Wayne Swan’s attack on National Australia Bank, labelling it “greedy” for “only” passing onto home loan borrowers 20 basis points of the Reserve Bank’s 25 basis point reduction in official interest rates is churlish and betrays a poor memory.

Swan appears to have forgotten that for the past year NAB has had the lowest headline home loan rate of the majors and, even though it will keep five basis points of the 25 basis point RBA cut rather than emulating the rest of its peers, will still have the lowest headline rate.

While Swan says the NAB decision is “a kick in the guts” for working families, NAB’s competitors are still privately fuming about the NAB abolition of unpopular bank fees. One senior banker has privately described those decisions as a “structural and permanent impairment” of bank profitability.

In fact NAB has done a lot more to provide competition and to cut the cost of banking than Swan’s own motley grab bag of “reforms” will ever do. There are, however, limits to how much it can sacrifice to attack competitors with far stronger retail banks than its own if it wants to narrow the gap between its performance metrics and their’s.

It was notable when NAB reported last week that the repositioning of the retail bank, which culminated in the “breaking up” campaign, had been very successful at driving volume growth — NAB’s mortgage book grew at three times the system growth.

It came, however, at a cost. NAB experienced a 12 basis point fall in the net interest margin of its retail bank as it sacrificed margin to attract volume and a 2.3% decline in “other” income, which includes fees. Yesterday, Westpac’s result showed its core retail bank maintained its net interest margin and the St George brand actually increased its by 19 basis points.

There is a limit to which any bank will trade lower margin for volume growth because of the prospect of marginalising the profitability of its loan book.

There is a particular reason, however, that NAB would be watching the growth in its mortgage book closely and why it probably wouldn’t be unduly concerned if the rate of growth slowed a little.

With the world on the brink of another financial crisis, longer-term wholesale funding markets are still technically open, but in practical terms they have shut down — funds are only available at prices that, if accepted, would signal desperation. No bank is going to tap them today and the situation in Europe is worsening.

While NAB, which raised $31 billion in term funding last year, is “only” looking to raise $23 billion this year, it would be conscious that asset growth has to be funded.

It is highly liquid and the five basis points it has held onto could be deployed to help compete for customer deposits as an alternative to wholesale markets, but all the banks have become more conservative as the eurozone has demonstrated increasing instability.

Add the pressure on margins to the funding challenge and, while NAB would presumably prefer and want to continue to grow at rates above the rest of the system, it wouldn’t be a surprise to see its rate of growth slow somewhat as it tries to finesse the margin and funding equations.

In the scheme of things, five basis points isn’t much to get excited about, particularly when NAB is still able to claim price leadership, but Swan should appreciate by now that banking is not just about price and that solidly profitable and soundly funded banks are a critical asset to an economy during a global financial crisis.

*This article first appeared on Business Spectator

Peter Fray

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