National Australia Bank said it expected to “recognise additional provisions in the second half result” – but is not able to quantify them now – as it makes “progress towards resolving several previously disclosed regulatory compliance investigations”.
The investigations include the corporate regulator’s probe into financial advice fees, which has been the focus of a torrid week for NAB at the Hayne inquiry, which has revealed the bank systematically charged superannuation customers for advice it did not provide.
NAB said at its half year results it could also face additional costs from “investigations in relation to actual or potential breaches of law or regulations” identified by the banking royal commission.
In an indication the royal commission and ongoing regulatory scrutiny is making the reporting of bank financial results more difficult, NAB said on Tuesday there are “significant uncertainties in determining a provisioning outcome at this time”.
It said the “additional costs” would be excluded from its target of growing expenses between 5 per cent and 8 per cent over the full year.
The revelation of extra provisions came as NAB announced unaudited cash earnings of $1.65 billion for the third quarter, down 3 per cent on the prior quarter, due to higher investment spending and a higher credit impairment charge.
NAB CEO Andrew Thorburn said in a statement accompanying the trading update: “The royal commission is challenging us with its focus on where we have let customers down. We are determined to respond and become a better bank through living our purpose and values every day.”
The comments come after NAB tried keep secret last week an ASIC document detailing its fee for no service problems, which would eventually cost the bank $87 million.
The ongoing focus of the royal commission on bank misconduct is also having an impact on trust measurements.
NAB also said on Tuesday its closely watched “net promoter score” (NPS) had dropped to -14 in June from -9 in March , which it said partly reflects “an overall industry decline”. The NPS score influences banker remuneration at NAB.
At its half year results released on May 3, NAB said the outcome of regulatory investigations, “including whether enforcement action will be taken or other legal proceedings initiated, is typically uncertain and the aggregate of potential liability in respect thereof cannot be accurately assessed”.
It pointed to two ASIC investigations relating to adviser fees, which have been in focus during royal commission hearings over the past week. NAB said three months ago it “continues to engage with ASIC on the design of the methodology for investigating and assessing [whether] whether customers who have paid to receive ongoing services have been provided with the agreed services in accordance with the relevant service agreement…. However, agreement with ASIC has not yet been reached due to different views about aspects of NAB’s proposed approach.”
NAB also said it was continuing to engage with ASIC on circumstances were its ‘plan service fee’ “continues to be charged and paid to a plan adviser after a superannuation fund member leaves an employer and is transferred to the personal division of the corporate superannuation product…. The outcomes of the ASIC investigation are uncertain at this time,” NAB said in May.
The additional provisions are also likely to relate to customers who may have received “non-compliant advice” since 2009. The cases have been progressing through a ‘customer response initiative’ review program with compensation in some cases offered and paid. But NAB said in May the “outcomes and total costs associated with this work are uncertain”, in part because plaintiff law firms “continue to encourage NAB customers who have suffered losses as a result of financial advice received from NAB advisers to contact them for legal advice”.
With analysts also fretting about how higher funding costs are pressuring bank margins, NAB said on Tuesday its net interest margin had “declined slightly” over the quarter, reflecting “elevated short term wholesale funding costs and ongoing intense home loan competition”.
Nevertheless, Mr Thorburn described the result as “sound”, pointing to revenue rising 1 per cent, buoyed by SME lending and New Zealand. But expenses rose by 2 per cent due to higher compliance costs and investment spend, as NAB reconfigures its workforce for the digital future.
“During the quarter we made further progress on our transformation by investing in both productivity and growth initiatives,” he said.
“Notwithstanding a challenging operating environment, financial performance [in the third quarter] has been sound. Revenue is up, despite elevated short term wholesale funding costs, while asset quality and balance sheet metrics remain strong.”
ANZ Banking Group also provided a market update on Tuesday.
With higher funding costs from the elevated BBSW spread a key feature of the Commonwealth Bank full year profit result last week and Bendigo and Adelaide Bank’s latest numbers released on Monday, ANZ said the “Bills/OIS spread has remained elevated”.
“Throughout FY18 the Australian housing system has been characterised by slowing credit system growth, increased price competition, increased capital intensity and tighter credit conditions,” ANZ said in a slide pack accompanying a quarterly Pillar 3 disclosure.
“The combined impact of prudential responses over the past three financial years including various regulatory changes, together with subsequent policy changes by the banks, has been a meaningful reduction in the average maximum borrowing capacity for home loan borrowers.”
ANZ said that more interest only loans had switched to principal and interest in the June quarter, $6.5 billion, than in each of the previous two quarters, and was above the $5.6 billion per quarter on average across FY17.
After CBA and Bendigo pointed to mortgage stress in parts of Perth, ANZ reiterated that credit quality in Western Australia was the worst in the country, although the number of mortgage borrowers more than 90 says past due on their loans was flat compared to the prior quarter across the country. “There are some pockets of stress in the mortgage book, primarily in Western Australia, more particularly in Perth itself,” ANZ said.
ANZ also called out the impact of tighter lending standards by major banks was having with banks outside the regulated sector growing sharply. Between September 2016 and June this year, APRA-regulated bank home loan growth was around 11 per cent, compared with 28 per cent increase for not banks. ANZ’s home lending portfolio grew at 0.4 times the average of the banking system in the June quarter.
ANZ’s total provision charge was $121 million in the third quarter, and the individual provision charge was $160 million, the lowest quarter since 2014. ANZ said this reflected “both the ongoing benign environment and improved quality of the portfolio”, and a high level of write backs and recoveries of institutional loans.