National Australia Bank stunned investors yesterday by taking an extra A$830m (£399m) provision against investments backed by US residential mortgages.
Shares of Australia's biggest bank dropped 13.5 per cent, the biggest one-day slide since the stock market crash of October 1987. NAB took only a small A$181m charge on investments in securities backed by US home loans in the first half. When it rep-orted results in May, the bank said it had "appropriately provisioned" for the assets.
The charge against the collateralised debt obligations (CDOs) – exotic pools of assets that have become notorious during the credit crunch – will hit profit by nearly A$600m, wiping out almost a quarter of second-half earnings. The shock writedown prompted investors to question the credibility of NAB's management, led by John Stewart, the Scottish former chief executive of Woolwich. In a fraught briefing with analysts, Mr Stewart blamed unforeseen turmoil in the US housing market that caused the mortgage defaults to rocket and recovery rates to slump.
NAB, which owns Clydesdale and Yorkshire in the UK, has now set aside enough to cover nearly 90 per cent of its CDO portfolio, which is considerably higher than many other banks. Mr Stewart told analysts: "The behaviour of the housing market in the US leads us to believe that the worst-case scenario might not be too far away from the most likely."
Mr Stewart rejected speculation that NAB might take part in a break-up bid for HBOS, Britain's biggest mortgage lender, which has a sizeable Australian business. "We're not sure this is a clever time to make acquisitions," he said. On Tuesday, NAB pulled out of the running to buy Australian and New Zealand investment banking operations from Royal Bank of Scotland.
Standard & Poor's cut its debt rating outlook on NAB to negative from stable and said the bank could suffer further writedowns and higher funding costs. NAB's total A$1.01bn writedown against holdings of distressed US mortgage securities makes it the worst-hit of Australia's banks. The country's other big lenders rushed to issue statements saying they did not have material exposures to the US residential mortgages but shares of Westpac, Commonwealth Bank of Australia and ANZ fell heavily.Reuse content