Counting the Cost

National Australia Bank has quantified the one-off customer remediation costs to be taken in the second half of FY18 that were originally flagged at its third-quarter FY18 trading update.

 

These costs are expected to amount to $314m after tax, which is higher than Ord Minnett’s previous allowance of $105m post tax, although it is consistent with similar provisions recently outlined by ANZ Bank (ANZ, Accumulate) and Westpac (WBC, Accumulate), and therefore is not surprising. The costs are over and above the bank’s 5–8% underlying cost growth guidance for FY18.

 

Breaking this down, on a continuing cash basis, the customer remediation and compliance costs are expected to amount to $261m post tax. About 69% relates to revenue lines associated with the wealth business, with the remainder coming through expenses which were said to include costs from implementing remediation processes and other regulatory compliance matters. About $53m (post tax) relates to discontinued operations.

 

Given these one-offs, the possibility of further costs in FY19 and the pending exit from the wealth business, we see the risk of a rebasing of the dividend as increasing. Rather than factor in a cut at this stage, however, we have included two discounted dividend investment plans in second-half FY18 and first-half FY19 to ensure it builds to the 10.5% common equity tier-1 ratio that regulators regard as ‘unquestionably strong’.

 

Our 2H18 continuing operations cash net profit forecast has reduced 4.9%, or $154m, reflecting the impact of the customer remediation costs. We note we had already allowed for $150m before tax. Despite these charges, NAB remains our preferred stock in the sector and we maintain our Accumulate recommendation with a $32.20 target price.

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