Nab Holds Loan Rates

National Australia Bank has effectively ruled out a near-term increase in its mortgage rates, pressuring its rivals also to hold steady, even as the cost of funding their loans erodes profits.

Handing down a 22 per cent rise in third-quarter cash earnings to $1.1 billion, NAB chief executive Cameron Clyne yesterday promised he would continue to price home loans at a discount to the other big lenders, as part of the bank's strategy to increase its share of the mortgage market.

But he gave the strongest sign yet that NAB was prepared to avoid out-of-cycle rate increases, acknowledging that it needed some ''flexibility'' in pricing mortgages as wholesale borrowing costs rose.

''I can say that while we watch these closely, we don't have any immediate plans to change our current settings,'' Mr Clyne said.

''We are pleased with the momentum our business is achieving. By maintaining a competitive proposition, we think that it is the right thing for the business as well as our customers.''

Despite NAB's strategy to have the lowest-cost mortgages among the big four, some investors have regarded it as having little choice but to join Commonwealth Bank or Westpac to push an out-of-cycle interest rise in the months after the election to protect profit margins.

NAB's standard variable mortgage rate is 7.24 per cent, compared with CBA's 7.36 per cent, ANZ's 7.41 per cent and Westpac's 7.51 per cent.

At yesterday's quarterly earnings briefing, Mr Clyne said the bank's interest margins were holding steady, but he warned that these margins - a key profit driver - were under pressure as wholesale borrowing costs kept rising.

CBA is this morning expected to reveal that its interest margins were crunched in the March quarter when it hands down a full-year profit of $6 billion.

Much of NAB's quarterly earnings increase was helped by a halving in bad debts during the quarter to $510 million. Market-share gains were also made in retail banking.

Investors, however, were hoping for more and sent NAB shares down 2.2 per cent to $24.50.

Mr Clyne said the recovery in business lending appeared to have been pushed back, with corporate Australia still nervous about reviving investment programs.

''The pipeline remains strong, but we do now believe that given the recent volatility in the global economic environment and a federal election around the corner, the return to business system credit growth may be delayed longer - more likely 2011,'' Mr Clyne said.

He remains bullish on the outlook for business credit, tipping growth of 6.5 per cent into 2011. NAB has the most to gain in business credit as it dominates the sector.

The quarterly figure, combined with a subdued outlook, suggests a second-half profit of $2.2 billion for NAB.

Analysts are still forecasting that without gains from higher-margin treasury income, NAB's interest margin will decline.

''The net interest margin is facing downward pressure from competitive pricing as well as rising wholesale funding costs,'' said Axiome Equities' Brett Le Mesurier.

NAB had raised $24 billion in wholesale funding, meeting this year's needs, and was eyeing opportunities for next year's funding requirement, he said.

While NAB this week offered a series of undertakings to the competition regulator in its $13.3 billion takeover of AXA Asia Pacific, Mr Clyne said these did not dampen the appeal of its move on the wealth manager.

Latest NewsNab Holds Loan RatesSunday, 05 March 2017

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