NAB's turnaround strategy starting to pay dividends

But the bank's moves to take it to the next level are starting to be questioned.

NAB, Australia's fourth-largest by market capitalisation, has implemented a plan to resuscitate its ailing personal banking business, which has long been considered the laggard of the group.

The "rebasing" of personal banking has centred on reviving its earnings growth by increasing its market share in mortgages, credit cards and retail deposits.

NAB has put in place a conscious decision to compete against its larger rivals -- the CBA, Westpac and ANZ -- almost entirely on price.

The bank has the cheapest standard variable rate of 7.24 per cent, compared with CBA's 7.36 per cent, ANZ's 7.41 per cent and Westpac's market-topping 7.51 per cent. NAB won plaudits when it was the only bank not to raise its mortgage rates above the RBA's 25 basis point hike in December last year.

The move and a pledge to keep mortgage rates low under a "Fair Value" campaign could finally be paying off for the bank, which has underperformed its rivals over the past few years.

New data from APRA shows NAB is increasing its mortgage market share, by primarily luring customers from CBA and Westpac. The bank now holds a 14.5 per cent share, eclipsing ANZ's 14.2 per cent. The two Melbourne-based banks still lag the Sydney banks, with CBA holding 28.4 per cent and Westpac 26.7 per cent.

Since the last RBA interest rate rise in May, NAB has increased its home lending portfolio each month.

During August, CBA and Westpac grew below the "system" rate, after ordering a slowdown in the growth of their mortgage books.

NAB's portfolio, on a three-month annualised basis, has grown by 16 per cent, easily outpacing the rest of the major four.

The bank also seems to be making significant headway in the battle for deposits.

Its household deposits pool has grown by 14 per cent in the past three months, annualised, being the most rapid growth in the field.

NAB's head of personal banking, Lisa Gray, told The Australian last week that the bank was keen to make greater headway to bridge the gap with its major rivals, especially in mortgages and credit cards.

The bank last week announced it would change some of the fee structures of its credit cards to try and boost market share.

"We want to be more competitive across the board," she said.

"We want to be more competitive on credit cards. We will work towards that by starting to grow by more than system."

A comprehensive new report from UBS found that NAB would endure a "rocky road to recovery" in the aftermath of the bank's failed $14 billion bid to buy Axa Asia-Pacific Holdings, the diversified wealth and insurance group.

The report found that NAB, along with its major rivals, would face significant earnings pressure and revenue headwinds, but still had a number of strong businesses.

UBS banking analyst Jonathan Mott said NAB's business bank was still the "jewel in the crown", as it generated half of the banking group's net profit.

The personal bank's earnings and margins, he said, would benefit by implementing a mortgage rate rise greater than the RBA's next official move.

"NAB views the personal banking segment as inevitably subject to competitive pressures and likely to bear the brunt of an overwhelming wave of political, social and regulatory pressures," Mr Mott said.

"If mortgage repricing is achieved, which is likely in October on the back of a 25 basis point RBA cash rate movement in our view, personal bank divisions across the sector are likely to show improved momentum in the first half of 2011."

While a mortgage rate increase could be popular with investors, a move would be hard to justify to the government and consumers.

The RBA warned last week that the major banks had been able to cover the higher costs from funding markets in the past two years with higher profits.

The declaration was seen as a warning to the banks not raise rates independently of the central bank.

Treasurer Wayne Swan also launched his first missive of the new government's term, when he said the economic and financial market conditions did not warrant the banks hiking by more than the RBA's official decisions.

Mr Mott said NAB should now set about rebuilding investor confidence, after the botched APH transaction.

In the past, the bank has examined Alliance & Lester and Bradford & Bingley and RBS branches in Britain and a stake in AMP, without success.

"Over the past 15 years NAB has looked at, proposed to acquire and undertaken a large number of M&A," Mr Mott said.

"It's track record on this front has proven to be very chequered.

"The active M&A agenda has often been blamed for the underperformance of its domestic banking and wealth management operations, which perhaps have not seen the same level of management focus as their peers.

"We believe that it will take some time for NAB to rebuild investor trust and confidence -- with organic earnings delivery the best remedy."

Source: the australian