NAB’s Mortgage Market Concerns Are Different Than You Think

Both customers and staff are benefiting from investments in better processes and systems (especially through automation and digitization) and hiring more frontline bankers. McEwan also argues that the relationship-based approach that NAB has emphasized over the past three years has helped deliver a series of impressive divisional results.

In Personal Banking, NAB’s Net Promoter Score was the highest among the Big 4 banks, with loan volumes growing 7.1% in 2022, representing a 1.1x growth across the broader system. Banking’s traditional heartland of SME lending grew 15.6% in lending volume, 1.3x system growth, while Business and Private Banking cash earnings surged 19.2% on an underlying basis to $4.4 billion reached.

Restoring momentum in NAB’s business banking sector and, most recently, maintaining it in the face of renewed competition from Commonwealth Bank (and to a lesser extent Westpac and ANZ) has been a key priority of NAB’s McEwan reforms. It was a matter.

McEwan believes the value of growing business banks will be further emphasized over the next 12 months as the lagged impact of rising Australian interest rates begins to show.

One reason is that he sees continued growth opportunities in business lending. But it’s also because his Mr. McEwan has become concerned about the state of the mortgage market.

‘Not the time’ for the mortgage market to grow

A barrel of rising interest rates and about a 20% decline in house prices from peak to trough, NAB has done a number of mortgage book stress tests.

But McEwan is pretty relaxed with what he sees. Across NAB’s $329 billion Australian mortgage book, bank staff are most concerned about the cohort of borrowers who owe about $1 billion. The repayment buffer for these borrowers is less than 3 months, and the dynamic loan to value ratio is about 90%.

Still, this represents only 0.3% of NAB’s total mortgages. And McEwan says NAB’s protective involvement with these borrowers reveals little problem.

“The interesting response to date has been people saying, like I said, ‘I’m fine for now. Thank you for calling.’ This was a bit of a surprise to us. The market has great resilience.”

McEwan acknowledges that things will change as interest rates continue to rise, but that’s not the main reason he’s pulling back from mortgages. Instead, the mortgage game is still highly competitive for several reasons, he says.

First, some of our competitors (Hi Westpac and ANZ) looking to revive home book growth are offering discounts and special incentives, such as cash back offers of up to $4,000. . McEwan didn’t call these competitors irrational, but it’s clear that mortgage sales are heating up despite rapidly declining home prices.

Second, a significant shift from fixed to variable mortgages is expected to continue over the next six months, sparking a battle for market share.

And finally, wholesale funding costs are rising, further compressing margins in the mortgage market.

McEwan wants to continue to serve existing customers and maintain broad market share. However, considering the business bank’s performance is so strong, I’m satisfied even if it’s growing slower than the rest of the system so far.

“Given the economic conditions we are seeing in the mortgage market, I would rather start depositing more of our surplus balance sheet into commercial banks, and more and more into corporate banks.

“I want to keep what I’ve got in mortgages, but I don’t think now is the time to grow in the mortgage market.”

That attitude is part of the reason why NAB’s 6% increase in cash earnings in the second half looks less explosive than its rivals. ANZ increased its cash profit by 9% in the second half, Westpac increased core revenue by 13% Six months ended September 30.

McEwan said the NAB fine-tuned its mortgage risk setting in November and May and continues to adjust the conservatism buffer.

“You have to be careful not to take on a business that you might regret in the next 12 to 24 months,” he says.

Of course, businesses are not immune to higher inflation and interest rates, as well as a possible slowdown in the economy as a whole. Citi analyst Brendan Sprawls said NAB’s own economist said business credit across the Australian banking system plummeted from 14.7% in 2022 to 3.6% in 2023. You are watching and pointing out.

This is still higher than system-wide mortgage growth of 2.5%, but only marginally.

Sproules believes that a sharp slowdown in business credit growth could reduce the earnings multiple premium opened between NAB and some of its peers to its strong business franchises. increase. NAB is currently trading at 12x his 2023 earnings, while Westpac is at 10.2x and ANZ at 10.1x.

perhaps. But if the biggest hit from rising interest rates over the next few years hits the housing market, McEwan’s banking leanings could prove prescient.

NAB shares are down 1.35% in early trading, but have gained 21.5% since mid-June.

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