The $10 billion cost of banks behaving badly

The cost of misconduct for the major banks and AMP just keeps ticking up. It’s not over yet but at this stage of peak remediation provisioning, the number appears to be approaching the magic $10 billion mark on a pre-tax basis.

And that represents about $3 billion in lost tax revenue for the government.

The total of the tariff must also include the costs of litigation, the royal commission and regulatory fines.

Bearer of bad news: NAB's interim chief executive Phil Chronican.Credit: Paul Jeffers

Indeed there are no winners. Customers, shareholders and the government can be counted as victims in one way or another.

The banks have suffered enormous brand damage – an amount that is impossible to quantify.

Even executives who have retained their jobs (admittedly that is most of them) have had their bonuses cut and understandably there will be little sympathy for senior bank management.

But it’s a case of no player wins a prize.

On Wednesday, National Australia Bank made a pretty hefty contribution to the overall financial toll – lifting its pre-tax provisioning by $1.68 billion for mostly customer-related remediation.

This took its total customer-related remediation to more than $2 billion – post-tax.

The decision to clear the decks in the current financial year will allow its incoming chief executive Ross McEwan to put his feet under a clean(ish) desk.Credit: AAP

NAB is now running second only to the Commonwealth Bank whose remediation costs are roughly similar but once its $3 billion AUSTRAC cost is factored in, it is a clear winner (or loser).

Before this week the market had been aware there was more remediation bad news coming from NAB. It has already told shareholders that it had yet to provision for the wrongful fees charged by its aligned wealth management advisers.

But neither NAB nor the other banks and AMP are prepared to draw a line under these provisions.

There will almost certainly be more coming.

The good news is the peak provisioning period should have drawn to a close because most have taken steps to estimate the costs within the major areas of concern – being banking-related misconduct and their wealth divisions’ fee overcharging.

And for NAB, in particular, the decision to clear the decks in the current financial year will allow its incoming chief executive Ross McEwan to put his feet under a clean(ish) desk.

More than in any other bank NAB executives have paid the price of the misconduct. Its former chief executive, Andrew Thorburn and its chairman Ken Henry, both announced their resignation in the wake of the royal commission’s final report.

NAB’s shareholders have also paid a significant price.

The bank’s latest round of provisioning will wipe out $1.18 billion from its net profit for the half year to September 2019 – an outcome that its interim chief executive and incoming chairman Phil Chronican acknowledged would be disappointing for shareholders.

The size of the provision certainly took investors by surprise.

“While we previously noted additional customer-related remediation provisions were expected in the second half of 2019, the size of these provisions is significant,’ Chronican said.

But NAB characterised the size of the provision as its prioritisation of dealing with the past misconduct.

It clearly would not want to draw any nexus between the profit hit for which the additional provisioning is responsible and its decision this week not to pass on the full Reserve Bank rate cut.

Nor was the bank willing to discuss whether the provisioning would impact the dividend to be paid in the second half.

The bank was one of the worst performers among the top 50 on Wednesday, dropping by 2.29 per cent in early afternoon trading.

Ratings agency Moody’s was unimpressed, saying the provisions add to existing pressure on profitability from ongoing interest rate cuts, which in itself will test the pricing power of all major Australian banks. It declared NAB’s announcement a credit negative.

Shareholders will be understandably wondering when the banks can put their misconduct and the financial ramifications behind them.