Rate hike profits to be short lived: NAB

by Miklos Bolza23 Oct 2017
While the National Australia Bank (NAB) will bring in increased profits due to higher rates on interest only loans, this will likely be short lived with customers switching to lower rate principal and interest loans, the bank’s chief operating officer has said.

These admissions came out on Friday (20 October) with CEO Andrew Thorburn and COO Antony Cahill facing the House of Representatives Standing Committee on Economics in Canberra.

Responding to a question by committee member and Labor MP Matt Keogh on profitability modelled by NAB prior to the interest rate hikes, Cahill admitted that the predicted revenue was “positive”.

“Our view was – and it still actually remains to be the case – that we will continue to see switching in the back book from interest only to P&I and any financial gain is likely to be short lived overall.”

Thorburn said that while NAB had done its best predictions around factors such as revenue, these can always change. However, he noted that “the best estimate would have been positive”.

Committee chair David Coleman also pressed the issue of interest only rate hikes and profitability, asking whether NAB made these moves to maximise profits.

Thorburn denied this, saying “if we were wanting to maximise profits, we would not have reduced principal and interest rates by eight basis points for 500,000 customers”.

Both Cahill and Thorburn repeatedly stressed that the primary driver for the interest only rate movements at NAB were the speed limits introduced by the Australian Prudential Regulation Authority (APRA).

“The main driver was the 30%. We had four months and we had to hit it hard. Demand in economics is affected as the price goes up. We put the price up to slow that demand,” Thorburn said.

In addition to changing pricing, NAB also “pulled a whole series of levers,” Cahill said, including reducing LVRs for interest only applicants and removing foreign applicants in the IO space.

NAB’s interest only back book has shifted from 41% to 37.7% because of these measures while the number of customers moving from interest only to principal and interest has tripled.

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