The National Australia Bank Ltd (ASX: NAB) share price could drop sharply this morning after announcing a $525 million after-tax profit hit from higher customer compensation costs.
What did NAB announce this morning?
NAB announced additional charges of $525 million after tax ($749 million before tax) in connection with increased provisions for its customer-related remediation program.
Management expects to see these costs reduce first-half cash earnings by $325 million and earnings from discontinued operations by an estimated $200 million.
NAB CEO Philip Chronican said the bank has made approximately 360,000 payments to customers with a total value of approximately $145 million since June 2018.
Of the first-half (1H19) charges, approximately 91% is for matters relating to NAB's wealth management business, with the remainder relating to the Banking division.
In combination with provisions raised in the second half of 2018 which have not yet been utilised, this brings total provisions for customer-related remediation as at 31 March 2019 to $1.1 billion.
The key items giving rise to increased costs for customer-related remediation include:
- Consumer Credit Insurance sales through certain NAB channels
- Non-compliant advice provided to Wealth customers which is being addressed as part of NAB's ongoing wealth advice review
- Adviser service fees charged by NAB Financial Planning, with provisions increased to reflect a higher assumed refund rate of 23% (31% including interest costs)
- Adviser service fees charged by NAB Advice Partnerships
- Banking-related matters including provisions for incorrectly charged fees on certain fee-exempt transactions
What does this all mean for NAB?
Today's announcement represents a significant increase in customer remediation expenses from the bank, which is becoming more commonplace in the wake of the Financial Services Royal Commission findings.
While NAB's share price is likely to fall in response to the profit hit, if I were a NAB investor I'd be keeping a closer eye on any dividend changes in the short to medium-term.
The bank has the lowest Common Equity Tier 1 (CET1) capital ratio of its Big Four bank peers, and it will need to find the cash to boost this ratio above APRA's 10.5% "unquestionably strong" level before 1 January 2020.
For those who want to look for growth outside of the banking sector, this top-rated stock could boost portfolio gains as it continues to soar in a $22 billion industry.
