Insurance scandal may hamper National Australia Bank’s plans to exit Britain

In addition to the specific conduct issues in Britain, NAB said the local currency cash earnings of the British banks were lower in the quarter, due to reduced net-interest margin “largely reflecting timing of the Financial Services Compensation Scheme” in Britain, which is an industry statutory compensation scheme for customers.

NAB’s shares lost 1. 6 per cent on Monday after new chief executive Andrew Thorburn revealed the bank would make additional provisions of “at least” £245 million at its full-year results in November.

Furthermore, Watermark Funds Management investment analyst Omkar Joshi said the uncertainty about the ultimate cost of British misconduct might encourage potential buyers of Clydesdale to force exposures to be retained in NAB. “If NAB wishes to sell/IPO Clydesdale, it may need to retain these claims in a similar fashion to what Lloyds did with its TSB float earlier in the year,” he said.

This was due to several “new developments”, including: “The implementation of a new complaints handling process, which is likely to lead to increased payments both for new complaints and in revisiting closed complaints; the need to extend our examination of historical records dating back to pre-2000 periods, including unindexed microfiche records; higher than expected levels of new complaints; and the fact that Clydesdale Bank is subject to an enforcement process with the FCA in relation to its previous PPI complaints handling processes, the outcome of which is not yet known”.

NAB’s third-quarter profit of around $1. 6 billion follows Commonwealth Bank of Australia’s $8. 68 billion full-year profit last week, up 12 per cent, while ANZ Banking Group on Friday reported an 8 per cent growth in cash earnings to $5. 2 billion in the first nine months of its financial year.

NAB’s British update came as it reported on Monday a third quarter cash profit of “approximately $1. 6 billion”, up 7 per cent on the previous third quarter.

NAB said on Monday an additional provision of “at least £170 million” would be required at the full-year result in relation to the mis-selling of interest-rate hedging products, more than doubling the existing provision of £152 million as at March 31 for this scandal.

Expectations have been growing that NAB might sell Clydesdale next year, but Morningstar analyst David Ellis said the additional provisions may push back the timetable. “It is disappointing there are further provisions in the UK and it is potentially pushing out the eventual exit from the UK,” he said.

Nomura analyst Victor German said NAB would have disclosed any firm estimate of the PPI exposure if it knew it. “Given they haven’t, suggests they are still working through those issues - but the language around it suggests it could be material, over £100 million rather than tens of millions,” Mr German said.

National Australia Bank faces an unknown exposure to the payment protection insurance scandal in Britain that has embroiled its Clydesdale Bank, raising concerns the sale of Clydesdale may be delayed and misconduct exposures may have to be retained within NAB after its British exit.

National Australia Bank Limited (ASX:NAB) increases its cash profit by 7 per cent in the third quarter of the 2014 financial year.

Read more here: SMH


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