In its annual report, NAB stated that it has responded to a number of requests from regulators to produce documents and information in relation to certain weaknesses with the implementation of its “Know Your Customer” (KYC) requirements and other financial crime risks.
AUSTRAC has proven to be a formidable force in recent years following the AML scandal at CBA and more recently at Westpac, which resulted in the resignation of CEO Brian Hartzer at the end of 2019.
Meanwhile, ASIC has taken civil penalty proceedings against NAB’s financial planning business, alleging fees were charged for no service, a failure to issue fee disclosure statements and failure to establish and maintain compliance system to prevent these issues from occurring.
Morningstar analyst Nathan Zaia said it remains difficult to know whether NAB’s AUSTRAC breaches are as serious as those that CBA and Westpac have been charged with.
“While we lack clarity on what a potential fine from ASIC or AUSTRAC could amount to, we have assumed a combined cost of $750 million. Our assumed $250 million penalty from ASIC and $500 million from AUSTRAC lower fiscal 2020 cash earnings estimate by around 8 per cent,” Mr Zaia said.
The analyst said that $750 million in fines and maintaining dividends will leave the bank “walking a tightrope” against APRA’s 10.5 per cent CET1 benchmark. Morningstar believes NAB will make small equity raisings rather than lowering dividends.
“The board will be mindful of the value shareholders place in the reliability of dividends, and unless it is forced to make another material cut, will be hesitant,” Mr Zaia said.
The analyst noted that the sheer size of the bank and its customer base mean that any flaw in its system or process is multiplied thousands of times over, with penalties accruing with each breach. This exposed NAB to significant penalties.
“It is disappointing the bank seemingly failed to rectify known issues more diligently and quickly,” he said.