Opinion
Competition kicks the stuffing out of NAB and Woolworths
Elizabeth Knight
Business columnistThere are plenty of ways to interpret the National Australia Bank’s half-year profit decline and the limp sales result from Woolworths – not the least of which is that they provide a reality check for those who argue that the highly concentrated banking and supermarkets sectors lack competition.
NAB’s cash profit in the six months to March fell 12.8 per cent, which (you guessed it) was the result of stiff competition in the sector, particularly on mortgages, but also on deposits.
So fierce is the competitive pricing, in fact, that two out of three home loans the bank is writing now are unprofitable.
NAB reported its half-year results on Thursday.Credit: Penny Stephens
NAB chief executive Andrew Irvine says the intensity of this competition may be beginning to ease, but given his bank wasn’t the one that spearheaded the mortgage wars but rather responded to it, where it goes to from here is unknown.
That said, NAB was the industry’s canary in the coal mine given it was the first to reveal its earnings. Investors across all the big banks appeared to let out a collective sigh of relief because while its results were nominally underwhelming, they could have been a lot worse.
Shares in NAB and its big three competitors rose in response to Thursday’s earnings report.
In contrast, the quarterly sales result from Woolworths appeared to take the market by surprise, and not in a good way. In an unusual turn of events, the supermarket giant has lost market share to a more aggressive Coles, which posted more robust sales earlier this week.
Woolworths said food prices rose only 0.2 per cent against a 5.8 per cent rise in the same period last year – an outcome that should muffle the noise coming from critics accusing the supermarkets of price gouging (although it probably won’t).
Coles boss Leah Weckert said earlier this week that budget-conscious customers were shopping at multiple supermarkets to get the best deals, and this was adding to the intensity of competition.
In banking, customers who are refinancing their fixed rate loans to variable loans are forcing the lenders to come up with the best deal possible. NAB and the Commonwealth Bank have been losing share in the mortgage market because of their reluctance to write unprofitable loans.
So fierce is the competitive pricing, in fact, that two out of three home loans [NAB] is writing now are unprofitable.
Irvine said that home loans through third-party broker channels have been below the cost of capital – and that’s two out of every three home loans his bank writes.
The Commonwealth Bank has tried to address the relentless shift to mortgage brokers by increasing the bonuses it pays its in-house mortgage sales team – a move that has earned it a stern rebuke from regulators.
But brokers are in a strong position in the current high-interest rate environment, which is motivating borrowers to scour the market to find the cheapest rate.
Irvine said to date NAB has not followed CBA’s lead on increasing in-house sales bonuses, but said the bank “wanted to maintain competition with other banks”.
NAB’s result has been somewhat cushioned by its focus on business banking, where the result was significantly healthier. While profit from the business bank fell slightly and sustained competitive pressure, NAB has retained its market share.
Its reliance on business banking is clearly giving it an edge over its rivals as business lending is growing strongly and far exceeding NAB’s expectations.
It was up 9 per cent over the past year, and the March pipeline for loans was NAB’s strongest on record, an outcome which Irvine described as “frankly astonishing”.
Irvine says it is proof that many businesses and sectors in the Australian economy are doing well – a fact that is overlooked when so many are focusing on more troubled sectors.
NAB’s strong skew to business lending could mean it is best in class in the banking sector during this profit season.
Woolworths boss Brad Banducci, who has been under the intense scrutiny of various government inquiries into supermarkets, said the grocery giant was expecting “trading conditions to be challenging for the next 12 months.”
Those who have been accusing Woolworths of over-earning should take note.
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