In a statement posted on the ASX today, Australia's biggest bank by assets, National Australia Bank Ltd (ASX: NAB), announced significant earnings adjustments for its FY14 results, which will be released on October 30.
The bank which continues to be plagued by its troubled UK Banking division, now expects FY14 cash profit to be between $5.1 billion and $5.2 billion. Compared with $5.94 billion last year.
$1.34 billion of writedowns, mostly related to UK misconduct charges and interest rate hedging, is the reason the bank's cash earnings will fall so heavily. As a result, the bank's CET1 capital ratio has fallen by 33 basis points and management will issue $1.6 billion of shares and discount the dividend reinvestment plan to boost its capital level. A dividend of 99 cents per share is expected.
On a call to analysts, CEO Andrew Thorburn said: "Clearly this is a disappointing result."
But the question on shareholders' minds is whether, or not, the latest batch of results will be the last time they're disappointed by these types of events.
With NAB's share price significantly underperforming its peers, such as Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and even the S&P/ASX 200 (INDEXASX: XJO) over the past decade, the question has been asked many times before.
According to The Fairfax Press, Mr Thorburn said: "What I can say is we certainly have more clarity on the PPI remediation framework we have agreed with the [UK] Financial Conduct Authority and we have taken into account a variety of other factors into impacting interest rate hedging".
Buy, Hold, or Sell?
I've previously said Foolish (capital 'F') investors should keep clear of NAB shares until we get more information (like this) on the group's UK operations and intentions with all its foreign assets, including Great Western Bank in the US. After the group's third quarter update in August, today's announcement was somewhat expected and the market reacted by sending NAB's share price slightly higher in mid-afternoon trade.
I still think there's considerable risk attached to NAB's shares and I am not a buyer at today's prices. Its new management team are doing what they can to improve the bank's standing with investors but until we get more information in its annual report, NAB is best left on the watchlist.
