NAB reveals more compliance issues; remediation underway

The bank’s new loan provisions in its second half included an increase in “target sector forward looking adjustment” of $367m for those sectors as the bank undertook a more granular assessment of its exposures.

The delicate dance between National Australia Bank and financial crimes regulator Austrac includes new breaches reported by the bank over the 12 months ended September 30.

NAB’s investors are keeping a close eye on disclosures around its compliance with financial crimes laws, given two of its rivals have been hit with whopping penalties.

Westpac this year copped a record $1.3bn penalty for not adhering to its legal obligations to help fight money laundering and terrorism financing, which it will pay to regulator Austrac. Westpac failures included not reporting international funds transfers as required and not flagging activity indicative of child exploitation.

Commonwealth Bank was hit with a $700m penalty in 2018 by Austrac for its own compliance shortcomings.

NAB’s accounts on Thursday quietly disclosed it has reported breaches to relevant financial crime regulators, “including over the last financial year”, and has responded to a number of requests for the production of documents.

The bank said identified issues included weaknesses with its implementation of Know Your Customer legal requirements, other financial crime risks, as well as systems and process issues that impacted transaction monitoring and reporting in specific areas.

“In particular, the group has identified issues with collection and verification of identity information and enhanced customer due diligence for non-individual customers. This is the subject of a dedicated remediation program that is underway,” the accounts said.

They also cautioned the potential outcome and total costs involved in fixing and remediating problems remained uncertain.

NAB chief Ross McEwan told this column NAB managers were involved in quarterly meetings with Austrac and were making progress on the issues.

“We are having regular meetings with them, we’ve got a program of work that we’ve agreed with them that will take some years to get ourselves through,” he said. “We’ve been spending elevated amounts to get ourselves our systems and our processes in good shape.”

NAB has about 1000 people working in the area and is drawing on technology to ensure it is boosting its efforts.

The bank has spent $300m since 2017 on investing in initiatives around anti-money laundering and Know Your Customer obligations.

It is an issue, McEwan — having seen the pain endured by CBA and Westpac — is very alive to.

“We should be stopping criminal activity from operating in Australia and making it very difficult to come in and use Australia to launder money for criminals from offshore,” he said.

NAB is also working with the Fintel Alliance — a private-public partnership — to increase the banking sector’s defences against criminal activity and support law enforcement investigations.

The COVID-19 crisis has also seen banks navigating a surge in fraud attempts and cyber attacks, which underscores why the sector can’t take its eye off the ball on proactive risk management.

Cost target

Along with a target for NAB to get back to return on equity in the double digits, the bank is looking to keep a lid on costs after COVID-19 threw this year’s plan off track.

McEwan told the market the bank was sharpening its approach to costs and targeting 2021 expense growth at zero to 2 per cent.

The idea is to get to a lower costs across NAB relative to the 2020 cost base of $7.7bn.

COVID-19 saw the bank have to boost headcount slightly to 31,372 as at September 30, from 30,776 a year earlier. That is unlikely to be the case in 2021 as the bank reassesses its branch network and McEwan looks to execute on his broader strategy.

Business pulse

NAB’s view on business lending and confidence for 2021 relies on a continuation of the impressive COVID-19 health outcomes achieved in Australia and New Zealand and a phased reopening of economies and state borders.

The bank is tipping Australian business loan growth to print at about 2 per cent in its 2021 year.

But McEwan is still treading cautiously on potential loan losses and NAB’s results highlighted additional modelling across sectors including aviation, tourism, hospitality, entertainment, retail and commercial property.

The bank’s new loan provisions in its second half included an increase in “target sector forward looking adjustment” of $367m for those sectors as the bank undertook a more granular assessment of its exposures.

That reflects a slower than anticipated recovery in the aviation sector and hospitality sectors — particularly in central business districts — from the pandemic and concerns about commercial property.

NAB partially offset those increases with reductions in charges for “high risk” mortgages given it made an economic adjustment and a reduction stemming from an easing of drought conditions in the agriculture sector.

The broad economic modelling expects a “more prolonged economic recovery and material uncertainty” around the outlook. That is linked to a tapering off of government and bank support measures, introduced at the height of the pandemic.

Overall, in NAB’s second half the bank put aside a further $1.03bn in forward looking provisions for loan losses, taking the 2020 total in that category to $1.86bn.

Credit impairment charges climbed to $2.76bn.

The total collective provision grew to $5.5bn in the 12 months ended September 30.

As the nation’s biggest business bank NAB is well placed to provide insights on the health of businesses, but the key test for it and all the nation’s major lenders comes after March 2021.

That’s when loan repayment pauses roll off and the more difficult conversations begin.