NAB in search of kudos and market share

Margins in the home loan segment look likely to contract for all lenders, with National Australia Bank declaring yesterday that it would cut mortgage rates more aggressively than any short-term decline in its cost of funds.

NAB's Australian chief executive, Ahmed Fahour, yesterday held a media conference to announce that NAB plans to cut its standard variable home loan rate by 25 basis points early next month if, as is widely expected, the Reserve Bank of Australia cuts the cash rate target by 25 bps to 7.0 per cent.

It isn't clear if the cut in variable rates will apply to loans marketed under the Homeside banner (through brokers), or whether the bank will retain the discount off the variable rate (often around 70 basis points) that is common on larger home loans.

The NAB decision goes against the grain of the posturing by several other banks over recent weeks, and also runs contrary to forecasts on funding spreads cited yesterday by Fahour.

So the question is, what's NAB's motive and objective here?

One theory is that NAB is looking for free kick from all the media coverage (which is mostly favourable so far) in order to get the phones ringing and to sell more home loans.

NAB (to some extent by choice) is a laggard in the mortgage market in Australia. The report State of Play (published by InfoChoice and The Sheet) shows that NAB lost market share in residential lending eight quarters in a row to March 2008.

Commentary last week by Commonwealth Bank and Westpac (with both skiting about home loan growth well above system) suggests that NAB may still be growing more slowly than system over recent months even though the market share of mortgage managers and lenders dependent on securitisation has crashed.

So the publicity benefit - and perhaps a pricing advantage, if rivals take their time in matching NAB's new standard variable rate of 9.36 per cent from early September - might be the primary rationale.

Given the seasonal surge in demand for home loan finance during spring this may simply be an excuse to chase free media to coincide with existing marketing plans.

NAB might also be drawing on the experience of Bank of New Zealand (a NAB subsidiary) from the controversial "mortgage war" of 2004 to 2006. While BNZ gained little, if any, market share from a period of narrower mortgage margins, BNZ's price leadership may have helped aid the bank's "mind share" in consumer and business markets and improved product sales more generally.

A second theory is that NAB has simply succumbed to the escalating pressure from Australia's government to deliver a cut in home loan rates that matches the assumed size of the forthcoming cut in the RBA cash rate target.

Some sources suggest that Australia's Treasurer, Wayne Swan, was blunt in the government's objectives on banking policy in private briefings with key bank executives earlier this week, and the consequences for non-compliance.

NAB, though, might be jumping at routine political rhetoric, as some other banks management teams are not, yet, fazed by the suggested threats.

It's also worth noting that Fahour was careful to decline to commit to cut home loan rates by 50 bps next month if the RBA cuts rates by that much.

An even more oblique explanation is that Australia's banking cartel is simply evolving into a cartel of two: Westpac (including St George) and Commonwealth Bank, and NAB sees itself as a challenger in the mortgage market.