Christine St Anne: National Australia Bank, Chief Executive, Cameron Clyne recently spoke at the Australia-Israel Chamber of Commerce lunch in Sydney this week. Among key things such as business reputation, Clyne also spoke about how the Bank has managed to turn around its Personal Banking division over the last 3.5 years. This included the Bank's radical strategy for cutting its fees announced back in 2011.

Cameron Clyne: If you go back 3.5 years ago, when we outlined our strategy to the market, what we clearly had - and bear in mind our Personal Bank is still relatively small in proportional terms. It gets a lot of focus, but it�s only 16% of our earnings.

What was very clear to us that our Personal Bank was not performing. It was going backwards in terms of market share. It was 8 percentage points behind the third in customer satisfaction, now in a four-horse race that is a hell of a gap.

What was becoming quite apparent to us was that if did not turn that around then we would have a number of issues. The first would be that we would not be sourcing deposits because obviously the Retail Bank, the Personal Bank is a good source of customer deposits and they are increasingly becoming important in trying to get to a much more stable funding ratio.

We would increasingly, potentially threaten the growth of our business bank, because you have to manage your balance sheet to certain concentration limits. What we wanted to do, of course, was to continue growing in business and often what people don�t always realize is that in the same time we�ve added those million customers, we�ve added 300 basis points of market share in business. So it�s not as though we�ve been just only focusing on that issue.

The only way we were going to do it was, in fact, to do something quite radical, because you'd had a number of in-market mergers here in the Sydney market that it made the - arguably the bigger retail banks even larger. So you had to do something organic and to do something quite quickly and we wanted to really push out on reputation. So we initially dealt with dealing to a range of fees and other things.

Now, I can present two arguments, both of which support the strategy. So, obviously, when we did that - took those fees, we took a hit to our earnings. Since we took that hit to our earnings, the personal bank has grown 21% compound annual growth. That is pretty, pretty strong by any measure. If you say, well that doesn�t count, I don�t like that measure, I�ll give you another one, which is to say we are now back to the earnings we had before we rebased, yet we have a million new customers and we�re number one in customer satisfaction. So that�s not a bad situation either to turn a business that is, basically in the space of three years from going backwards to being back to where it was in three years and gives us a platform to grow and�

St Anne: As one of the country�s key mortgage lenders, Clyne was also upbeat on the outlook for Australia�s residential property market.

Clyne: It is unquestionably the first question you get asked by overseas investors, when is the Australian housing market going to collapse? Because if you look at traditional metrics like affordability, it does look at the difficulty end of the scale but there are a whole series of factors in the Australian market that put a bit of a floor under property prices. We still do a net intake of migrants, which provides some genuine source of demand and that demand is concentrated into a few number of urban centres. There is also a genuine supply constraint. It still takes a long, long time to get housing approvals developed - developments approved, which obviously constraints supply.

Finally, we have this unique situation in Australia, where 85% of mortgages are variable. So the capacity for interest rates to move rapidly to improve affordability in a crisis is significant. Whereas one of the big problems, of course, in foreign markets is people are trying to get out of fixed mortgages and those sort of things. So when you put it all altogether, it does provide a bit of a floor under property prices. So we're relatively comfortable about them.

St Anne: In its last trading update, National Australia Bank reported subdued outlook for its U.K. businesses. A topic also raised by Clyne at the lunch. He said while it was hard to predict the outlook for Europe, National Australia Bank�s U.K. businesses were doing well given the uncertain environment.

Clyne: The English economy is struggling, and by definition our banks are, and they are in still many respects probably amongst the better performing banks in that market, but that�s cold comfort when you�ve got a very difficult economic environment.

St Anne: Funding pressures were, of course, another key theme to the Bank. Clyne also spoke about the particular challenges the Bank now faces under the new capital requirements.

Clyne: Part of the regulatory regime we're moving towards is that Banks by 2018 need to be one, what�s really termed, 100% stable funded, which really says that your funding basis needs to be either customer deposits or term funding with greater than 12 months to maturity. The logic behind that is that you're not subject therefore to the vagaries of the short-term market that at the moment probably make up 10 to 15 odd percent of how the Bank funds itself.

Interviewer: That�s a good thing, it�s a good�?

Clyne: I think on balance it is, but there are implications because long-term funding is more expensive than short-term funding. So there's going to be issues around that, and whether or not we can continue to fund credit at a high level.

The task will be made harder, of course, when we have a rebound in confidence, because money will flow out of deposits. Now, some people misinterpreted the view that that means that the money doesn�t disappear from the economy. That�s not the point we were making when we - certainly when we mentioned this in a recent trading update. The point we�re making is that under that regulation, all deposits are not created equal. So the regulator clearly places a greater premium on deposits they think are stickier.

So, if the consumer has the money in their bank account that is considered by the regulator, one of the safest form of deposits, because they feel its risk of flight is less. If the consumer becomes more confident and goes and buys equities, then the money still exists in the system, it just moves from out of the retail deposit account into the wholesale deposit account, which carries less of a weighting.

So that�s the real issue is at the moment we�ve got flattering set of numbers because it�s mostly parked in retail and retail is well rated by regulators. If the economy improves and all that money is either spent or purchase equities, it moves into wholesale deposits and wholesale deposits have a lesser weighting. So it�s not that the money disappears, it's still the same pool in the economy, but it will actually carry less weight for the banks and that will be a challenge for us.

St Anne: Christine St Anne for Morningstar.