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NAB’s low rates win it more customers, but at a cost

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National Australia Bank’s six month profit is up to a record $2.83 billion as it beats its rivals on customer growth thanks to a low interest rate strategy.

But doubts remain on whether its guarantee to offer the lowest rate among the big four banks is sustainable.

A 6.0 per cent rise in NAB’s cash profit in the six months to March 31 was the result of higher earnings from NAB’s personal, business and wholesale banking divisions.

Earnings in the personal banking division rose by 7.4 per cent from the same period in the previous year to $464 million, as NAB continues with an aggressive pricing strategy that began at the end of 2009.

After this month’s interest rate cuts, NAB offers a standard variable rate on mortgages of 6.99 per cent, two basis points lower than its nearest rival Commonwealth Bank.

NAB chief executive Cameron Clyne said lower pricing and aggressive marketing continued to deliver results for Australia’s third largest lender.

“We’ve had the lowest standard variable rate for 34 months, so the switching to NAB has been very substantial,” he told reporters in Sydney on Thursday.

But lower pricing has come at a cost, with the personal bank’s net interest margin, a measure of profits made on loans, down a substantial 20 basis points since 12 months ago.

Asked whether NAB would extend its guarantee to offer the lowest mortgage rate of the big four banks into 2013, Mr Clyne said that decision would be made closer to the end of 2012.

But he defended NAB’s strategy.

“I would much rather have the personal bank that we’ve got today than the one we had three years ago, that’s for sure,” Mr Clyne said.

NAB’s overall net interest margin was down six basis points from a year ago to 2.17 per cent.

The cost of attracting deposits was a main driver of that fall, and will dictate future rate movements, Mr Clyne said.

“The repricing doesn’t have an automatic flow through to bottom line,” he said.

“We’ve still got high deposit costs.

“So we’ll obviously be make our pricing decisions as we go forward, but deposit costs are continuing to rise.”

As expected, NAB’s net profit for the six months to March 31 was down 15.5 per cent to $2.05 billion due to a loss from its banks in the United Kingdom.

Morningstar analyst David Ellis said there were few surprises in NAB’s results, and maintained his forecast of a full year net cash profit of $5.87 billion.