The National Australia Bank Ltd (ASX: NAB) share price has come under pressure on Wednesday following the release of an update this morning.
At the time of writing the banking giant's shares are down 3% to $28.75.
What was in NAB's update?
This morning the bank announced additional charges of $1,180 million after tax ($1,683 million before tax) relating to increased provisions for customer-related remediation and a change to the application of its software capitalisation policy.
These charges are expected to reduce its second half cash earnings by an estimated $1,123 million after tax and earnings from discontinued operations by an estimated $57 million after tax.
What do the charges comprise?
According to the release, charges of $832 million after tax ($1,189 million before tax) relate to additional customer-related remediation. This is due largely to the inclusion of a provision for potential customer refunds of adviser service fees paid to self-employed advisers. This brings total provisions for customer-related remediation at September 30 to $2,092 million.
One positive is that it now has in place provisions for the estimated costs and customer payments relating to all known material customer-related remediation matters based on information currently available. However, it has warned that until all customer payments have been completed, the final cost of such remediation matters remains uncertain.
NAB Chief Executive Officer, Philip Chronican, explained: "NAB is moving forward with rigour and discipline to make things right for customers. While we previously noted additional customer-related remediation provisions were expected in 2H19, the size of these provisions is significant. 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."
"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. 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 to bring greater discipline and focus to remediating customers," he added.
In addition to this, following a review of its software capitalisation policies, the minimum threshold at which software is to be capitalised has increased from $0.5 million to $2 million. This reflects the bank's 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 its capitalised software balance as of September 30 by $494 million and second half cash earnings by $348 million (post tax).
However, there will be no impact on its capital position given capitalised software balances are already deducted from Common Equity Tier 1 capital.
