NAB’s $20bn sea of red as ‘one off’ costs mount

You could mount a pretty solid argument that NAB’s one-offs have become a permanent feature of its results.

NAB CEO Ross McEwan (right) with chairman Philip Chronican. Picture: Stuart McEvoy.

It’s just as well the market values companies on future rather than past earnings, because National Australia Bank’s predilection for massive provisions and writedowns over the last two decades could have risked permanent damage to its franchise.

Over the last week, NAB and Westpac have pre-announced $450m and $1.2bn in one-off items, respectively, ahead of their full-year results early next month.

It was NAB’s seventh consecutive half-year of big hits to its bottom-line profit, contributing to an extraordinary, $20bn sea of red ink stretching back to 1998.

On UBS numbers, that amounts to well over double the combined one-offs for the remaining three major banks, or 15 per cent of all profit generated by NAB over the last 22 years.

While the market tends to “look through” irregular items and focus on underlying earnings, you could mount a pretty solid argument that NAB’s one-offs have become a permanent feature.

Despite this, investors are backing a new management team, led by chairman Phil Chronican and chief executive Ross McEwan, to bridge the yawning gap between above-the-line and below-the-line profit.

Unlike some of their NAB predecessors, Chronican and McEwan are career bankers, with McEwan rating NAB’s leading business bank as one of the nation’s two premium banking franchises along with Commonwealth Bank’s retail business.

If Chronican and McEwan can’t weave some traditional magic and restore NAB to something approaching its pre-1998 glory, it’s hard to conceive of someone else doing a significantly better job.

NAB, of course, is heavily exposed to the dormant Victorian economy, which was eased back to life on Monday when Premier Daniel Andrews flagged that COVID-19 restrictions would be eased.

Cognisant of the pandemic’s heavy impact on his core franchise, McEwan urged small and medium-sized businesses to embrace the economy’s reopening.

“Businesses right across Melbourne now have the certainty they need to open their doors and to get people back into work, which is great for the state, and for Australia’s economic recovery,” he said.

“Today is a big step but many of our customers are still doing it tough and there is a long way to go.”

NAB’s heavy exposure to Victoria, SMEs and high net-worth individuals means McEwan won’t be shooting the lights out when he reports NAB’s full-year profit on November 5.

The outlook is for top-ups to economic overlays in the 2020 financial year and higher credit charges in 2021.

That said, the broader economy is starting to recover, and the expected ravages of the recession have been mitigated by the federal government’s unprecedented policy support.

Hopefully, though, McEwan was adhering to the maxim that you should never waste a crisis when he announced last week’s one-offs.

The appetite for more of the same is wearing thin.