National Australia Bank (ASX: NAB) has today announced the additional charges of $525 million after tax for its customer remediation program. The news sent the stock to face the sell-off in day trade as the stock price declined by 0.02% to trade at $25.235 on 18 April 2019 (3:56 PM AEST).
The additional cost underscores the added responsibility of the bank for rapidly compensating its customers over the fee for no service breaches. As a result, these charges are estimated to further damage the financial health of the company as 1H19 cash earnings are expected to be reduced by $325 million and earnings from discontinued operations by an estimated $200 million, according to the report released on Thursday.
NAB’s Chief Executive Officer, Philip Chronican stated that Since June 2018, the Bank has made approximately 360,000 payments to customers, amounting to a total value of ~$145 million. He added, currently ~350 people are dedicated for remediations and soon it will become around 500 across NAB so as to build greater focus and discipline on remediating customers and making sure they these issues never happen again.
The further charges of $525 million follow the additional costs of $314 million pre-tax announced in October 2018 in relation to the refunds and compensation to customers affected by issues in NAB’s Wealth business. The company today stated that after adding provisions raised in the second half of 2018 which have not yet been utilised, the total provisions for customer-related remediation has reached to $1,102 million as at 31 March 2019.
NAB further stated that of the 1H19 charges, approximately 91% are for Wealth-related matters including advisor service fees, the Wealth advice review, plan service fees. The remaining 9% of the charges are proportioned to be used for banking related issues including provisions for wrongly charging fees on fee-exempt transactions.
The key items giving rise to increased costs for customer-related remediation include the progression of a remediation program that arose from an ASIC industry-wide review relating to the Consumer Credit Insurance sales through certain NAB channels. Through progression of the program, NAB aims to deliver a greater degree of reliability.
The costs also include the increased provisions to reflect a higher assumed refund rate of 23% for the adviser service fees charged by NAB Financial Planning. With respect to adviser service fees charged by NAB Advice Partnerships, the Bank has increased provisions to cover the anticipated costs for the approach and review to remediation but does not include any allowance for customer refunds.
The impact would also be seen on the Net profit attributable to owners of NAB as it is reportedly expected to decline by $525 million in 1H19.
NAB last traded at a price to earnings multiple of 12.540x with a market capitalisation of $70.96 billion as at 18 April 2019. Over the past 12 months, the stock has declined by 11.47% including a negative price change of 1.64% in the past six months.
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