It’s official, the real story at the NAB. And it’s not forex options and boardroom silliness.
Last week Crikey told readers to ignore the hype of the NAB board and
watch the numbers in the bank’s interim report out today which would
reveal the damage done to the brand. And Don Boardwalk had produced
another excellent analysis of the lost opportunities and the general
level of underperformance that’s been accepted by major shareholders.

And now, with the numbers in, it’s much worse than previously thought.
With the compartive figures now available for the last three half years
– March 2003, September 2003 and March 2004 – it’s clear the board and
management have not been in control during these 18 months.

In fact Frank Cicutto and Charles Allen, the departed CEO and Chairman
respectively, and all those juvenile hissy fits between Cathy Walter
and the Graeme Kraehe-led gang of seven, have clouded what a miserable
job they’ve done in driving the bank forward, building value and
performing these past 18 months.

The ANZ, St George and Westpac, with David Murray’s CBA on a sort of
‘trustwatch’, are streets ahead of the NAB in the way the various arms
of those banks are performing, the way assets are being worked,
interest margin compression is offset elsewhere and the way employees
are obviously performing.

Let’s look at some indicators. While returns on equity and assets look
not too bad at above 18 per cent and around one per cent respectively,
the better indicator is the cost to income ratio. I know
each bank complains that the others measure their’s differently, but in
essence its a fairly standard measure.

So what how has the NAB gone? In March 2003, the Cost To Income ratio
was 47.3% with a major factor the underperformance of the MLC-based
wealth management business because of the slump in equity markets. Six
months later by September 2003 and the Cost to Income Ratio had risen
to 49.6%, despite a rebound in equity markets helping wealth management
and improving income levels. Move forward to March this year and
despite the higher equity markets and the housing boom, problems
elsewhere in the bank, especially in Europe, drive the Cost to Income
Ration up to 50.9%.

In effect 18 months of going backwards, while Westpac and ANZ have both
knocked their figures lower in the same time. Now that’s as good an
illustration of the way the board and senior management of the NAB have
lost the plot.

When Frank Cicutto took over from Don Argus as CEO in the late 90’s he
inherited a bank where the overall Cost To Income Ratio was just under
the 50% mark. Essentially that means for the past five years, there has
been no significant improvement in the overall efficiency of the NAB.

Income may have risen from the greatest housing boom we’ve had and the
long upturn in the overall economy, but thanks to the $4.3
billion purchase of the MLC, which exposed the bank to the vagaries of
equity markets, along with Homeslide and a general inability to
manage costs, all that extra money was fritted away.

When Frank Cicutto assumed the top job he made some remarks which were interpreted in the market especially among institutional
investors, as being softer on cost control than Don Argus. This and
worries about the departure of Argus after a decade at the helm, saw
the NAB’s share price driven down from the high $20s to the low $20s in
early 2000 before turning and running up over $30 a share
and towards $35 a year ago. Under and overshootings all over the place,
but that inital unease about Mr Cicutto’s ability to control costs was

The heart of any bank is its retail business. The way it makes money
from dealing with the millions of people who have its banking products.
It’s the essence of modern banking in Australia and it’s here the NAB’s
underperformance is apparent.

In March 2003 half it earned $1.553 billion, but in September this had
eased to $1.526 billion, but by March this year was down to $1.465
billion. Now that’s what I call underperformance, especially when the
ANZ and Westpac have been driving earnings from the heart of their
banks higher.

But there is another way of measuring this. Remember Positioning For
Growth, one of the many results of the many strategic reviews
commissioned by Frank Cicutto and the Board (another review is
currently underway) That set a number of targets. The directors by
March 30, 85% of the targets set for that date had been achieved.

An undershooting on cost cuts usually means bad Karma from the market,
but then the investment community has had other problems to worry about
recently with the NAB. Costs rose in the six month to March by 4.9 per
cent, faster than any income measure except from
Wealth Management where the stronger share markets helped with inflows,
returns and fee income.That costs were allowed to rise sharply, when
the interest margin was again squeezed ( falling to a low of 2.40% in
March 2004), is another indication of just how far the senior managers
and the board were from controlling the bank’s day to day operations
and longer term stratergies.

But the market caught up the NAB after the result, making down the
shares in a grumpy sort of sell-off. So looking at how the various
parts of retail banking went and Financial Services Australia did well
all things considering, with cash earnings of $999 million, up on the
previous two halves and a gain of 10.5% on a year before.

But then the bad news flows. European Financial Services business had
cash earnings of $308 million, down on September and 37 per cent down
on the March half last year.

New Zealand was flat, cash earnings in the latest half a million
dollars under the same period last year while ‘Other’ including the
Corporate Centre (head office where the senior management and board
resides) had a serious of escalating losses ending with $117 million
worth of red ink in the latest half.

Wealth management earned more with cash earnings of $221 million against the $161 million a year earlier.

Both Westpac and the ANZ did far better in New Zealand than the
NAB.Wealth Management is cyclical and depends on stockmarket activity
and performance And it still amazes that the NAB (And the CBA and David
Murray with Colonial) didn’t understand how much the MLC depended on
the health of the markets for reveneue and earnings growth.

But the dog remains the European business, mostly in the UK which on
present figures seem unsaleable except at heavy losses. But seeing the
AMP managed to get rid of the HHG business in the UK which threatened
to destroy the company, there’s no reason why the NAB, with not such a
desperate situation, couldn’t effect the same style of divorce.

The NAB went into Europe mostly under the previous regimes of Nobby
Clark and Don Argus. Its clear the businesses acquired were too
small, had no scale and were left alone for too long. Despite a lot of
talk about transforming them and bringing them up to Australian
operating levels, you’d have to ask why it has taken the best part of a
decade to start that process. That is a board and senior management

Homeside was also done under Don Argus, as was the Bank of Michigan
which was essentially sold to offset the Homeslide losses (under
Frank Cicutto).

The Michigan business was a good buy and with the stepped up level of
acquisition in the US at the moment, its quite possible NAB could have
received an even bigger price. Homeslide and the decision to quit the
US were decisions by the board and senior management.

They are both examples of the poor decision making processes that have
characterised the NAB over the past five to six years. Before that was
Don Argus trying for a last, desperate crowing deal of his time at the
helm with marriage proposals tossed out willy nilly to the AMP and the
ANZ. Both would have been foolish in the extreme. Again that sums up
how far the country’s biggest bank has strayed from the boring business
of remaining in business, borrowing and lending people, companies money
and selling them financial products.

It confirms that the present review, being driven by CEO John Stewart,
will be vital in restoring the health and forward momentum of the bank.
And so will the new directors. Perhaps Cathy Walter’s spats with Graeme
Kraehe(and his eventual departure) will see directors installed who
understand the need to manage a bank for the future, not for today and
who can control a senior management team and make them perform.

If they can’t then the NAB will gradually die from underperformance.