Last week NAB announced they were to withdraw a capital issue due to market conditions. Today they announced the conversion of 7,500,00 NAB Capital Notes which were issued on 23 March 2015, and issued 35,140,972 fully paid ordinary shares in connection with the conversion at a price of $21.342608.
The original securities were paying 3.5% plus bank bill rate less the tax rate, so would be quite expensive relative to other funding mechanisms. They are also due for conversion no later than 23 March 2022, but had an optional conversion on 23 March 2020, which NAB exercised.
I see some claiming this is a sign of distress, I disagree, it is a convenient and effective method of enhancing capital, ahead of pressures ahead. Yes, it is a conversion, but tagging it a “bail-in” is in my view inaccurate. The share price of the conversion was higher than the market price.
That said, in a falling market NAB shares were down around 10%.
NAB has today announced a sweeping support package for business and personal customers at a time when they need it most.
Business customers experiencing financial
difficulty can defer their payments on a range of floating and variable
rate business loans for up to six months. Home loan customers
experiencing financial challenges will also be able to pause their
repayments for up to six months.
NAB, which is Australia’s largest bank for
businesses, will cut 200bps from the rate on new loans and all
overdrafts on its flagship digital business product QuickBiz, effective
March 30.
It will reduce variable rates on small
business loans by 100bps, effective March 30 – on top of the 25bps
reduction announced on March 13.
NAB also announced reductions of up to 60bps to fixed rate home loans to give customers the option of added certainty.
There are no changes to home loan variable rates. For depositors, NAB has introduced a 10-month term deposit rate of 1.75% p.a. in recognition that this low interest rate environment is hurting savers.
This package could provide a potential
injection of more than $10 billion into the economy over six months, or
$380 million a week, depending on customer needs and take-up.
NAB CEO Ross McEwan said: “Our focus is
clear – to support our business and personal customers with their
financial needs when they need it most.
“These measures will provide significant
relief to businesses and homebuyers over the next six months as we all
deal with this unprecedented situation.
“Businesses in particular need help and
they need it now, so we have come through with a range of measures. This
support will provide cash flow relief so they can stay open, and keep
people in jobs. One third of Australia’s small to medium businesses bank
with NAB and we are going to be there for them.
“The changes also offer our home loan
customers the option to fix their rate at our lowest rate ever, or pause
payments to help ease financial pressures.”
The support package announced by NAB is in
addition to industry-wide measures announced earlier today by the
Australian Banking Association.
“We support the measures announced by the
ABA today and welcome recent actions taken by the Federal Government,
Reserve Bank of Australia and APRA. We will continue to work with the
Government and regulators on further initiatives,” Mr McEwan said.
“This is an extremely difficult time but
we will get through this together. For more than 160 years, NAB has
supported Australians through challenges. We are well-capitalised and
stand ready to play our critical role.
“NAB is open for business. We continued lending throughout the Global Financial Crisis and we’ll continue to lend through this.”
Mr McEwan encouraged customers to call NAB
to discuss how they may be able to access the relief package. “If any
customer has questions or concerns contact your banker now – please
don’t wait,” he said.
The full list of measures announced by NAB is:
NAB Business customers will be able to:
Defer principal and interest for up to
six months on a range of business loans, including floating and variable
rates, and equipment finance loans;
Receive a 200-basis point rate cut on new loans and all overdrafts on QuickBiz, effective March 30;
Receive an additional 100-basis point
reduction on variable rates for small business loans, effective March
30. This is on top of a 25-bps reduction earlier this month;
Access up to $65 billion of additional
secured limits to pre-assessed customers, with $7 billion currently
available for fast assessment process;
Access up to $9 billion in additional limits for unsecured lending for existing customers via QuickBiz; and
Defer business credit card repayments.
NAB Personal customers will be able to:
Pause home loan repayments for up to six
months, including a three-month checkpoint. For a customer with a
typical home loan of $400,000, this will mean access to an additional
$11,006 over six months, or $1,834 per month.
Access a 10-month term deposit rate of
1.75% p.a. for 10 months, effective March 24. This is for personal
customers only, with deposits of $5,000 to $2 million.
Access fixed home loan rates of 2.39%
p.a. for 1-year, 2.29% p.a. for 2- and 3-year, and 2.79% p.a. for 5-year
(owner-occupier P&I), effective March 25. First home buyers will
have access to a rate of 2.19% p.a., fixed for two years. This delivers
reductions of between 10 and 60bps (table below).
Access over $20bn in redraw and more than $30bn in offset. Note: Around 1 in 2 accounts are at least 6 months ahead based on redraw & offset balance; and 4 in 10 are 12 months ahead.
Reduce repayments on variable rate loans.
Over the past 12 months, reductions of 84bps to our owner-occupier
variable rates have provide a potential benefit of $3,360 per year to
customers with a $400,000 loan. Most customers have not yet taken the
option to reduce their payments.
NAB’s advertised package home loan fixed rates change as follows, from 25 March 2020:
The
Commonwealth Bank of Australia has confirmed that brokers will be able
to apply for CBA’s First Home Loan Deposit Scheme loans for their
clients from 2 January 2020, while NAB has outlined that brokers will
need to wait a while longer.
The federal government’s First Home Loan Deposit Scheme (FHLDS) is due to commence operations on 1 January 2020.
The
scheme aims to allow up to 10,000 FHBs per year to get into the
property market sooner, requiring just a 5 per cent deposit, yet still
giving them access to competitive interest rates and waiving the need
for lender’s mortgage insurance (LMI).
The
government has agreed to guarantee the difference between the
borrower’s 5 per cent deposit and the standard 20 per cent deposit
required to take out a home loan without paying LMI.
It
has previously been announced that the two major banks involved in the
scheme, NAB and CBA, would be the first two lenders to start accepting
applications for the scheme from borrowers, while the other 25 non-major
lenders on the lending panel (mainly mutual banks and credit unions)
will be accepting applications from 1 February 2020.
Brokers can offer CBA FHLDS loans from 2 January
CBA customers will be able to apply for the scheme via the CBA website and call centres from 1 January.
However, given that
1 January 2020 is a public holiday, CBA has confirmed that it will make
FHLDS loans available to customers on 2 January, via all channels –
including branch and broker.
A
Commonwealth Bank spokesperson told The Adviser: “We’re excited that,
from 2 January 2020, customers will be able to apply for the First Home
Loan Deposit Scheme with Commonwealth Bank through our home loan
channels, including brokers.
“As
Australia’s largest lender, we help more Australians buy their first
home than any other bank, and its exciting that we can help get more
first home buyers into the market under the scheme.”
NAB to offer FHLDS loans online first
However,
brokers wishing to write FHLDS loans via NAB will need to wait a while
longer before applying, as the bank will be taking a “phased approach”.
According
to the bank, eligible customers will be able to apply for the scheme
through NAB via its website and call centres from 1 January 2020, as
well as through “select direct and retail channels”.
No
date has yet been released for full rollout of the FHLDS loans via
broker or the wider branch network, but NAB has said it will update
broker partners in January with how the phased approach is tracking.
A NAB spokesperson told The Adviser: “It
has always been our intention to offer the scheme through the broker
channel. However, given the short timeframe between being announced as a participant lender and the go-live date, we’ve needed to take a phased approach to implementation.
“We are working hard to implement the
scheme in the broker channel, and across our branch network, as quickly
as possible,” the spokesperson said.
The
delay will be a blow to brokers looking to write FHLDS loans for their
clients, especially given the fact that the scheme is capped at just
10,000 loans per year and the choice of lenders available to brokers is
limited.
While
Minister for Housing Michael Sukkar commented that the “composition of
the panel should also enable strong activation of mortgage broker
channels and promote choice for first home buyers”, many brokers have
highlighted that many of the smaller/regional lenders (who are expected
to take up 50 per cent of the 10,000 loans) are not members of their
aggregator’s panel – and therefore brokers would not be able to write
loans to these lenders unless they directly accredit with them.
For
example, brokers operating under the larger broker groups – AFG,
Aussie, Connective, Loan Market and Mortgage Choice – are unable to
access more than half of the lenders chosen under the FHLDS, as they are
not on the groups’ lender panel (according to the lender panels listed
on the groups’ websites).
These
include: Australian Military Bank, Bank First, Bank of us, Community
First Credit Union, Defence Bank, G&C Mutual Bank, Indigenous
Business Australia, Mortgageport, People’s Choice Credit Union,
Queensland Country Credit Union, Regional Australia Bank, The Mutual
Bank or WAW Credit Union.
ASIC has commenced civil penalty
proceedings in the Federal Court against National Australia Bank Limited
(NAB) and seeks findings of several thousand contraventions of the ASIC
Act and the Corporations Act.
ASIC alleges that from December 2013 to February 2019, NAB:
engaged in Fees for No Service Conduct by
failing to provide ongoing financial planning services to a large
number of customers while charging fees to those customers;
failed to issue, or issued defective, fee
disclosure statements (FDSs). ASIC alleges that the defective FDSs
contained false or misleading representations in that they did not
accurately describe the fees the customer paid and/or the services the
customer actually received. The provision of the defective or
out-of-time FDSs terminated the ongoing fee arrangements between NAB and
its customers and it is ASIC’s case that consequently NAB was not
lawfully entitled to continue to charge the fees;
failed to establish and maintain compliance systems and processes to detect and prevent these failures; and
contravened its overarching obligations
as an Australian Financial Services licence holder to act efficiently,
honestly and fairly.
It is also ASIC’s case that NAB engaged in
unconscionable conduct from at least May 2018 by continuing to charge
ongoing service fees to certain customers when it knew that it had not
delivered the services and had issued defective FDSs or at least knew
that there was a real risk that it had engaged in this conduct. However,
NAB did not stop charging fees to its customers until 4 February 2019.
ASIC is seeking declarations, pecuniary
penalties and compliance orders from the Federal Court to prevent
similar contraventions occurring in the future.
‘Fees for No Service
misconduct has been widespread and is subject to ongoing ASIC regulatory
responses including investigations and enforcement actions. This
widespread misconduct was examined in some detail by the Financial
Services Royal Commission. ASIC views these instances of misconduct as
systematic failures, unfair to customers including those that are more
vulnerable.
‘When the Fees for No Service
misconduct is coupled with Fees Disclosure Statements inadequacies or
failings, customers are potentially placed in a more disadvantageous
position. The customer may not therefore have been provided with the
opportunity to know whether they have received the services for which
they have paid or the amount of fees charged to them’ said ASIC Deputy
Chair Daniel Crennan QC.
The maximum civil penalty for contraventions alleged against NAB are:
$250,000 per contravention for breaches
of s962P (charging ongoing fees after the termination of an ongoing fee
arrangement) and s962S (failing to provide a timely FDS);
$1.7 to $2.1 million maximum penalty
(depending on the time period) per contravention for breaches of s12CB
(unconscionable conduct) and s12DB (false or misleading
representations).
NAB received more than $650 million in
ongoing service fees from 2009 to 2018. NAB has stated that it has
provisioned more than $2 billion for Fee for No Service remediation
across all of its advice licensees.
Background
Fees for No Service conduct and
remediation of that conduct by NAB and other licensees was examined as
part of the Financial Services Royal Commission. ASIC has been
monitoring NAB’s (and other licensees’) remediation of its fees for no
service failures with the last update on its progress provided on 11
March 2019 (19-051MR).
On 28 November 2019, ASIC released Report 636 – compliance with the fee disclosure statement and renewal notice obligations (19-325MR).
As noted by Report 636, FDSs are intended
to help customers understand what services they have paid for, what
services they have received and how much those services cost, and to
enable them to make more informed decisions about whether their ongoing
fee arrangements with their adviser should continue. Not issuing or
issuing late or defective FDSs deprive customers of an opportunity to
make those important decisions.
ASIC’s action against NAB falls within
ASIC’s Wealth Management Major Financial Institutions Portfolio. The
Portfolio focuses on the financial services conduct of Australia’s
largest financial institutions (NAB, Westpac, CBA, ANZ, Macquarie and
AMP) with respect to credit and retail lending, financial advice, fees
for no service, superannuation trustees, insurance, unfair contract
terms and other licensee obligations, and other conduct arising from the
Financial Services Royal
NAB has announced it will be taking part in the government’s first home loan deposit scheme, operational from 1 January 2020. Via Australian Broker.
The bank has been selected by the National Housing Finance and Investment Corporation (NHFIC) to offer mortgages under the scheme.
“We are proud to be chosen to partner with the federal government and
NHFIC,” said Mike Baird, NAB chief customer officer of consumer
banking.
“Every year our bankers help more than 15,000 Australians achieve
their dream of owning their first home. This scheme is a fantastic way
of helping even more customers, allowing them to potentially save
thousands of dollars on their mortgage.”
The scheme will provide 10,000 eligible Australians per year access
to a home loan with a deposit of as little as 5%. To implement the
scheme, the NHFIC will contract with a panel of selected lenders rather
than having direct contact with borrowers.
Before offering the guaranteed loans, lenders will need to update
their internal systems and train front-line lending staff on how to
apply the scheme eligibility criteria alongside regular considerations,
such as loan serviceability.
The NHFIC has communicated key considerations in its selection of
lender partners includes the loan products on offer, including interest
rates and other fees, as well as the quality of the customer experience.
According to Baird, NAB is the only major to have a special rate for
first homebuyers, which is currently 2.88% fixed for two years. The
major bank also emphasised it will not charge eligible customers higher
interest rates than equivalent customers outside of the scheme.
“We see this appointment as a great endorsement of NAB’s home loan
offering and our support of Australians looking to buy their own home
for the first time,” said Baird.
Before the scheme is live in the new year, customers are able to check their potential eligibility on the NHFIC website.
The New Zealand Reserve Bank has increased its supervisory monitoring of the Bank of New Zealand (BNZ) and applied precautionary adjustments to its capital requirements following the identification of weaknesses in BNZ’s capital calculation processes.
BNZ identified a number of
errors while undertaking a programme of remediation, which began in early 2018
and is expected to continue into 2020. These included three capital calculation
errors, which resulted in misreported risk weighted assets over a number of
years.
It is now required to
increase the risk weight floor of its operational risk capital model from $350
million to $600 million capital. The $250m increase is a supervisory capital
overlay.
The Reserve Bank requires
banks to maintain a minimum amount of capital, which is determined relative to
the risk of each bank’s business. BNZ has not been in breach of minimum capital
requirements at any point.
“However given the
likelihood that further compliance issues will be discovered during the review
and remediation, the Reserve Bank regards a precautionary capital adjustment as
prudent,” Deputy Governor Geoff Bascand says.
In 2017, the Reserve Bank
conducted a review of bank director attestation processes and noted that many
banks were attesting to compliance on the basis of negative assurance, ie they
did not have evidence to suggest that they were not in compliance.
Breaches are now being
identified as banks review their governance, control and assurance processes
and move from a negative assurance to a positive evidence-based assurance
framework. Over the past year, a number of banks have disclosed breaches of
their conditions of registration, Mr Bascand says. Many of these have related
to errors in the calculation of their regulatory capital or liquidity which, in
some cases, have gone undetected for a number of years.
“We are reassured by BNZ’s response to the issues along with the independent oversight from PWC,” Mr Bascand says. “BNZ has committed to providing the Reserve Bank with regular and timely updates of the details of issues as they are discovered and the remedial activity as this work progresses. “The additional capital overlay will be removed when remediation is complete. It is the Reserve Bank’s expectation that the current review will identify all outstanding compliance issues and potential breaches.”
The chief executives of the big four banks have doubled down in defence of their mortgage pricing decisions after being accused of profiting off a “loyalty tax” imposed on customers. Via The Adviser.
Appearing before the House of Representatives standing committee on
economics on Friday (15 November), NAB chairman Philip Chronican and ANZ
CEO Shayne Elliott denied that the banks have been “profiting from
inertia” by charging existing mortgage customers higher rates in a lower
rate environment.
Deputy chair of the committee and Labor MP Andrew Leigh accused
the banks of imposing a “loyalty tax” on existing borrowers, which do
not receive rate discounts offered to new customers.
In response, NAB chairman Philip Chronican said there were a range of
factors influencing the bank’s pricing decisions, adding that the level
of discounting on a particular loan was determined by the
characteristics of the credit contract.
“On our variable rate mortgage products, we charge different rates
for different products for a whole range of reasons,” he said.
“The overwhelming majority of our variable mortgage rate customers,
in fact, 97 per cent, have discounts below the standard variable rate,
and each of those discounts are set with reference to the riskiness of
the loan, the size of the loan, and the combination of business that the
customer brings in.
“The discount is for the life of the loan, unless of course the
customer, at their discretion, comes back and wants to reunite with us
or refinance with another organisation if they can get a better deal.”
Mr Chronican said that in light of cuts to the cash rate, the bank has offered existing customers reviews of their home loans.
“We offer all of our customers a review of their mortgage and have
called all of our customers over the past 12 months, asking if they’d
like a review of their mortgage,” he said.
“In the month of October alone, 15,000 customers took advantage of that and we increased the discount on those.”
However, deputy chair of the committee Andrew Leigh pressed Mr
Chronican, asking: “Why is it that customers have to respond to a
request for a review rather than simply receiving the same rate as a new
customer would get? Aren’t you profiting from inertia?”
To which Mr Crhonican responded: “It doesn’t exactly feel like that. It’s a competitive market to get new business.
“We are accurately conscious that we want to retain our customers,
but as I’ve explained, the differences are not as great as many people
make them out to be.
“We compete at a point of time to get a customer, and we quote a discounted rate to get them and be competitive.”
He conceded: “We are conscious that overtime, those rates become
uncompetitive, but [it’s] hard to have an individual negotiated rate if
everybody has to get the same rate.”
Meanwhile, ANZ CEO Shayne Eliot flatly rejected claims that the bank
has been charging a loyalty tax, also citing competitive pressures.
“I don’t accept the concept of loyalty tax. What we do is we
competitively priced our products every day to offer the best price that
we can for the services that we provide,” he said.
“Given the nature of our products, you will no doubt be referring to
that there is a difference between what is known as the front book and
the back of book; the pricing that we charge a new customer today versus
the customer yesterday, or previously.
“But we don’t impose a tax. It’s an outcome of a highly competitive well-functioning market.”
When asked if it was “unusual” to charge customers different prices for
the same product, Mr Elliott said: “Well, it’s not the same product,
with respect. A mortgage today is not the same as a mortgage tomorrow or
week ago.
“We price mortgages on the day based on the environment they’re in,
the cost of funds on that day, the risk environment on that day and the
competitive environment on that day, so I’m not sure that they are
equivalent products.”
Scrutiny over the pricing behaviour of the big banks recently
intensified following their failure to pass on the RBA’s full 25 basis
point cuts to the cash rate.
This triggered Treasurer Josh Frydenberg to commission the Australian Competition and Consumer Commission (ACCC) to conduct a Home Loan Price Inquiry. The inquiry will review pricing behaviour from 1 January 2019 to examine:
the differences between advertised rates and the prices actually charged or paid;
the differences between rates paid by existing customers and those
paid by new customers (front and back book pricing behaviour);
pricing decisions in response to changes to the official cash rate; and
factors preventing customers from switching to cheaper home loans.
In exploring these matters, the ACCC will consider consumer decision
making and biases, information used by consumers, and the extent to
which lenders may contribute to consumers paying more than they need to
for home loans.
Nab reported a 13.6% fall in statutory net profit for 2019, at $4,798 million, compared with $5,702 million last year. Along with ANZ and Westpac, it is the same story of a massive hit from customer remediation (past results inflated by milking customers, and many customers still require remediation), margin compression, not helped by lower cash rates, weak loan growth, and higher mortgage delinquency and provisions. And again they expect 2020 to be a weak year economically speaking. So no growth story here.
Revenue was down 4.2%, although they at pains to point out that excluding customer-related remediation, revenue rose 1.1% mainly reflecting growth in business lending partly offset by lower margins. Of course they dismiss many of the writes-downs as a one-off, and there will be some “putting the trash out” as the new CEO takes up the reigns. $2,092 million for customer remediation all up, is a big number, and not yet final. But do not be misled, the underlying business is under extreme pressure, and competition for the meager loan volumes is intense.
Net Interest Margin (NIM) declined 7 basis points (bps) to 1.78%. Excluding Markets and Treasury and customer-related remediation, NIM declined 4bps with home lending competition an important driver.
Expenses rose 0.2%. Excluding large notable items, expenses were up 0.4% with productivity benefits and lower performance based compensation largely offsetting higher investment and increased spend to strengthen the compliance and control environment.
But the revenue excludes customer-related remediation $1,207m in FY19, $249m in FY18. Expenses excludes: customer-related remediation $364m in FY19, $111m in FY18; capitalised software policy change $494m in FY19; restructuring-related costs $755m in FY18.
In cash earnings terms, they fell by 10.6%, from $5,702 million in 2018 to $5,097 in 2019.
FY19 cash earnings includes charges of $1,100 million after tax for additional customer-related remediation. During FY19 they uplifted customer remediation practices with more than 950 people (including NAB employees and external resources) solely dedicated to remediating customers.
In combination with provisions raised in 2H18 which have not yet been utilised, provisions for customer-related remediation as at 30 September 2019 total $2,092 million. They warn that the final cost of such remediation matters remains uncertain.
Cost savings of $480 million were achieved in FY19 bringing total savings since September 2017 to $800 million.
Collective provisions rose to 0.96% of CRWA’s, which equates to $3,360 million.
Whereas specific provisions fell to 39.7%, but were also higher.
Credit impairment charges increased 18% to $919 million, and as a percentage of gross loans and acceptances rose 2bps to 15bps. FY19 charges include $60 million of additional collective provision forward looking adjustments for targeted sectors experiencing elevated levels of risk.
The ratio of 90+ days past due and gross impaired assets to gross loans and acceptances increased 22bps to 0.93%, largely due to rising Australian mortgage delinquencies.
While Australian housing arrears increased further, loss rates for this portfolio is 2bps. Collective provision forward looking adjustments for targeted sectors increased over FY19 and now stand at $641 million. In their scenario testing, they estimate a Peak Net Credit Impairment of $1.8bn in year 2, which equates to 57 basis points, based on an average home price fall of 25.2%
2.4% of mortgages in Australia are above 100% LVR (based on SA3 level CoreLogic data, so not very specific).
The final fully franked dividend of 83 cents per share (cps) has been held stable with the 2019 interim dividend, bringing the total for FY19 to 166 cps. This represents a 16% reduction compared with FY18.
Across the divisions in cash earning terms:
Business & Private Banking $2,840 were down 2.4% on last years, reflecting higher credit impairment, charges and higher investment spend. Revenue increased 1% reflecting good SME business lending growth.
Consumer Banking & Wealth $1,366 were down 11.2% where banking earnings decreased given lower margins with competitive pressures in housing a key driver, combined with increased credit impairment charges.
Wealth earnings also declined reflecting the impact of customer preferences and repricing on margins, and lower average funds under management and administration.
Corporate & Institutional Banking $1,508 down 2.1% reflecting higher credit impairment charges relating to impairment of a small number of larger exposures. Revenue increased 1% despite lower Markets income, with higher lending volumes benefitting from continued focus on growth segments.
New Zealand Banking NZ$1,055m up 5.1% benefitting from growth in lending, partly offset by increased investment spend and higher credit impairment charges.
The Group Common Equity Tier 1 (CET1) ratio is 10.38%, up 18bps from September 2018, and includes $1 billion (25bps) of proceeds received in July from the 1H19 underwritten Dividend Reinvestment Plan and 34bps adverse impact from regulatory changes relating to operating risk and derivative counter party credit risk measurement.
Leverage ratio (APRA basis) of 5.5%
Liquidity coverage ratio (LCR) quarterly average of 126% and Net Stable Funding Ratio (NSFR) of 113%
NAB expects weak credit growth ahead, a GDP result in 202 of around 2% and business confidence also weakened which may dampen business credit growth.
National Australia Bank Ltd (NAB) announced additional charges of $1,180 million after tax ($1,683 million before tax) relating to increased provisions for customer-related remediation and a change to the application of the software capitalisation policy. This is expected to reduce 2H19 cash earnings by an estimated $1,123 million after tax and earnings from discontinued operations by an estimated $57 million after tax.
Customer-Related Remediation
The 2H19 result will include charges of $832 million after tax ($1,189
million before tax) for additional customer-related remediation. The key
driver of these additional charges is inclusion of a provision for
potential customer refunds of adviser service fees paid to self-employed
advisers. NAB now has in place provisions for the estimated costs and
customer payments relating to all known material customer-related
remediation matters based on information currently available. However,
until all customer payments have been completed, the final cost of such
remediation matters remains uncertain.
NAB Chief Executive Officer, Philip Chronican, said: “NAB is moving
forward with rigour and discipline to make things right for customers.
While we previously noted additional customerrelated remediation
provisions were expected in 2H19, the size of these provisions is
significant. 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.
“We have undertaken to significantly uplift customer remediation
practices, as part of a broad program of reform to change the way we
operate and ensure NAB meets customer and community expectations. We
have made approximately 450,000 payments to customers with a total value
of $202 million between June 2018 and August 2019, and have a dedicated
remediation team of about 400 people helping to bring greater
discipline and focus to remediating customers.”
Of the 2H19 charges, approximately 92% are for Wealth and
Insurance-related matters, with the remainder for Banking-related
matters. In combination with provisions raised in 2H18 and 1H19 which
have not yet been utilised, this brings total provisions for
customer-related remediation at 30 September 2019 to $2,092 million.
The key items giving rise to increased provisions for customer-related remediation include:
Adviser service fees charged by NAB Advice Partnerships
(self-employed advisers). Provisions have been increased to include
allowance for customer refunds based on total ongoing advice fees
received between 2009-2018 of approximately $1.3 billion, with an
assumed refund rate of 36% (or approximately 55% including interest
costs). Key considerations in estimating a refund rate include
assumptions about circumstances where documents are not available or
readily accessible, including where advisers are no longer working in
the industry;
Consumer Credit Insurance sales through certain NAB channels. This
relates to a previously disclosed remediation program which arose from
an ASIC industry-wide review. Provisions have been increased mainly to
reflect higher refund rates based on experience to date;
Non-compliant advice provided to Wealth customers which is being
addressed as part of NAB’s ongoing wealth advice review. Provisions have
been increased mainly to cover higher expected costs to undertake the
program; and
Adviser service fees charged by NAB Financial Planning (salaried
advisers). Provisions have been increased to reflect higher expected
costs and a higher assumed refund rate of 28% (or approximately 39%
including interest costs).
Capitalised Software Policy Change
Following a review of NAB’s software capitalisation policies, the
minimum threshold at which software is to be capitalised has increased
from $0.5 million to $2 million, reflecting NAB’s focus on
simplification and the increasingly shorter useful life of smaller
software items. The change will be applied to both current and future
software balances and is expected to reduce NAB’s capitalised software
balance at 30 September 2019 by $494 million and NAB’s 2H19 cash
earnings by $348 million (post tax). There is no impact on Group capital
given capitalised software balances are already deducted from Common
Equity Tier 1 capital. This change in approach will significantly
reduce the number of individual capitalised assets on the balance sheet from approximately 1,390 to 340.
Earnings Impact
Details of the expected 2H19 cash earnings impact are provided in the
table below. As has been the case in prior periods, 2H19
customer-related remediation costs and capitalised software change will
be excluded from FY19 and FY20 expense growth guidance of ‘broadly
flat’. Further detail will be provided when NAB releases its 2019 Full
Year results on 7 November 2019, including an update on progress towards
achieving unquestionably strong capital requirements. The matters in
this announcement remain subject to finalisation of NAB’s 2019 Full Year
results, including review by the auditors.
