Compliance Costs Bite As NAB Provides Mixed Q3 Update

Investors noted the mixed nature of the third quarter trading update from the National Australia Bank and sent the shares up 1.5% to $28.37 around midday, ignoring all the poor publicity from the royal commission.

That was despite the warning in the update that the bank will it take extra provisions in the second half (to September 30) for “regulatory compliance investigations.”

NAB drew attention to the extra provisions in the update which said unaudited cash profit was 3% lower in annual terms in the June quarter, at $1.65 billion.

NAB CEO Andrew Thorburn signalled the bank would also be feeling the impact of compliance shortcomings in its second half.

“As we make progress towards resolving several previously disclosed regulatory compliance investigations, we expect to recognise additional provisions in the 2H18 result, noting there are significant uncertainties in determining a provisioning outcome at this time,” he said in the statement to the ASX on Tuesday.

NAB did not say how much it would set aside in extra provisions, but referred to contingent liabilities in its most recently half-year, which included a wide range of potential costs.

These included its compensation of clients who were charged “fees for no service,” an issue that has been investigated by the royal commission over the last week – and a “wealth advice review” being carried out by ASIC and which featured prominently before the royal commission.

Net interest margin declined slightly, reflecting elevated short term wholesale funding costs and ongoing intense home loan competition.

Expenses rose 2% due to higher compliance costs, investment spend consistent with the accelerated strategy, and increased depreciation and amortisation.

Mr Thorburn, who last week admitted NAB had been too slow to compensate customers but denied criminal wrongdoing by the bank, acknowledged the royal commission’s impact.

"The Royal Commission is challenging us with its focus on where we have let customers down. We are determined to respond and become a better bank through living our purpose and values every day," Mr Thorburn said.

The higher provisioning costs would be excluded from its previous guidance for expense growth of 5% to 8%.

NAB said revenue was up 1%, but its profits fell because of higher spending on investment and credit impairment charges.

“Credit impairment charges rose 9% to $203 million and included $25 million of additional collective provisions for forward looking adjustments (FLAs), bringing the total balance of FLAs to $547 million, the NAB said.

“Asset quality remains sound with the ratio of 90+ days past due and gross impaired assets to gross loans and acceptances steady at 0.71%,” the bank said.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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