Ken Henry says NAB has strong capital and is ready to embrace fintech future

National Australia Bank chairman Ken Henry, who as Treasury secretary navigated Australia through the global financial crisis, says the bank's capital levels are already "unquestionably strong", the standard the financial system inquiry (FSI) declared was required for banks to withstand another trauma like the GFC.

Dr Henry, who assumed the NAB chair on December 17 replacing Michael Chaney, also says digital disruption is "a form of innovation that we should embrace" because it will reduce costs and is good for customers.

NAB chairman Ken Henry says big banks should be just as good at disruption as any fintech player.
NAB chairman Ken Henry says big banks should be just as good at disruption as any fintech player.  Photo: Louise Kennerley

As part of its exit of Clydesdale Bank, which Dr Henry discussed in an interview with The Australian Financial Review, NAB raised $5.5 billion in fresh equity last year, lifting its common equity tier 1 (CET1) capital to just over 10 per cent.

On an internationally comparable basis, Dr Henry said NAB's CET1 is 13.5 per cent, a level the board feels already places it in the top quartile of global banks, the standard FSI chairman David Murray said banks must aspire to.

"We do feel we are unquestionably strong," Dr Henry said. "But we don't have all of the data on this: not all of the decisions have yet been taken on capital."

The comments come after analysts last week suggested recent decisions from the Basel Committee on Banking Supervision suggest the global capital debate has reached an inflection point, as Basel's recent rules point to less capital being loaded onto banks than they originally feared. This would make it relatively easier for Australian banks to maintain the 'unquestionably strong' standard and suggests that jumbo capital raisings like the ones seen in 2015 might not be forthcoming in 2016.

"Our expectation is if there was a further increase to capital, we would have a reasonable implementation time frame, and this is something we would be able to accommodate," Dr Henry said.

"We have done what we through was prudent to do. We went early to raise additional capital, the market appreciated the reason we did that, and we are pleased we did as much as we did when we did it. We may need to do more, but we start from a strong position."

Australian Prudential Regulation Authority (APRA) chairman Wayne Byres said in a speech in November that the work done in 2015 to lift equity levels, thereby reducing leverage, had put the big banks in a strong position to meet the financial system inquiry standards. The big four banks raised $18 billion last year after the FSI called for them to carry higher risk-weightings against mortgages.

"We continue to have a soundly-capitalised banking system overall in Australia and, with the aid of recent capital raisings, the relative positioning of the major bank capital ratios against their international peers is much closer to that recommended by the FSI," Mr Byres said. "That means that, given where we are today, APRA and the banking industry have time to manage the transition to any new requirements in an orderly fashion."

In an interview, Dr Henry also discussed the responses of incumbent banks to the threat of digital disruption, with fintech expected to remain a hot topic in 2016.

"We shouldn't be afraid of digital disruption. Digital disruption is a form of innovation that we should embrace," he said.

For example, there was no reason that NAB could not launch a peer-to-peer lending platform more efficiently and with more scale than some fintech disrupter, he said. "For incumbents, big banks like us should be in a better position to engage in digital disruption than those trying to disrupt us. If P2P lending is profitable, then the incumbent banks should be better at it than anybody else. We should be able to do it much more efficiently, and at a much bigger scale than anyone else."

With the federal government putting start-up culture and innovation at the centre of its policy platform running into the election this year, Dr Henry said for banks, new technologies will both enhance customer experiences and reduce costs.

"If digital innovation leads to more efficient ways of achieving credit intermediation, we are in a strong position to embrace those new efficiencies. Maybe the whole sector becomes more efficient. If it does, our customers will benefit."

The establishment of NAB Labs, an innovation lab in Melbourne, and NAB Ventures, a corporate investment fund to invest in start-ups, aims to imbed an innovation culture across the bank, Dr Henry said, while also providing access to cutting edge ideas where they are emerging globally.

"We are not sitting on hands here. We see [fintech] as both interesting, and an opportunity for us to do what we currently do better and for us to do new things."