NAB takes another billion-dollar hit as royal commission customer-remediation costs double


October 02, 2019 23:24:15

NAB has more than doubled the cost of compensating customers for years of misconduct to more than $2 billion.

Key points:

  • NAB’s new provisions relate largely to reimbursing customers more than a third of $1.3b in fees paid to self-employed wealth advisors between 2008 and 2019
  • NAB’s share price tumbled more than 3pc on the news of the latest cost blow out
  • Across the banking sector, total costs relating to misconduct uncovered at the royal commission is now more than $10b

In a statement to the ASX, NAB said its pre-tax, customer-related remediation costs would be increased by another $1.2 billion on top of the existing $1 billion tally.

The new remediation provision was part of a pre-tax $1.7 billion ($1.2 billion after tax) bundle of additional costs, including new accounting treatment of software, which will drag down the 2019 full-year profit to be announced next month.

Overall, cash earnings are likely to be cut by $1.1 billion over the second half of the year.

NAB said the new remediation costs were largely driven by the inclusion of a provision for potential customer refunds of fees paid to self-employed advisers.

However, the new provisions may still not be the end of it.

“Until all customer payments have been completed, the final cost of such remediation matters remains uncertain,” the bank’s statement noted.

Shares tumble

NAB chief executive Philip Chronican said the size of the new provisions were “significant”.

“NAB is moving forward with rigour and discipline to make things right for customers,” Mr Chronican said.

“We understand that shareholders will be rightly disappointed. However, we also recognise the need to prioritise dealing with these past issues and fixing them for customers.”

Shareholders exercised their disappointment by dumping the stock on Wednesday morning.

Shares fell by around 3 per cent to $28.85 in early trade (11:00am AEST).

More than a third of adviser fees to be paid back

The provisions for self-employed advisers relate to $1.3 billion in fees collected between 2009 and 2018.

NAB will refund 36 per cent of these fees, or 55 per cent including the interest costs accrued over time.

Provisions for salaried NAB advisers were also raised, with a refund rate of 28 per cent, or 39 per cent including interest.

NAB has also increased the refunds for the inappropriate sale of consumer credit, or “junk” insurance, which was highlighted in the banking royal commission.

Out of the $2 billion of compensation payments identified, only 10 per cent ($202 million) has so far been paid back to customers.

NAB’s wealth disaster

The new provisions underscore the magnitude of the disaster NAB’s foray into wealth management has been.

On top of now paying back around half the fees accrued over the past decade, the “holy grail” of achieving strong cross selling of wealth and banking products has never been realised.

NAB bought into the sector in 2000 with the $4.6 billion acquisition of MLC, still one of the most expensive mergers in Australian corporate history.

Two decades on, NAB is bailing out and plans to dispose of MLC either through a stock market spin-off or trade sale.

However, the legacy may not end there as NAB’s current and former superannuation trustees, NULIS Nominees and MLC Nominees, are facing court action from ASIC for allegedly charging superannuation members fees for services that were not provided.

Banks’ misconduct bill hits $10b

Shaw and Partners bank analyst Brett Le Mesurier said taking into account not only customer-remediation costs, but other expenses arising from the royal commission including litigation, compliance and regulatory costs, NAB’s royal-commission-related costs were well over $2.4 billion.

Mr Le Mesurier said more costs across the sector would likely be revealed during the upcoming bank results season.

“I’d expect something from Westpac, but nowhere near the size of NAB’s announcement, but there could still be a couple of hundred million out there waiting to be announced,” he said.

“The Big Four banks and AMP have now cracked $10 billion in total [misconduct-related] costs, although that’s still much smaller than the Payment Product Insurance scandal in the UK.”

The PPI scandal has already cost Lloyds Bank more than $35 billion, while NAB’s former UK subsidiary, the Clydesdale Bank, is up for $5.5 billion.

Credit ratings agency Moody’s Investors Service said the new $1.2 billion in after-tax provisions were an overall negative for NAB.

“These charges — for further customer-related remediation and the write-down of software — add to existing pressure on profitability from ongoing interest rate cuts, which in itself will test the pricing power of all major Australian banks,” Moody’s vice-president Frank Mirenzi said.

NAB will release its 2019 full-year results on November 7.






First posted

October 02, 2019 13:43:52

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