Returns on NAB broker loans ‘below the cost of capital’

National Australia Bank (NAB) has released its half-year results for the financial year 2024 today (2 May), revealing that the major lender continues to face net interest margin (NIM) constraints in a competitive home lending environment - and that the broker channel is not producing returns on capital.

In his first financial results presentation since taking the reins as group CEO five weeks ago, Andrew Irvine told journalists that while returns in Australian home lending had risen quarter on quarter, they remained compressed, particularly with low returns in the broker channel (which accounted for 64.9 per cent of new lending in the half).

The major bank’s results showed that NAB’s NIM in the retail bank was 1.72 per cent in the period ended March 2024, down from 1.77 per cent in the same period the year prior. Revenue softened from 1H23 levels (with net operating income down to $10.1 billion from $10.5 billion) as the benefits of a higher interest rate environment were “more than offset by competition”, according to the bank.

According to NAB, the 5-bp decrease mainly reflects lending margin competitive pressures primarily relating to housing lending, along with higher term deposit costs and deposit mix impacts. (However, these were partially offset by higher earnings on deposits and capital as a result of the rising interest rate environment.)

Irvine said: “We have seen returns in Australian home lending bottom out and start to come back but they are, in the broker channel, below the cost of capital. They tipped above cost of capital in proprietary, which is good. And you know, we’re a disciplined allocator of capital in our business. And so, if this home lending continues to rationalise, I think you can see us put more capital in that part of our business.”

Speaking to Mortgage Business, Irvine explained that the reason the broker channel was seeing returns below the cost of capital was due to the bank’s pricing.

He told Mortgage Business: “One of the things that we do in the broker channel is to have a price premium versus competitors. And so, routinely, we would price a five to seven price premium to other banks.

“We do that because we have a superior service proposition. And what we find is that when customers are buying when they’re in the purchase market, they’re comfortable with that premium because they want to have certainty on settlement and low stress. When it’s a refi-heavy market, I think customers are a little bit more price-sensitive.

"And so, what I think that does, is allow us to moderate volume in that channel. And you’re going to continue to see us do that while returns are south of the cost of capital.”

When asked by Mortgage Business whether the bank would cease passing on any cash rate cuts as a result of NIM pressures, Irvine said: “We price our mortgage book on the assumption that we will pass on the cash rate changes, both on the upside and the downside.”

Irvine noted that mortgage NIM had "established" over the last few months, however, and in the last quarter [had] actually "started to go back up".

"They’re nowhere near what I would call normalised margins but at least the trajectory is upwards now. And so we’ll see what happens going forward."

Overall, NAB saw its Australian home loan balances rise by $11 billion to $344 billion (year on year), spread evenly between the two halves.

In the half ended March 2024, $39 billion of new lending was achieved, 97.5 per cent of which was for variable rate loans and 62.3 per cent was owner-occupied.

Brokers wrote 64.9 per cent of new lending, with the channel now having originated 51.4 per cent of its entire home lending portfolio.

In the first half of FY24, NAB also saw arrears increase. The ratio of 90-plus days past due and gross impaired assets to gross loans and acceptances increased 13 bps to 0.79 per cent. NAB said this mainly reflects higher arrears across the Australian home lending and business lending portfolios, partially offset by lower impaired assets.

Irvine said: “Economic growth is slowing and cost-of-living pressures, resulting from both higher rates and inflation [are] being felt by more households as well as businesses. The majority of our customers, however, are doing okay. That doesn’t mean they’re enjoying it and they’re having to make some tough choices about how they manage their money, but they’re doing okay.

“Of course, there are some who are struggling and we are supporting those that need our help. Our message, as always, to those who are hurting is: please do not cut it out on your own. Get in touch with us as soon as possible.”

Business lending growth ‘astonishing’

While NAB’s home lending growth rose by 3.7 per cent in Australia, its business home lending and business finance lending had risen much faster.

According to the half-year results, NAB saw an 8.6 per cent growth in Australian SME business lending, with returns skewing much higher for this side of the business.

Irvine commented that the pipeline of loans in the business lending arm was “astonishing’.

“NAB’s differentiator continues to be the strength of our business focus,” he said.

“We saw our business and private bank as well as our corporate and institutional bank account for almost 70 per cent of total underlying earn. We are the largest lender to small and medium businesses in Australia and continue to see good credit growth with credit up almost 9 per cent in the past 12 months.

“Interestingly, in March, we’ve had our strongest pipeline on record in the business.

“That’s frankly astonishing.”

Irvine said he believed the pipeline was “astonishing” as the bank had expected business credit to moderate as interest rates and conditions softened.

“And frankly, what we’ve seen today is business credit growth, surprising on the upside … If you’d asked me six months ago (as the previous head of the business and private banks), whether we would have printed nearly 9 per cent business credit growth, I’d have said: ‘No chance’. And yet here we are,” Irvine said.

The group CEO said he believed the driver of business lending growth was the fact that there are “still large sectors of our economy doing really well” – such as minerals, mining, agriculture, and manufacturing – which tend to get overshadowed in the headlines by the sectors that are struggling.

The business bank was also performing well with home lending, with NAB revealing that about a third of its home loans are in business and private, which typically skew towards investor and proprietary lending, and that home lending in this sector grew three times faster than in the consumer bank.

[Related: NAB announces change of CEO]