NAB Strengthens Outlook for Earnings Growth


The highlight of the strategy and technology update is the AUD 800 million in estimated annual cost savings expected by the end of 2017. The business simplification and efficiency project is closely linked with leveraging technology and increasing product cross-sell in the key personal banking and wealth management divisions. Offsetting the cost savings will be approximately AUD 260 million in higher software amortisation charges by 2017.

NAB’s narrow moat is underpinned by strong competitive advantages, including dominant pricing power, regulated barriers to entry, large-scale low-cost operations, access to lower-cost funding, a large sticky customer base and a highprofile well-regarded banking franchise. NAB can successfully execute on its strategy and technology initiatives and, in the process, strengthen its competitive advantages.

The reorganisation and senior management reshuffle is a plus, enabling a refreshed executive team with new heads for wealth and personal banking. Changing customer dynamics and rapidly upgrading technology require much more cooperation between the two major growth centres as the population ages, digitisation take-up accelerates and the superannuation sector grows.

As expected, the United Kingdom exit strategy looks likely to be a disciplined and targeted run-down of the troubled commercial real estate loan portfolio and a tightly-managed, scaled-down retail banking businesses, rather than a clean exit. The systems upgrade project is an attempt to catch up with peer-leading Commonwealth Bank (CBA) and hopefully leap frog into a market-leading position.

However, major technology upgrades are long, costly and complex projects, requiring complete commitment from all levels of management. CEO Cameron Clyne noted it could take up to 10 years to determine technology winners and losers among the four major banks. The pace of change will only increase, and banks with flexible product and customer systems sitting on top of robust core banking systems will be the winners. Clearly it will be difficult for the technology laggards to catch up.

Over the medium term, revenue growth will leverage the eventual recovery in the heavily-populated non-resources east-coast economies, but surplus capital will accumulate faster than it can be reinvested in profitable capital efficient initiatives.


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