By James Eyers
National Australia Bank, the nation’s top lender to businesses, has flagged a sharp increase in provisions for bad debts ahead of its first-half results, as it braces for financial distress among customers most exposed to surging energy prices.
The bank said on Monday that its interim results on May 4 would include $706 million in impairments, up from $485 million in the prior half, with an additional $300 million set aside as protection against a potential rise in bad debts.
NAB’s chief financial officer, Inder Singh, said the increase in provisions was based on the likelihood of an economic downturn and the prospect that some high-fuel-using, fuel-dependent business customers may be unable to repay loans.
NAB’s shares were down 3.5 per cent in late trade to $41.05, a sharper fall than other bank stocks, as analysts and investors pointed to looming challenges for chief executive Andrew Irvine.
Evans and Partners analyst Ashley Price said NAB’s share price implied a level of excellence exceeding what the bank was delivering.
“NAB’s focus on customer experience may well deliver lasting value, but the challenge will be lifting net promoter scores whilst pursuing productivity gains and disciplined pricing in a competitive environment requiring significant technology investment,” said Price in a note to clients, after the bank revealed the increase in provisions.
“With the share price trading ahead of our valuation, we retain our negative recommendation; valuation $40.”
Before Monday’s fall in its share price, NAB had been trading on a price-to-earnings per share multiple of 21 times earnings compared to a historical average of 12 times.
NAB’s share price had outperformed the other major banks from the start of the year until early March, but the stock has fallen since the Middle East conflict began, given its exposure to energy-driven cost pressures among business clients.
It is the nation’s biggest lender to customers in the agriculture and transport sectors, who face higher costs for diesel and fertiliser, with exports of both remaining stuck in the Persian Gulf.
Morgans Financial analyst Nathan Lead said NAB’s move to increase its provisions may reduce consensus earnings forecasts for the full year by around 2 per cent.
After a chaotic weekend in the Middle East that offered little clarity on when the conflict might end, NAB said in a statement that it was “taking action to strengthen the capital position and balance sheet resilience”. It said the changes “better reflect the risks now inherent in our business”.
Morgan Stanley analyst Richard Wiles also said in a note that at NAB’s result briefing next month, the key focus would be on the business lending pipeline and leading indicators of credit quality.
“We weren’t surprised by NAB’s decision to increase its provisions and capital buffers,” he said. “This should help to strengthen its balance sheet settings.”
NAB expects to raise about $1.8 billion by applying a 1.5 per cent discount and partially underwriting its dividend reinvestment plan in the first half. That would bolster its common equity tier 1 capital and ensure its balance sheet remains “unquestionably strong”.
NAB’s increased provisions follow a similar move by rival Westpac last week and comes as a federal government-backed $1 billion interest-free loan program for struggling businesses is put in place. Investors said ANZ is also expected to announce an increase in its provisioning for a potential rise in bad debts.
Still, some investors expressed surprise at the magnitude of NAB’s provisioning increase. “It looks like all banks will be rolling through overlays based on assessments of deterioration [in the economy], so ANZ is next,” said Matthew Haupt, lead portfolio manager at Wilson Asset Management. “Expectations are much lower than before.”
NAB also said it would change its software capitalisation policy to better align with a rapidly changing technological environment. This will result in a large notable item in its first-half results.
Zero interest loans
On Monday, banks opened applications for zero-interest loans to businesses facing surging costs due to the Middle East conflict. The loans are targeted at logistics and manufacturing companies in areas such as freight, fuel, plastics and fertiliser as global price rises for key inputs.
Loans of up to $5 million are available through major banks and are supported by the Albanese government’s $15 billion National Reconstruction Fund.
For borrowers who don’t qualify for the government-backed interest-free loans, the Australian Banking Association said banks would consider temporary assistance depending on individual circumstances.
This may include moving customers to interest-only payments for a period, temporarily deferring payments, restructuring loan terms to lower monthly repayments, providing flexible access to savings and term deposit products, and offering emergency credit limit increases or temporary overdrafts.
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