National Australia Bank says investors will have to wait until its interim results are released on May 7 to discover the impact of COVID-19 on loan losses and dividends, after announcing first-half earnings will take a $1.14 billion after-tax hit before the impact of the coronavirus pandemic is accounted for.
The new charges, representing around 18 per cent of NAB's expected cash earnings for the full year, are due to additional remediation costs for the fee-for-no-service scandal, a reduction in the value of its MLC life insurance business, and additional software expenses.
Analysts said these would not be sufficient to reduce NAB's dividend, given the limited impact on the capital ratio. But NAB said the impact of the pandemic on its "earnings and balance sheet, including provisions, combined with capital and dividend implications" would be revealed when new chief executive Ross McEwan delivers his first set of results to the market on May 7.
UBS reckons NAB - along with ANZ and Westpac, which also report interim results in the coming weeks - will not make returns to shareholders this half, after the prudential regulator warned this month dividends may need to be suspended until the COVID-19 outlook is clearer.
The crisis is expected to trigger higher credit impairment charges across the banking sector, as unemployment rises, some businesses struggle with repayments and housing credit growth slows.
In addition to any COVID-19 provisions, NAB's after-tax profit for the half to the end of March will be reduced by $188 million due to additional customer remediation costs; by $742 million from changes in its software capitalisation policy; and by a further $214 million after a new impairment in MLC Life.
NAB shares lost 2.4 per cent to close at $16 on Monday, and are 37 per cent below their level three months ago.
NAB's release was unsurprising and represented "a combination of catch-up on remediation together with new-CEO deck clearing," said Credit Suisse analyst Jarrod Martin.
The bank cited the "challenging operating environment within the life insurance industry" as driving an impairment worth 37 per cent of the carrying value of the 20 per cent that NAB still retains in MLC Life, after selling the other 80 per cent to Nippon of Japan in 2016.
At the upcoming interim result, the wealth business will be reported separately as MLC Wealth, and no longer part of consumer banking.
NAB said in February it was continuing to progress the formal separation of MLC Wealth but the full exit might be deferred into next year.
NAB said on Monday it had reduced the value of its capitalised software balance by $1.06 billion from March after reviewing its software capitalisation policy. This sees some internally developed software carried as an asset, while some is expensed through the profit and loss account.
The bank said it would increase the "minimum threshold" for capitalising software from $2 million to $5 million - resulting in a larger amount going through the expense line, reducing earnings. The move was designed to "uplift business accountability for projects less than $5 million" and recognises the shorter useful life of smaller software items.
The additional remediation costs mostly relate to existing overcharging of service fees by salaried advisers at NAB Financial Planning, which became a key focus for the Hayne royal commission.
Mr Martin noted NAB had assumed a higher customer refund rate of 40 per cent - compared to 28 per cent previously - for service fees charged by their salaried advisers and an increase in program costs.
The Australian Securities and Investments Commission began court action against NAB in December, alleging it engaged in unconscionable conduct from at least May 2018 by continuing to charge service fees to some customers when it knew it had not delivered the services, and for issuing defective disclosure statements.
NAB said the additional remediation of $188 million after tax - or $268 million before tax - is expected to reduce its common equity tier 1 capital (CET1) ratio by 6 basis points. The software capitalisation policy and wealth impairment would have no impact on the CET1 ratio.
At its quarterly results in February, NAB said its CET1 ratio was 10.6 per cent, only just above the "unquestionably strong" requirement, which the regulator has now allowed banks to drift below, to support new lending into the struggling economy.
The new charges come as NAB is considering job cuts to save costs. NAB chief executive Ross McEwan told staff on Friday he would fight to protect its 34,000 employees from the economic fallout of COVID-19 but said it was inevitable some jobs would go as the bank right-sizes itself for the future.
NAB's earnings downgrade also follows Westpac last week, which said it would take at least a $1.43 billion hit in the first half due to the cost of the AUSTRAC money laundering debacle and ongoing refunds to customers.
Westpac said it would update the market just ahead of its May 4 interim result on provisions relating to credit losses arising from the COVID-19 crisis, which could impact the first-half dividend.
NAB reported cash profit for the first quarter of $1.65 billion, which was up 1 per cent, and analysts are expecting a half-year profit of just over $3 billion and $6 billion for the full-year, meaning the additional charges announced on Monday represent 36 per cent of the expected first-half earnings and 18 per cent of the full-year's profit.
The market is expecting Mr McEwan to update the bank's strategy when the results are announced on May 7. Before the additional charges were announced on Monday, there were expectations of an acceleration in IT investment, more remediation provisions and possible asset write-downs.
Some in the market also think NAB could announce a capital raising at its interim results to strengthen its balance sheet, although this could also be achieved by slashing the dividend.