http://www.abc.net.au/news/stories/2010/05/06/2891727.htm?section=justin
Summary
The National Australia Bank's first-half of report show a fell in profit by 21.6% ($2.1 billion), after fee reductions and lower interest rate compared to its competitors. The bank’s chief executive, Cameron Clyne, says cuts in customer fees and NAB’s low variable home loan interest rates will be valuable in the future by building market share and customer retention. New transaction account openings have increased by 32 % and new mortgage flows also increased by 20% but caused a 22 % decline in personal banking earnings. Even though their profit dropped, there is an increase in cash earnings of $2.2 billion and a fall in bad debt charges from $1.8 million to $1.2 billion. This was better than the market expectation.
Connection
First of all, the textbook talked about how bad debts can affect a business’s profit significantly and that is why businesses need to estimate the amount of the expected uncollectible accounts at the end of each period. The fall in bad debt for NAB contributes to the increase of cash earnings when the NAB’s profit is slipping down. The second connection is the financial instruments. In the textbook, it explains 4 types of financial instruments and the one that is related to this article is loans and receivables. NAB is lowering interest rate and fee reduction to attract customers. Even though it contributes to their decrease in profit, their action is an investment. The investment is to make a more sustainable business by improving customer relationships and satisfaction to make NAB reputation broader.
Reflection
The fell in bad debt charges helped NAB to have an increase in cash earnings and I think it also gives a positive sign of the Australian economy recovering from the global financial crisis. People have the money to pay back their debt, which means their economy is not affected by other financial crisis and NAB can have a higher net realizable value. I think NBA’s actions of the fee reductions and lowering interest rates are ways to keep their customers in this recovery period. My opinion is that NAB’s strategy is good for short term because it can provide them with sufficient cash over this period of time, so they can solve their financial crisis that they might have and to balance the fell in their first-half profit.
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Fee reduction and lower interest rate acted as a pull-factor which attracts investors or potential homeowners to apply for mortgage yet NAB still reported a net decline in their net profit. One of the reason is fees that were previously collectible are now deducted; in other words, it increased NAB’s operating cost. In addition, a lower interest rate than competitors shrink their profit margin as Australian Central Bank have raised their interest rate for the past year. Lastly, we also see a decrease in bad debt expenses. It signifies allowance accounts in NAB’s balance sheet simultaneously dropped with the improving economy. I agree that with lower cost to the customers and decreasing bad debt expenses, NAB will be able to acquire more market shares in the future and thus remain competitive at the Australian bank industry.
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