NAB will have to live with narrowing home loan margins for now.
Mark Joiner, the executive director of finance at National Australia Bank, walked an industry conference in Melbourne, on Friday, through many of the prominent issues facing the
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bank. He kicked off with the impact of a permanently increased cost of funds.
Joiner said the increased cost of funds to banks generated by the 2008 financial shock was around 110 basis points.
"There is volatility around that, but really no prospect for this spread to tighten over the medium term," he said.
Joiner sees plenty of pressures adding to the cost of funds over the coming years.
The need for banks to finance assets once financed outside the banking system is one trend.
The transition to Basel 3, with more stringent rules on capital and liquidity, is a second.
NAB is planning for the cost of funds to continue rise, but at a moderate pace.
Joiner noted that over the last 12 months retail money had became more expensive than wholesale money, a trend illustrated in today's chart.
"I can see the cost of funds rising to mid-2013," Joiner said. "And I can see it growing a little for the five years after that." This was a reference to the transition period banks will have to meet the Basel 3 prudential regime now being framed.
Joiner referred to what he termed the "revenge of the regulators", which he said was adding to organic pressure to build capital ratios and improve liquidity.
He noted that NAB increased its capital base from around $30 billion to $40 billion over the crisis period, an increased pool in need of servicing at market rates of return. (For more on this, see the next article.)
Liquidity, he said, "will probably end up being three times what it was. All that has to find its way back to the pricing mechanism."
The outcome, he said, will be "a safer but more costly banking system."
With these introductory remarks, Joiner reiterated one long-standing NAB theme: it will not join with any bank considering lifting home loan margins.
"We will probably see banks buckling more to a recognition of their obligation to a broader range of stakeholders," he said.
While there were reports on Friday and Saturday that Joiner appeared to endorse a rise in home loan margins as a pricing option for NAB, these reports have it the wrong way round. On Friday, Joiner explained that NAB plans to continue with its recent pricing policy, which is to follow the RBA rate.
It is thus staying with a pricing stand that distinguishes NAB from the rumblings o some other big banks (notably Westpac) over the merits of lifting margins.
Joiner was speaking at the Banking & Finance Conference 2010. The Australian Centre for Financial Studies and the Financial Services Institute of Australia were joint organisers of the conference.