Banks, AMP compensation bill could top $10bn: Shaw and Partners

The $6bn bill faced by the big four banks and AMP to rectify wrong­doing and repay customers will climb, analysts say.

NAB is yet to get a good handle on how much it needs to repay customers who received poor advice from so-called aligned planners which sit under its dealer groups.

The $6 billion bill faced by the big four banks and AMP to rectify wrong­doing and repay customers will climb in the second half, as they assess the cost of poor advice provided by their aligned financial planners.

That is the view of analysts following National Australia Bank’s disclosure of an additional $749 million in before-tax provisions, or $525m after tax for its customer remediation program on Thursday.

That brought NAB’s total provisions for customer-related remediation to $1.1bn, and the financial hit isn’t over yet.

NAB is yet to get a good handle on how much it needs to repay customers who received poor advice from so-called aligned planners which sit under its dealer groups.

Shaw and Partners analyst Brett Le Mesurier puts the running tally for remediation, Hayne royal commission expenses, higher compliance and risk costs and the implementation of audits and repayment programs at the big four and AMP at $6bn. The total includes costs going back more than two years.

The figure, however, does not include Commonwealth Bank’s $700m fine paid to AUSTRAC last year to resolve breaches of anti-money-laundering and counter-terrorism financing laws.

Including his estimates for new charges arising in the six months ended September 30, Mr Le Mesurier gets to $8bn and that could be conservative.

“It’s not hard to see it (the bill) easily topping $10bn,” he told The Weekend Australian.

CLSA analyst Brian Johnson is also pencilling in a higher remediation bill at the banks, particularly as NAB and Westpac work through the files of planners within their dealer groups.

“There is more to come,” he said, noting that NAB was likely to face a bigger hit in its dealer groups due to larger numbers of aligned financial planners.

Westpac and NAB have already largely provided for remediation charges for advisers directly employed by the banks.

NAB’s announcement said 91 per cent of the charges for the six months ended March 31 related to wealth management, while the remainder included consumer credit insurance and incorrect charges levied on “fee-exempt” transactions.

ANZ Bank kicks off the sector’s profit season on May 1, and is followed by NAB and Westpac. CBA has a June 30 year end.

UBS analysts expect the interim bank results to be murky, given asset divestments and remediation charges. “Expect another messy set of numbers by the banks given the impact of asset divestments, remediation charges and royal commission expenses in both this half and prior periods,” they said in a note to clients.

NAB’s announcement said customer-related remediation costs would be excluded from the full-year expense growth guidance, which was “broadly flat”. The new charges and provisions will lead to a $325m hit to first-half cash earnings.

Earnings from discontinued operations will be reduced by $200m for the half year, compared to $53m in the prior six months. NAB also said its board would review the bank’s dividend settings.

“That is telling you a dividend cut is coming,” CLSA’s Mr Johnson said. “The market was already pricing in a dividend cut.”

He cautioned that while bank funding cost pressures had abated, after they had all repriced their mortgage books, any benefit to net interest margins could be offset by other factors including fierce competition for loans.

Shaw and Partners’ Mr Le Mesurier expects NAB’s first-half dividend to fall from to 90c from 99 cents a year earlier.

He also said NAB’s provisions reflected a refund rate of 23 per cent plus interest for clients of salaried advisers. That compares with 28 per cent plus interest announced by Westpac in March.

“No provisions have been taken yet for the refunds to clients of aligned advisers. However, provisions have been taken for the cost of determining the size of the refunds. There are clearly more charges to come,” he said.

NAB acting chief executive Phil Chronican said NAB was “putting things right”. Since June the bank has made about 360,000 payments to customers worth $145m.

“There are currently around 350 people dedicated to remediating customers and we will soon have around 500,” he said.

In March, Westpac warned of a $260m dent to interim earnings due to remediation programs. But that excluded aligned financial planners where the charges were “still being determined”.