NAB profit to be hit by compensation, impairments and staff underpayment

NAB’s second-half profit will be dented by higher customer compensation, property impairments and having to repay staff for underpayments.

NAB CEO Ross McEwan. (AAP Image/Daniel Pockett)

National Australia Bank’s second-half profit will be dented by higher customer compensation, property impairments and a swelling balance to repay staff for an underpayment blunder.

In an ASX statement on Friday, NAB said the total hit to cash earnings would be $264m in the six months ended September 30, while the impact on net profit attributable to shareholders would be $450m. The announcement prompted analysts to cut their expectations for NAB’s second-half dividend, given the banking regulator’s guidance that lenders should only pay up to half of profit as dividends during the pandemic.

NAB joins rivals Commonwealth Bank, Westpac and Bank of Queensland in having to deal with employee underpayments, an issue a host of ASX-listed companies are grappling with.

Friday’s statement said the bank would book a net increase in payroll remediation provisions of $128m before tax, or $90m after tax.

In an internal memo, seen by The Weekend Australian, NAB chief executive Ross McEwan said the bank wanted to finalise an investigation on matters raised in an underpayments review by the end of calendar 2020, but some matters could spill into 2021.

“The issues largely stem from a lack of appropriate investment, governance and oversight over time, resulting in a payroll system not fit for purpose,” he added. “We are moving as quickly as possible to find and fix these issues and want to make sure we get this right. As we have said previously, these issues are not acceptable.”

When NAB first identified the underpayment issue in December it said it related to about 730 employees and $850,000.

The Finance Sector Union was highly critical of NAB over the payroll errors.

“This is one of the biggest provisioning for underpayment of wages in Australian history, $128m for this current bank financial year to both current and former staff that goes back as far as 2012,” said FSU national secretary Julia Angrisano.

“Workers should be able to trust their employer to pay them properly and yet a top 10 ASX company has been getting it wrong for years.”

The ASX statement identified impairments of property-related assets of $134m before tax, or $94m after tax. The charges primarily relate to plans to consolidate NAB’s Melbourne office space, given the backdrop of COVID-19 and more employees adopting a “flexible and hybrid approach” to working, it said.

Mr McEwan’s memo added: “I do want us to return to work in our commercial buildings when it is deemed safe to do so and in a way that gives colleagues more flexibility than pre-COVID working.”

NAB also highlighted a further increase in customer compensation charges, across its wealth and banking units, and warned the program’s final cost remained uncertain.

The bank will book a net increase in provisions for customer-related remediation of $380m before tax, or $266m after tax. The bulk of the amount reflected compensation from NAB’s wealth operations and $135m before tax related to the banking division.

The latest customer compensation charges take NAB’s total over the last two years to about $2.1bn after tax.

NAB has agreed to sell its wealth arm MLC to ASX-listed IOOF for $1.44bn, although the bank has committed to covering remediation and other historic liabilities. The bank will now report MLC’s income in discontinued operations.

In total, the provisions outlined by NAB on Friday are expected to reduce its common equity tier one capital ratio by 15 basis points.

NAB’s shares edged up 0.6 per cent to $19.53 on Friday.

The bank reports full-year profit on November 5. Investors will also be closely watching for any revision to NAB’s expected loan losses, stemming from COVID-19.

The bank said its annual results would include “the outcome of a review” of expected credit losses and associated impacts. It has so far set aside $800m for COVID-19-related loan losses.

UBS analyst Jon Mott cut his final dividend estimate for NAB to 30c, but remains upbeat on the stock.

“We expect further top-ups to economic overlays with its FY20 result and credit charges to rise in FY21 as delinquencies come through. However, trading at book value, we see upside in NAB as the economic outlook improves,” he said.

Merrill Lynch analyst James Ellis lowered his expectation for NAB’s second-half dividend to 30c a share from 40c. He said the bank should handle the latest charges. “With an 11.56 per cent third-quarter 2020 pro-forma equity tier one ratio, NAB appears well positioned to absorb the indicative 0.15 per cent impact from the provisions and impairment.”