economic outlook will continue to deteriorate and will dampen our earnings into
the foreseeable future," chief executive Cameron Clyne told journalists on Tuesday.
NAB made a net profit of $2.66 billion in the half year ended March 31, down 0.9
per, which was at the lower end of analysts' expectations.
Underlying cash earnings, which excludes significant items and credit risk on
derivatives, fell 9.4 per cent to $2 billion.
NAB cut its first half dividend by a well-flagged 24.7 per cent to 73 cents to
maintain its strong balance sheet, and gave few clues as to the fate of its final
dividend for the year.
"We haven't got a forward look on dividend - that's obviously going to be a factor
of ongoing profitability," Mr Clyne said.
Mr Clyne said bad debts from lending to business was set to rise further over the
remainder of fiscal 2009, with consumer bad debts picking up in 2010 as unemployment
rose, due to the economic downturn impacted.
NAB's shares fell 76 cents, or 3.45 per cent, to $21.28 on Tuesday.
However, the result also showed strong momentum in revenue, which surged 11.5 per
cent to $8.5 billion on strong lending growth and a four basis point rise in net
interest margins for NAB's Australian operations.
Asked about its willingness to pass on future interest rate cuts by the Reserve Bank
of Australia (RBA) to customers, Mr Clyne called for a debate on bank funding costs
to dispel the notion that the RBA cash rate was the sole determinant of bank lending
rates.
"The banks have used the Reserve Bank for 10 years as cover for the way we move
interest rates," he said.
"We've never taken the time to explain how banks are funded.
"The Reserve Bank cash rate is only a very small component of how we're funded."
Mr Clyne said the Australian economy faced some "enormous structural challenges"
related to the reliance of the banks on offshore funding sources.
NAB did not pass on any of a 25 basis point rate cut by the RBA in April to its
customers and said decisions on whether to pass on any future cuts will continue to
depend on the funding costs issue.
"While it's pleasing that the marginal cost of funding is coming down, as things
start to become a little more stable than they have been, the average cost is
rising," Mr Clyne said.
NAB expects the RBA cash rate, currently at three per cent, to fall to two per cent
before the current cycle troughs.
But business lending is unlikely to be the beneficiary of big bank rate cuts because
of business customers' higher risk profile.
In the first half, NAB's Australian operations enjoyed a 17 basis point rise in net
interest margins made on business customers, as NAB re-priced its lending book to
cover rising funding costs, risk and "intense" competition for deposits.
The business customer default ratio is around five times that of consumers, Mr Clyne
said, as he explained why interest rates on mortgages had dropped 380 basis points
but just 290 basis points for business loans since last September.
NAB is still lending to small and medium enterprises, Mr Clyne said, although the
sector had started to show signs of "stress" in the second quarter of fiscal 2009.
The bank, which on Tuesday kicked off the start of the financial institutions
reporting season, said the current tough economic conditions are set to continue.
"It's difficult to see where it will peak but we are looking at a difficult bad and
doubtful debt outcome for (fiscal) 2009 and 2010," Mr Clyne said.
On the Australian economy, Mr Clyne said the recent cycle of bad news, which had
severely disrupted financial markets, appeared to be moving on.
"We seem to have moved beyond what where a fairly regular round of systemic shocks,"
he said.
Separately, Mr Clyne said bank executives, including himself, will probably take a
haircut on their variable bonus this year, given NAB's earnings slump.