A look at the NAB remediation charges

Last week, the National Australia Bank (ASX:NAB) released details of the customer remediation charges it expects to take in its 2019 interim result following the Royal Commission into Financial Services. NAB will provide additional detail in its interim result, which is released to the market on 2 May.

NAB announced an after-tax charge of A$525 million, with A$325 million of this billed to its continuing operations and the other A$200 million attributed to the divested MLC operations. Approximately 91 per cent of the charge relates to NAB’s Wealth businesses, and the residual being customer remediation in the Banking operations.

Importantly, the company release states that the charges taken recognises the estimated costs associated with salaried wealth advisors, but do not include aligned advisors. Therefore, there are likely to be more charges taken in future periods.

The announcement takes NAB’s total after tax customer remediation charges to A$839 million, well above the levels announced to date by the other major banks. The total customer remediation charges announced by the major banks to date are shown in the table below.

Source: company reports, MIM estimates

Note: CBA has only provided a cumulative pre-tax figure to the end of 1H19. The numbers above only include the direct customer remediation payments and indemnity provision for NewCo. The after-tax figure is an estimate assuming a 30 per cent corporate tax rate.

The table shows that NAB has borne more pain than the other three majors in terms of both absolute and relative cost from customer remediation, with charges to the end of 1H19 equating to around 1.2 per cent of its current market capitalisation. While NAB is yet to incorporate the cost of remediation for aligned advisors. Offsetting this, NAB appears to have taken fewer charges for the rest of its businesses, with over 90 per cent of the charges taken relating to the Wealth business.

While these charges, and an expectation of further charges, have a material impact on near term earnings, they will not be charges that recur into perpetuity. As such, it is important to be cognisant of the underlying earnings generation of the bank excluding these charges in assessing their sustainable value less a finite value of remediation costs.

What is of more interest in the near term is the impact these charges have on the capital position of each bank given the need to meet APRA’s new ‘unquestionably strong’ capital requirements by 1 January 2020.

The charges taken to date have had an impact on the amount of capital accumulated by the banks to meet the raised capital hurdle, and additional charges in future periods will provide an ongoing headwind to capital accumulation. For the better capitalised Australia and New Zealand Banking Group (ASX:ANZ) and the Commonwealth Banks of Australia (ASX:CBA), the charges reduce the potential for capital management, while for Westpac (ASX:WBC) and NAB, it increases the risk of an equity raising and/or cut to the dividend.