• Big four bank NAB has provisioned $2.76 billion for “potential COVID-19 impacts”, triple its earlier allocation.
• NAB’s full year results acknowledged “rising delinquencies” that were occuring outside its loan deferral program.
• “Asset quality is starting to deteriorate given economic disruptions caused by COVID-19. While the outlook remains uncertain, further deterioration is expected,” CEO Ross McEwan said.
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NAB has become the latest big four bank to face up to the rising costs of COVID-19.

Releasing its full-year results on Thursday, NAB revealed it has tripled the amount the bank is holding in anticipation of bad loans to $2.76 billion.

The cautious approach, similarly adopted by Westpac and ANZ in recent weeks, punched a hole in its full-year profits, plunging by 37%.

“Certainly, the impacts from COVID have meant that we’ve had to do quite a bit of forward provisioning, which has hurt the results this year,” CEO Ross McEwan said.

In expectation of “potential COVID-19 impacts”, NAB has provisioned $388 million for customers in the particularly hard-hit sectors of tourism, aviation, hospitality and entertainment, retail,
and commercial property.

Despite all banks offering loan repayment deferrals until January, NAB acknowledged that those outside of the program were experiencing “rising delinquencies”.

Those have pushed up the percentage of NAB customers behind on repayments by three months or more. Combined with those in negative equity – where their home is worth less than their loans – the group now makes up 1.03% of total loans.

“Asset quality is starting to deteriorate given economic disruptions caused by COVID-19. While the outlook remains uncertain, further deterioration is expected,” McEwan said.

That’s notwithstanding the $42.9 billion worth of deferred loans on NAB’s books, the most of any bank according to the latest APRA figures. Despite being the smallest of the big four, NAB’s outsized exposure to business lending has helped push it to the top of an unenviable list, with deferred loans making up 9% of its total.

It comes as the bank undergoes an overhaul of its operations in a bid to simplify itself in the wake of the financial services royal commission. It includes selling its wealth business MLC, which will improve its equity footing, to finally ‘retiring’ its ill-advised loan referral program.

To cap it off, the bank looks like it will fork out at least $128 million to remediate underpaid staff.

It’s lucky then that NAB underwent a $4.25 billion capital raise early in the pandemic to see it through the storm.

The extra equity will come in handy given the other ill-effects of the coronavirus pandemic on the bank’s bottom line.

“A very low-interest-rate environment that we’ve had throughout the last 12 months has impacted our earnings and the third impact, of course, is less [sic] people wanting to borrow because of uncertainty,” McEwan said.

The Reserve Bank has tried to inject stimulus into the Australian economy via successive rate cuts, sending the official cash rate to an unprecedented 0.1% on Tuesday.

While it has helped lift homeowners into the property market, the spectre of a prolonged recession has undermined confidence. Rising unemployment, projected to hit 8% in the coming months, combined with a wind-back of key government supports are suppressing the urge somewhat to take on six-figure debts.

For the very same reasons, lenders may do well to be equally cautious.

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