National Australia Bank shares lost 2.3% yesterday after the bank revealed another massive provision to cover the cost of remediating customer complaints.
The shares ended at $29.02 after investors digested the news that the bank will take a $1.18 billion ($882 million after-tax) pre-tax charge against its full-year profits due to be revealed next month.
The pre-tax cost is $1.68 billion and the charge relates to additional compensation payouts to clients charged for financial advice that was not delivered, refunds for dubious insurance, as well as software accounting changes of $348 million.
Interim chief executive Phil Chronican said the charge will reduce second-half cash profits by $1.123 billion.
“While we previously noted additional customer-related 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,” Mr. Chronican said in an announcement to the ASX yesterday morning.
NAB said 92% of the remediation charges were for wealth or insurance with the biggest source of the new compensation payments being financial advice, especially self-employed advisers who operated under NAB’s licence.
The charge came thee days after the bank ruled off its 2018-19 accounts on Monday, September 30 and two months before Ross McEwan will step into the CEO role, with Mr. Chronican to become the next chairman of NAB.
As a result of the charges, NAB said its cumulative provisions for customer remediation were now worth $2.09 billion as at September 30. That could very well rise as the bank processes more complaints.
NAB said a key driver for the compensation payments was ongoing adviser service fees charged by self-employed NAB advisers. The bank said it was making allowance for more than a third of the ongoing service fees its advisers charged between 2008 and 2018.
It was also increasing provisions for consumer credit insurance, a product that banks offered on the promise it would cover customers’ loan repayments. Industry reviews have since found out this type of insurance was of limited or even no value for many, as it was often sold to people who were never eligible to make a claim.
NAB said some of the compensation related to “non-compliant” financial advice, and refunds for clients of its salaried financial planners.
The bank also said its second-half profit, to be released on November 7, would take a $348 million hit, because of changes to its accounting policies that would reduce its capitalised software balance.
Mr. Chronican said the bank had paid $202 million, spread across 450,000 payments, between June last year and August this year.
