NAB's Big Gamble

One of the biggest bets in Australia is being made by Westpac, with National Australia Bank as the counterparty.

If Westpac is right, it could emerge from this decade with the sort of strength and kudos that the NAB enjoyed coming out of the mess of the 1980s, while the NAB would be headed for much more serious trouble.

If Westpac is wrong, it is headed for a shrinking future as not much more than a building society and consumer banking service, while NAB is further along the comeback trail than it is being given credit for.

The form guide for this bet is the APRA (Australian Prudential Regulation Authority) business banking market share figures for the June financial year. The banking watchdog’s figures are a sub-set of Reserve Bank of Australia (RBA) numbers, but they take out wholesale bills and non-bank business lending to provide a sharp look at how the banks are performing in the business of business. Westpac claims APRA takes out too much, but we’ll come to that.

The APRA figures are being happily distributed by NAB’s business and private banking executive general manager, George Frazis. “Happily” because they show an extraordinary performance by the NAB.

In the year to June 30, NAB increased its business lending by an astounding 17.3 per cent to $71.14 billion to consolidate its position with the biggest share of the business market '” 23.4 per cent.

The ANZ ran second with growth of 10.4 per cent for a 19.1 per cent share, then the Commonwealth with 7.6 per cent growth and a 14.9 per cent share.

In fourth place in share terms on 13.1 per cent is Westpac '” but its volume grew by just 3.3 per cent in the latest year, compared with the average for all the banks of 8.5 per cent. That performance is the corollary of the NAB’s success '” one doing roughly double system growth, the other doing less than half.

The obvious question to raise about the NAB (and even more so about some of the smaller banks lending aggressively at present) is: at what price is that extra market share being purchased. The normal suspicion would be that either the business is being purchased by cutting margins or that credit quality is being compromised by taking risks.

Frazis says margins and credit quality are holding '” although that credit risk level had already been reassessed with a more generous bias for small-to-medium businesses. With APRA still crawling all over the NAB (following the scandal in its treasury operations), it’s hard to imagine they are being too adventurous.

Frazis reckons the out-performance is coming from a combination of: Having better clients to begin with who are wanting to invest and expand at this stage of the cycle; having a much bigger distribution network for business lending than any other bank; changes within the NAB to speed up decision making on business lending; and changes to encourage NAB business bankers to become more active in their relationships with clients. (I would translate that to meaning the frontline lenders have more of their pay packets riding on outcomes.)

A pick-up in business borrowing has been the great hope of Australia’s banks '” and the RBA and Federal Treasurer '” as the housing boom cools. The 8.5 per cent system growth is respectable and bankers from the RBA governor Ian Macfarlane down are reasonably confident the strength is there.

Westpac doesn’t like the APRA figures, claiming they aren’t entirely representative in the business space, questioning the regulator’s treatment of bill acceptances as trading securities and other matters. (St George also argues with the bill acceptances treatment and believes it has a bigger market share).

A spokesman for Westpac much prefers the broader RBA statistics for credit growth. According to these numbers, Westpac had growth outside housing and personal finance of 11.4 per cent in the June year compared with system growth of 11.5 per cent.

As usual in any argument about statistics, the truth probably lies somewhere in between. Westpac admits its small business lending had slowed down in the June year, but the bank says it has since picked up.

The APRA numbers are simply amazing, maybe too amazing, but even taken with a grain of salt they still point to a fall that is all the more extraordinary considering the way Westpac dominated Australian business banking until the board and management lost their collective marbles in the late 1980s and almost lost the bank as well.

Westpac has consciously taken a more cautious stance on lending. It was one of the first to try to blow the whistle on the inner city investment unit bubble, cutting back sharply on its loan-to-valuation ratio. The APRA figures would indicate that it’s taking a similarly cautious approach to business banking when plenty of its competitors are out there chasing business hard '” maybe too hard.

I’ve heard various bankers mumble about how aggressive some of the smaller players have become, with Suncorp and Bank of Queensland most often mentioned in dispatches. The APRA numbers show Suncorp enjoying growth of 9.8 per cent to be running in fifth place, now level with St George.

It leaves investors as very interested observers of this big bet. The cautious might feel more comfortable with Westpac’s conservatism, while NAB shareholders will be hoping such strong growth in business lending is more than the first swallow of their bank’s new summer.

- Michael Pascoe