The National Australia Bank's CEO, Cameron Clyne,
says the bank's fee cuts will pay off in the long run.
The National Australia Bank's first-half profit fell, after fee reductions and lower interest rate rises than its competitors caused a 22 per cent decline in personal banking earnings.
NAB says its statutory profit was down 21.6 per cent at $2.1 billion, "largely due to accounting volatility" related to various financial instruments.
However, it reported cash earnings of $2.2 billion, which was 8.2 per cent higher than the same time last year, and 20.9 per cent higher than the half-year ended in September 2009.
This was around the average forecast of seven analysts surveyed by Reuters.
A fall in bad debt charges to $1.2 billion from $1.8 billion a year earlier was better than market expectations.
Fee cuts bite
The bank's statutory profits were the third highest of the big four, beating only than ANZ's $1.9 billion result.
NAB's cash earnings from personal banking slipped by 22.3 per cent to $317 million, largely due to customer fee cuts, higher funding costs and deposit rates, and having the lowest mortgage interest rate of the major banks.
The National Australia Bank's standard variable mortgage rate of 7.24 per cent is 0.27 percentage points below the highest rate of 7.51 per cent charged by Westpac, which yesterday announced a $2.9 billion profit.
However, the bank's chief executive, Cameron Clyne, says cuts in customer fees and the NAB's relatively low variable home loan interest rates will be valuable in the future by building market share and customer retention.
"They represent an investment to create a sustainable business and improve customer relationships and satisfaction and the broader reputation of the NAB," he noted in the financial report.
"Customer satisfaction has risen and there has been a 32 per cent increase in new transaction account openings. We have also seen 20 per cent growth in new mortgage flows and a 42 per cent reduction in customer complaints."
He says the strategy could work particularly well for the NAB during an election year, and may help head-off increased regulation or taxes on banks.
"There is a heightened political scrutiny driven by consumer perceptions that banks have benefited from reduced competition due to mergers and significant government support and stimulus measures skewed to household mortgages," he told analysts.
"With this being an election year there's an increasing risk that the government may consider measure to address consumer concerns about competition."
It was the NAB's business banking division that propped up the result, with a 33 per cent rise in earnings to $1.1 billion.
That improvement was largely driven by a substantial fall in bad debt provisions as the Australian economy recovered faster than expected from the global financial crisis.
The bank has declared an interim dividend of 74 cents per share.
