NAB ‘pleasantly surprised’ at low defaults rate

Ross McEwan, the CEO of National Australia Bank (NAB), has acknowledged that while the rising rate environment to tackle high inflation has been “hard for many Australians” – and that the bank’s Wellbeing survey showed financial stress is growing (with one in four feeling worse off financially than just a year ago) – customers are proving “resilient”.

Speaking to the House of Representatives standing committee on economics for its review of Australia’s four major banks on Wednesday (12 July), Mr McEwan revealed that since interest rates started rising in May 2022, NAB had contacted more than 500,000 customers (including 8,600 home loan customers “who [NAB] thought were most at risk”) but said that “surprisingly, only 14 wanted immediate help”.

Indeed, he said that the number of customers in hardship or arrears, while growing, remains below pre-COVID-19 levels.

Mr McEwan told the standing committee: “We have been pleasantly surprised at the resilience that is shown to date … We are starting to see an uptick on what we call our 30, 60, and 90-day [arrears figures] ... but the levels that we’re seeing are still below the 10-year average and the levels we saw in (what was still considered to be a ‘normal year’) 2019.”

The CEO said that he was “very aware” that the arrears levels may increase given that 55 per cent of NAB borrowers who have super-low fixed rates of around 2 per cent are now rolling onto higher variable rates of around 5.5–6 per cent, but added: “We’ve been surprised how low the default rates have been.”

Mr McEwan reiterated the bank would therefore be watching arrears figures “like a hawk” given they have started to rise, which he attributed to “interest rate rises” and “all of the other prices that are going up on customers”, meaning they’re having to make different choices.

Shaun Dooley, group chief risk officer, added that the bank was particularly looking at “areas of potential vulnerability” such as borrowers on single incomes, for example, but noted while there was an increasing 30-day past due, a “lot of it was curing itself as it roles into 90-day past due”.

“That is performing better than what we saw pre-COVID-19 and certainly better than the long-term average,” Mr Dooley said.

Mr Dooley also noted that, on average, NAB home loan customers are about 41 months ahead of schedule – largely as a result of people paying down more over the last two years when interest rates were at record-low levels.

“We also see customers taking action to manage their own expenditures as well, to ensure that they can deal with all the outgoings that they have been facing. So we’re seeing a pretty resilient customer base actually and it’s held up, probably better than what we expected this time last year,” Mr Dooley said.

“Certainly there is some prospect of further interest rate increases and we continue to monitor and engage with our customers very close ... To check in with them and see how they’re going and we’ve certainly got a very extensive analysis program to help customers who might be starting to feel some stress.

“We expected it to be worse than it actually has played out. But that doesn’t mean that it won’t get worse. We’re certainly seeing the pressure increase and so we’re monitoring it very closely.”

The major bank’s executives reflected that small businesses were also showing resilience, with the CRO noting that 90-day past due at March was below pre-pandemic levels at 56 bps, but acknowledged that some areas were rising. These included the construction, property, business services, and agriculture industries.

Over the course of the hearings, the NAB leaders were also asked about their thoughts on the 3 per cent serviceability buffer (as was ANZ).

While NAB has recently announced a lower serviceability test for some borrowers, Mr McEwan said NAB was “very supportive of having a buffer put in place through the regulator and have been supportive of that the whole way through”.

“It’s really around the customer that we’re looking after and making sure that they have the capabilities – if interest rates do go up – so they can actually continue to make repayments,” he said.

Elsewhere in the hearing, Mr McEwan also flagged that there was a “need for urgent action to address the chronic undersupply of housing”.

“Without more supply, demand will inevitably push up prices further,” he said.

“Respondents to our residential property survey say fast-tracking planning permissions and development would be the single most effective way to reduce Australia’s housing shortage.

“A coordinated effort by state and territory governments to introduce faster, simpler, and more consistent processes for approving land development and residential construction will lift supply.

“More social and affordable housing is also needed. The finance sector, all levels of government, and developers have a role to play here. NAB wants to lend and has made available a further $6 billion for affordable and specialist housing by 2029.”

[Related: Big banks laser-focused on arrear rates]