Andrew Thorburn, the CEO of the NAB, appeared before the the House of Representatives economics committee in Canberra today.
Here are his opening remarks:
Mr Chairman, and Members of the Committee, it is a privilege to be before you to talk about the profession and the business of banking.
This is an important conversation.
I am a proud banker, having worked only in a bank my whole career. It is a profession that must be based on trust, respect and integrity. Indeed, the Banking & Finance Oath states: “Trust is the foundation of my profession”. This was true when I started my career – and remains true today.
For bankers, trust is the currency that matters the most.
I’m proud to be CEO of NAB, because the role of a bank is vital.
At its core, it has the purpose to help people, businesses and the economy prosper.
However, there have been some issues in our industry and at NAB, which we cannot be proud of.
I want to assure our customers, and you, that we are committed to facing into this, so we can be a stronger bank and a stronger profession.
Today, I would like to cover three key areas:
1. The different stakeholders banks have, and the importance of maintaining a balance between them;
2. How a bank balance sheet is structured, and the flow on to profitability and pricing;
3. Building trust through action.
A slide pack with further detail on these topics has been distributed to you and is also available to our customers and the community on our website, as is this
GETTING THE BALANCE RIGHT
Banking has been an important and trusted part of society for centuries, connecting those who need access to credit with those who want a safe place to invest.
We have a huge responsibility to get it right for our customers. We are crucial to their lives, and to helping the economy grow.
Banking requires a careful balance of the needs of all stakeholders — homeowners, businesses, depositors, mum and dad shareholders as well as superannuation funds representing millions of Australian workers and retirees.
More than five million Australians and Australian businesses choose to bank with NAB.
They expect us to help them with some of the most important decisions they’ll make – decisions like providing finance for a home, saving for retirement, and starting and growing their business.
Each month, NAB lends at least $4 billion to help people buy or renovate a property.
As Australia’s biggest business bank, we lend at least $2 billion a month to back Australian businesses – small and big – and we help secure finance for major infrastructure projects.
NAB itself directly contributes much to the Australian economy.
In the 12 months to March 2016, our business generated $17.1 billion in revenue. Of this, we paid:
- $4.3 billion in salaries to our 35,000 employees;
- $3.6 billion in expenses to our suppliers; and
- $2.2 billion in tax.
That left $7 billion.
$2.2 billion was retained as capital to support new lending and to build the capital base of the bank, making it stronger and more resilient.
$4.8 billion was paid to our 584,000 shareholders — 95% of these are Australians and the majority of these are working families or retirees, who either receive dividends directly, or indirectly through their superannuation fund.
Delivering quality and sustainable returns is essential to maintaining the confidence of global investors.
Australia has a level of investment that exceeds our national savings – and accessing these funds is crucial to enable us to inject them into the Australian economy, enabling investment and economic growth.
During the global financial crisis we saw how important it was to keep these flows open, providing access to capital to allow us to continue lending to households and businesses.
Today the Australian economy remains attractive by global standards Confidence levels are encouraging but longer term risks are emerging.
The Financial System Inquiry made recommendations to ensure banks are “unquestionably strong … even in times of financial stress” and to increase bank capital ratios.
There is a cost to higher capital requirements but the cost of not having a strong, safe and stable system – as we have seen overseas – is greater.
BALANCE SHEET & PRICING
Banking in Australia is competitive. We are in a low growth environment — all the banks are working hard to win business, both deposits and loans, and this is good for customers.
I know the Parliament — and the wider community — is concerned about the relationship between the RBA cash rate and how we set interest rates.
We have not been clear enough that our mortgage and other lending products are not — and have never been — directly linked to the cash rate.
Many of you would recall that, from the 1990s until the GFC, movements in mortgage lending rates did correlate to movements in the cash rate.
But, we now operate in a low rate environment and other factors are having far greater influence.
Funding costs have fallen overall — but they have not fallen by as much as our lending rates.
This has meant a reduction in bank margins.
The accepted measure of bank margin, Net Interest Margin or NIM, has been in gradual decline for at least two decades.
Put simply, banks are now earning less than they used to for every dollar they lend.
So, why is NIM falling?
On the funding side, one of the main drivers is the change in the funding mix, made up of:
- Customers deposits;
- Short and long-term wholesale funding; and
- The equity our shareholders give us.
These funds are pooled and lent out to our customers.
Each funding type has different costs — and do not move in sync with each other, or the cash rate.
New global regulations designed to further strengthen the banks means we need greater levels of deposits and longer term wholesale debt because they are viewed as more stable.
This has driven competition for deposits and we are paying more to customers for term deposits, relative to the cash rate.
The price of international wholesale funding is determined by supply and demand for Australian bank and NAB-specific debt in the global market — not the Australian cash rate.
On the lending side, competition between Australian banks has never been more intense — and so borrowing rates have fallen faster than deposit rates.
So it comes back to getting the balance right between what we pay for funding and the rate at which we lend.
This balance is dependent on attracting investment from savers, global investors and shareholders, by offering them a fair return and confidence in the stability of the bank.
BUILDING TRUST THROUGH ACTIONS
From my first days as CEO of NAB I have said our “future success would be defined by our culture and the leadership we deliver for our people and our customers”.
Indeed, these were the words I used when addressing a Senate Committee last year.
This is a constant process and remains true today.
To our customers, I acknowledge we have not always delivered as well as we could or should have. We must do better.
My focus and responsibility is for improvement now — not later.
Recent improvements in regulatory oversight have sought to give Australians greater confidence in their banks.
However, the industry needs to lead with its own real and lasting reform.
As Chair of the Australian Bankers’ Association, I have worked with my counterparts, and we have committed to making real changes, together.
In April this year, following extensive consultation, we launched a comprehensive reform package of six initiatives aimed at building further trust and confidence in our banks.
This package has strong oversight from independent experts, holding the industry to account and reporting on progress every 90 days.
At NAB, since 2014 our vision has been to be Australia and New Zealand’s most respected bank.
Our stakeholders will decide if we achieve that ambition. But to get there, we know change is needed. As we have said before, “We are proud but not perfect.”
When you have 35,000 staff serving millions of customers, there will be mistakes made. We must acknowledge these mistakes. We must be accountable and fix them.
If we want our customers to trust us, we have to do more to build that trust. I would now like to focus on three areas of importance to this:
1. How we pay our people;
2. How we address complaints; and
3. How we help customers in hardship.
Customers need to be confident that every time they deal with their bank, they are receiving products and services that best suit their needs.
That is why we measure performance and pay our people in a way that reflects our focus on helping customers — and we have worked to get in place: balance, measure and safeguards.
There is a range, but across our workforce, 85% of staff pay is fixed, or base salary. Average potential incentive payments make up 15% of total remuneration.
For NAB Executives, myself included, one third of any incentive is dependent on whether our customers would recommend us to family or friends.
Everyone at NAB has a balanced scorecard which measures how they are contributing across four key areas 1. Customer, 2. Risk, 3. Financial and 4.
People & Leadership
Further, for 88% of our people, they are on an incentive system that involves no direct product or sales targets. This includes 2,300 tellers in our frontline retail team, who are not authorised to sell any lending products.
We have 12% of our staff on incentive schemes involving product targets, and any payments are subject to various safeguards to protect the integrity of the system.
I acknowledge more needs to be done on the critical area of product sales commissions and product-based payments.
We expect and welcome changes as a result of the review being conducted by Stephen Sedgwick on behalf of the ABA.
We have also moved away from performance-based, fixed pay increases for customer service and support staff.
They will now receive a standard pay rise of 3% per year, under our 2016 NAB Enterprise Agreement — negotiated with the Financial Sector Union and ratified last week by the Fair Work Commission.
Safeguards are also in place to ensure we all meet rigorous conduct and compliance standards. If we don’t, that could result in reduced or no incentive payment – or even recovery of previous incentive payments paid.
Customers also want us to deliver better service – and to not let them down.
So we are doing more to get the basics right.
We are finding ways to improve and address the root cause of complaints.
Customers don’t like fees and charges that they don’t understand or value.
So NAB has responded by:
- Offering a transaction account with no monthly fees; and
- Completely removing dishonour fees on personal transaction accounts.
To support customers in resolving complaints, we have dedicated Independent Customer Advocates — Dimity Kingsford Smith for NAB Wealth; and Catherine Wolthuizen for our retail and small business customers.
Feedback from customers has enabled us to identify and address 100 “pain points” this year alone – little things that make a big difference.
Finally, we knew we had to improve the way we treat retail and small business customers experiencing hardship.
In 2013, NAB’s Financial Ombudsman Service complaints for financial hardship were the highest in the industry.
So we partnered with Kildonan Uniting Care to rethink our approach.
We now spend more time understanding why customers are struggling to pay their loans, rather than just recovering money — and help customers get back on track.
While one complaint is one too many, we now have the lowest number of financial hardship complaints accepted by the Ombudsman — 175 in 2015/16 — and achieved a 64% reduction in total complaints.
Mr Chairman and Committee members — our bank has a values led culture.
Core to this is doing the right thing and having respect for people. I am proud of our 35,000 people and their commitment to these values.
By living our values, listening and taking action, we are committed to building the trust of our customers and the community.
For bankers, trust is the currency that matters the most.