The National Australia Bank Ltd (ASX: NAB) share price is up despite the major ASX bank reporting more costs for the upcoming FY20 result.
NAB’s painful update
The major bank said that its FY20 second half earnings will be impacted by a number of items.
There will be a net increase in provisions for customer-related remediation relating to the Hayne Royal Commission. The total cost is $380 million before tax, or $266 million after tax.
The $380 million is broken up into two areas. There is $245 million of before tax costs for wealth-related matters – this is now included in the discontinued operations section of its reporting. This is for matters relating to non-compliant advice provided to wealth customers and for adviser service fees charged by NAB Financial Planning, with an assumed refund rate of 66% after interest costs. It also includes “other matters” for a general increase.
There is also $135 million of before taxes which is for banking-related matters, which will be included in cash earnings.
In addition to the $380 million, there is also a net increase in the payroll remediation provisions of $128 million before tax. This relates to an issue relating to under (and over) paying dating back to October 2012.
On top of that, NAB said there’s an impairment of property-related assets of $134 million before tax. This relates to plans to consolidate NAB’s Melbourne office space with more staff likely to work from home more often. The office will be used for purposes of collaboration, planning and creating the right culture.
The above provisions and impairment are calculated to reduce NAB’s CET1 capital ratio by approximately 15 basis points (0.15%).
Summary
NAB keeps recognising painful costs for its accounts. The Royal Commission costs have been going on for a few years now. It’s a serious drag on profit, at a really bad time. If only NAB had done the right thing from the start.
Another issue that NAB is facing is that its net interest margin (NIM) is hurting – which is a key profit driver. As long as official rates are low, it makes it harder for NAB to generate decent profit.
NAB may be in a better place once COVID-19 impacts are over and all the remediation is paid. But the key could be higher RBA rates. Until then, there are other ASX dividend shares I’d buy such as Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) and Brickworks Limited (ASX: BKW).
