National Australia Bank’s (ASX: NAB) plunging profit, slashed dividend and $3.5 billion capital raising is a rude shock which exposes the havoc the COVID-19 pandemic has caused on Australia’s banking system.
NAB’s decision to bring forward its results and expose a 52% fall in half year profit to $1.44 billion shows the effect provisions for bad debts are likely to have across the board.
The bank announced a $1.61 billion credit impairment charge, which more than doubled as a result of the expected hit from COVID-19, and will pay an interim dividend of just 30¢ a share, down from 83¢.
NAB goes in strong but still needs more capital
NAB chief Ross McEwan said the bank had “significantly strengthened’’ its capital, funding and liquidity in recent years.
“However, given the uncertain outlook, we have taken proactive steps to further strengthen our balance sheet.”
NAB is the first bank to declare a dividend since the banking regulator APRA said banks should consider suspending dividends until the COVID-19 uncertainty lifted but the lower dividend combined with a large capital raising has obviously passed muster and could be a good indicator of what is to come from the other banks.
Retail shareholders not happy
“I can guarantee you that retail shareholders will not be happy with a dividend reduction, as we’ve done, but I think in the circumstances we’ve done the right thing,” Mr McEwan said.
The chief executive outlined several possible scenarios for the Australian economy including the now familiar V-shaped fast bounce back and the more worrying U-shaped recovery where economic growth remains negative or sluggish for a long period of time before recovering down the track.
The base case is for the economy to contract by 3% this year and then grow by 3.4% in 2021.
That would see unemployment peak at 11.6% and reduce to 7.3% next year with house prices falling by 10% this year but rising 2.6% in 2021.
U-shaped recovery looks terrible
The less pleasant U-shaped scenario would see the economy contract by 3% this year and shrink a further 2.5% next year with the economy emerging from the recession in 2022 with fairly feeble 2% growth.
Under this scenario unemployment would reach 7.4% this year before blowing out to 10% in 2021 and 10.4% in 2022 while house prices would fall 20.9% this year and a further 11.8% in 2021 before beginning to grow by just 2.5% in 2022.
Mr McEwan said he was unsure which of the scenarios was more likely.
Small and medium businesses see income dry up
NAB is the largest lender to small and medium-sized enterprises in the country and Mr McEwan said many of these customers had seen their income literally dry up in just a week.
“We have been talking to tens of thousands of businesses and they’re hurting badly, they’re hurting very badly,” he said.
NAB already has plenty of loans deferring payments
It is not hard to understand the scale of NAB’s problems when you see that the bank has already approved six-month loan deferrals on 70,000 home loans with balances worth $26.5 billion.
For business loans it has deferred repayments on 34,000 loans with balances of $17.4 billion.
The unstated issue for the banks is that some of these customers will probably not make it through the other side of COVID-19, which is why NAB’s overall charge for impairments rose from $470 million last September to $1.16 billion.
If the economic recovery turns U-shaped, even that level of provisioning may not be enough as more business and housing loans turn bad and NAB would be forced to increase provisions further.
NAB shares have suspended trading as it prepares for the $3.5 billion capital raising but shares in the other banks were down by as much as 3.5% on Monday.