Wednesday 20 August 2014

Insurance scandal may hamper National Australia Bank's plans to exit Britain

By James Eyers
National Australia Bank faces an unknown exposure to the payment protection insurance scandal in Britain that has embroiled its Clydesdale Bank, raising concerns the sale of Clydesdale may be delayed and misconduct exposures may have to be retained within NAB after its British exit.

NAB’s shares lost 1.6 per cent on Monday after new chief executive Andrew Thorburn revealed the bank would make additional provisions of "at least" £245 million at its full-year results in November. The additional costs relate to two areas of banking industry misconduct being targeted by the British Financial Conduct Authority: the mis-selling of both payment protection insurance (PPI) and interest-rate hedging products. Mr Thorburn said the misconduct charges were "difficult to predict".

British banking giants Barclays, Lloyds and RBS have all topped up their litigation and regulatory provisions this year as regulators continue to probe banking conflicts of interest in the wake of the global financial crisis. It has been discovered that PPI policies that were meant to repay customer borrowings if their income fell because they became ill or unemployed were actually designed to limit payouts while egregious premiums were charged.

NAB said on Monday an additional provision of "at least £170 million" would be required at the full-year result in relation to the mis-selling of interest-rate hedging products, more than doubling the existing provision of £152 million as at March 31 for this scandal.

It also said "at least £75 million" would be required for increasing costs of administering the PPI remediation program, but flagged the total PPI provision would be larger. This was due to several "new developments", including: "The implementation of a new complaints handling process, which is likely to lead to increased payments both for new complaints and in revisiting closed complaints; the need to extend our examination of historical records dating back to pre-2000 periods, including unindexed microfiche records; higher than expected levels of new complaints; and the fact that Clydesdale Bank is subject to an enforcement process with the FCA in relation to its previous PPI complaints handling processes, the outcome of which is not yet known".

NAB, which held a provision of £126 million for PPI issues as at March 31, said the ability to reliably estimate the impact of these new developments "remains uncertain".

Analysts predicted another £100 million could be added to the PPI provision by November. Late last month, RBS said it was taking an additional provision for PPI of £150 million.

Nomura analyst Victor German said NAB would have disclosed any firm estimate of the PPI exposure if it knew it. "Given they haven’t, suggests they are still working through those issues - but the language around it suggests it could be material, over £100 million rather than tens of millions," Mr German said.

Analysts also expressed concern that the timing and structure of the sale of Clydesdale might be impacted as conduct charges ballooned. Expectations have been growing that NAB might sell Clydesdale next year, but Morningstar analyst David Ellis said the additional provisions may push back the timetable. "It is disappointing there are further provisions in the UK and it is potentially pushing out the eventual exit from the UK," he said.

Furthermore, Watermark Funds Management investment analyst Omkar Joshi said the uncertainty about the ultimate cost of British misconduct might encourage potential buyers of Clydesdale to force exposures to be retained in NAB. "If NAB wishes to sell/IPO Clydesdale, it may need to retain these claims in a similar fashion to what Lloyds did with its TSB float earlier in the year," he said.

NAB’s British update came as it reported on Monday a third quarter cash profit of "approximately $1.6 billion", up 7 per cent on the previous third quarter.

NAB said revenue was down by around 1 per cent "due mainly to lower markets income as subdued volatility reduced trading opportunities". Over the third quarter, home loan balances grew at an annualised rate of 8.5 per cent. Cash earnings in NAB Wealth had increased over the quarter. The charge for bad and doubtful debts for the quarter fell 9 per cent, which helped the bottom line.

Mr Thorburn said NAB had achieved a "satisfactory" third quarter. "Costs were well contained and asset quality continues to improve. While revenue growth remains challenging, Australian home lending continues to achieve market share gains and Australian business loan growth improved in what is traditionally a stronger quarter," he said in a statement.

Mr Ellis said NAB’s Australian and New Zealand "banking franchise is in reasonably good shape. So as soon as the group can exit the UK without incurring too much of a write-down, the better for the stock price and better for shareholders."

In addition to the specific conduct issues in Britain, NAB said the local currency cash earnings of the British banks were lower in the quarter, due to reduced net-interest margin "largely reflecting timing of the Financial Services Compensation Scheme" in Britain, which is an industry statutory compensation scheme for customers.

Conduct issues are not the only headache for NAB in Britain. Mr Thorburn said the Scottish independence vote on September 18 was a risk; a pro-independence vote "may give rise to significant additional costs and risks for Clydesdale Bank. We continue to closely monitor the situation and have appropriate contingency planning in place."

The balance of the British commercial real estate run-off portfolio declined from £3.3 billion to £3 billion over the quarter; the portfolio reported a modest loss in the third quarter. NAB’s once healthy British banks were poisoned by overinvestment in commercial property which was exposed by the financial crisis.

Under former CEO Cameron Clyne, who stepped down on August 1, NAB has been rationalising Clydesdale and Yorkshire banks to prepare them for sale. The prospect of a British exit helped NAB’s stock re-rate last year.

NAB’s third-quarter profit of around $1.6 billion follows Commonwealth Bank of Australia’s $8.68 billion full-year profit last week, up 12 per cent, while ANZ Banking Group on Friday reported an 8 per cent growth in cash earnings to $5.2 billion in the first nine months of its financial year.



Source: BusinessDay

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