Big four bank signals $1.1bn earnings hit

A major bank has indicated its first-half earnings will be eaten away by $1.14 billion, including further remediation provisions dominated by adviser costs.

NAB has made the call, telling the market its first-half earnings for 2020 will be impacted by a net increase for remediation matters of $268 million before tax ($188 million after tax) and an impairment of the carrying value of its investment in MLC Life by $214 million.

But the crux of the earnings erosion is tipped to be a change to NAB’s application of its software capitalisation policy, which will reduce the bank’s earnings by $742 million after tax.

NAB is set to release its 2020 half-year results on 7 May, when the bank has hinted it will reveal how the COVID-19 pandemic has affected its earnings and balance sheet.

From 1H20, the wealth business will be reported as a separate segment called MLC Wealth and no longer form part of consumer banking.

Of the remediation charges to NAB’s cash earnings for its continuing operations ($418 million before tax, $293 million after tax), $184 million after tax relates to additional charges.

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Around 69 per cent of the further costs are expected to be directed for wealth-related matters, 23 per cent for banking-related matters and 8 per cent for Bank of New Zealand.

The key drivers were said to be adviser service fees charged by NAB Financial Planning (the group’s salaried advisers), which saw provisions increased to show a higher assumed refund rate of 40 per cent (56 per cent including interest costs) in contrast to 28 per cent at 30 September.

Increased wealth-remediation costs and progression of work on banking related matters were also cited.

The remainder of the 1H20 cash earnings charges of $109 million after tax ($155 million before tax) was said to reflect provisions raised for newly identified matters, the most significant being issues relating to workplace superannuation.

The first half’s earnings for discontinued operations is also set to be increased by $105 million after tax ($150 million before tax), reflecting a reassessment of provisions associated with MLC Life.

The net increase in remediation is expected to reduce the group’s Common Equity Tier 1 capital (CET1) ratio by approximately 6 basis points.

But until all customer payments have been completed, the final cost of customer remediation remains uncertain.

Meanwhile, NAB stated the “challenging operating environment within the life insurer industry” has resulted in a decline in the carrying value of its 20 per cent investment in MLC Life since September.

The $214 million impairment loss represents a 37 per cent reduction in the carrying value of the investment.

The change for NAB’s software capitalisation policy was made following a review, with it increasing the minimum threshold at which software is to be capitalised from $2 million to $5 million.

NAB stated the update reflects a change in approach to managing projects, which is intended to uplift business accountability for projects less than $5 million.

The change will be applied to both current and future software balances and is expected to reduce NAB’s capitalised software balance at the end of March by $1.05 billion and NAB’s 1H20 cash earnings by $742 million after tax.

The amortisation saving in the second half is forecast at $154 million, but it is expected to be broadly offset by investment expenses already capitalised.

The bank reported the software capitalisation policy update and impairment of NAB’s investment in MLC Life have no impact on the group’s CET1 ratio.

Big four bank signals $1.1bn earnings hit
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