National Australia Bank Ltd cuts home-loan rates to win customers

The bank has recognised that low rates might not be enough for customers.

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National Australia Bank Ltd (ASX: NAB) believes it must improve its customer service levels in order to achieve greater growth in its home lending business.

Despite pledging to maintain the lowest advertised mortgage rate out of the major banks as part of its "breaking up" marketing campaign in 2011, the bank's growth in the local home loan market was slower than any of its major competitors between 2011 and 2013, indicating that the strategy needed to be improved.

The bank will now shift its focus towards improving its customer service levels to boost its share in the market. It argues that: "Just to have a purely price-led strategy is dangerous," suggesting that customer service is a major driver behind a customer's decision regarding which bank to deal with.

The approach is certainly questionable. While service might be more highly considered amongst the nation's smaller banks, the rates and fees charged by the big four are the major driver for customers who are more likely to go where the lowest prices are. Having said that, reaching out to customers and improving their experience can't hurt. If customers can get good service and good rates at the same time, NAB may just have the winning strategy.

On Monday, NAB unveiled a range of cuts to its fixed rate products. It reduced its two-year fixed loan by five basis points to 4.84%, while its three-year and five-year products were lowered by seven basis point and 10 basis points to 5.06% and 5.69% respectively.

Foolish takeaway

The news comes as the big four banks engage in aggressive competition to entice customers by offering large discounts on their home loans. NAB, Westpac Banking Corp (ASX: WBC), Commonwealth Bank of Australia (ASX: CBA) and Australia and New Zealand Banking Group (ASX: ANZ) are currently offering discounts between 0.85% and 0.94% on variable loans.

Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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