Nab Warns Of Extra $400m Hit

The Age

Wednesday October 1, 2008

Eric Johnston, Financial Services Editor

NATIONAL Australia Bank last night warned it will have to spend an additional $400 million over the next five years to insure against potential losses on a troubled $1.6 billion holding of complex debt instruments, mostly backed by US and European corporate loans.

But the banking giant has surprised many by insisting that its entire $4.5 billion portfolio - made up of collateralised debt securities backed by corporate, property and private equity loans - remains sound, despite the global market for these instruments crashing.

"All conduit assets have been reviewed and as of today, no further material provisioning against this portfolio will be reflected in NAB's 2008 results," the bank said in a statement last night.

The move came as NAB and its three big rivals - ANZ, Westpac and St George - yesterday ruled off their accounts for financial 2008, with analysts predicting the banks would deliver the slowest earnings growth in seven years.

Commonwealth Bank of Australia, the nation's biggest bank, has already delivered its full-year result.

Analysts had anticipated NAB faced a write-down of between $500 million and $1billion on its so-called conduit entities.

But a NAB spokesman said the hedging contracts were a "more cost-effective way" of dealing with the portfolio.

NAB has already flagged full-year write-downs of about $1.01billion on holdings of asset-backed securities linked to the US housing market.

The bank's conduits were initially set up to give clients access to global capital markets through off-balance-sheet vehicles.

Since the US subprime meltdown, there has been little investor appetite for the underlying assets. Adding to concerns over the bank's portfolio, US banks are warning that credit weakness had started to spread from residential customers to US corporate borrowers.

The latest charges relate to NAB taking out long-dated hedges to protect the risks associated with a $1.6 billion portfolio of synthetic collateralised debt obligations with exposures to European and US corporate names through credit default swaps.

More than half these are linked to US corporate loans, with the balance spread between corporate loans in Australia, Asia and Europe.

NAB said hedges - entered into with a "large global bank counterparty" - would strengthen its positions and substantially reduce the likelihood of loss arising from the portfolio. It declined to name the bank.

It will take a $100 million hit to earnings this year. Ongoing hedge costs will run to $60million a year for the next five years.

"The new protection levels mean that the (CDOs) would be able to withstand corporate default rates equivalent to the worst of those experienced over the past 90 years," NAB said.

This leaves nearly $3 billion of CDOs, corporate bonds and commercial mortgage-backed securities without protection.

Credit Suisse yesterday tipped NAB's full-year earnings would drop 6%. ANZ is expected to report a 20% drop this month.

LINK

- www.nab.com.au