National Australia Bank has provided for additional charges of $1.18 billion after tax for customer remediation and software, which the institution expects will erode its cash earnings for the second half of the year by $1.12 billion.
The bank’s upcoming second-half result will include total charges of $832 million for additional customer-related remediation, the key driver being potential refunds of financial adviser service fees paid to self-employed advisers.
Of the 2H19 charges, approximately 92 per cent are for wealth and insurance-related matters, with the remainder being caused by banking.
In combination with provisions raised in 2H18 and 1H19 which have not yet been utilised, NAB’s total reserve for customer remediation at 30 September was at $2.09 billion.
NAB has estimated the provisions needed, however until all customer payments are completed, the final remediation costs remain uncertain.
NAB chief executive Philip Chronican said while the bank had previously expected additional customer remediation provisions in the second half of the year, the size of the provisions is significant.
“We have undertaken to significantly uplift customer remediation practices, as part of a broad program of reform to change the way we operate and ensure NAB meets customer and community expectations,” Mr Chronican said.
“We have made approximately 450,000 payments to customers with a total value of $202 million between June 2018 and August 2019, and have a dedicated remediation team of about 400 people helping bring greater discipline and focus to remediating customers.
“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.
The key items giving rise to the costs include provisions increased to allow for customer refunds based on total ongoing advice fees between 2009 and 2018 of around $1.3 billion, with an assumed refund rate of 36 per cent, or around 55 per cent including interest costs.
Provisions have been increased as well for non-compliant wealth advice and adviser service fees charged by NAB Financial Planning, reflecting higher expected costs and a higher assumed refund rate of 28 per cent (or around 39 per cent including interest costs).
Consumer credit insurance sales through certain NAB channels also contributed, related to a remediation program which arose from an ASIC industry-wide review.
The regulator said the design and sale of consumer credit insurance had “consistently” failed customers.
The newest load of charges, $1.68 billion before tax, is expected to reduce earnings from discontinued operations by an estimated $57 million after tax.
NAB added the minimum threshold at which its software is to be capitalised has increased from $0.5 million to $2 million, reflecting its “focus on simplification and the increasingly shorter useful life of smaller software items.”
The change will be applied to both current and future software balances and is expected to reduce NAB’s capitalised software balance at 30 September 2019 by $494 million and NAB’s 2H19 cash earnings by $348 million (post-tax).
NAB will release its full-year results on 7 November.
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
Sarah has a dual bachelor's degree in science and journalism from the University of Queensland.
You can contact her on [email protected].
APRA has launched a review into the capital treatment of the major banks’ investments in their banking and insurance subsidiaries, followi...
The government has directed the Australian Competition and Consumer Watchdog (ACCC) to investigate the banks’ mortgage pricing, following ...
ASIC has urged investors to be careful in establishing self-managed superannuation funds (SMSFs), declaring many Australians set up funds th...