National Australia Bank to Raise A$3.5 Billion as Earnings Plunge

(Bloomberg) -- Australian bank investors got their first taste Monday of what is set to be a horror earnings season, as National Australia Bank Ltd. reported a 51% plunge in profit, slashed its dividend and embarked on a A$3.5 billion ($2.24 billion) capital raising.

The early announcement -- the lender wasn’t due to report until next week -- has shareholders bracing for the worst earnings season since the global financial crisis. Even before the coronavirus outbreak sent the economy hurtling into recession, bank profits were under pressure from ultra-low interest rates and the cost of cleaning up years of misconduct.

“It looks pretty grim,” said Jun Bei Liu, a portfolio manager at Tribeca Investment Partners Pty. “Banks’ fortunes are linked to our economy, and in the short term we are in recession.”

Click here for more details on NAB’s earnings and share sale

While National Australia was halted from trading Monday for the capital raising, shares of the other big banks fell as investors digested the news. Australia & New Zealand Banking Group Ltd., which reports Thursday, dropped 1.8% and Westpac Banking Corp., which has already flagged a A$1.43 billion charge, declined 3%.

Bad-debt provisions are forecast to soar across the industry as lenders grapple with the challenge of assessing how big a hit their loan books will take in what is shaping up to be the biggest global downturn since the Great Depression. In the U.S., the five biggest banks have set aside roughly $25 billion to cover future losses.

Melbourne-based National Australia set aside A$807 million to reflect the potential economic impact of the virus, though warned that could triple in the worst-case scenario of a prolonged recession and persistently high unemployment.

“The banking sector has got some large issues with bad debts in the years ahead,” said George Boubouras, head of research at K2 Asset Management. “This is just the start.”

Bad-debt provisions vary widely depending on economic assumptions. In a V-shaped recovery, where the shock is short-lived, bad debts could double, according to Citigroup Inc. analyst Brendan Sproules. In a prolonged downturn, sour loans could almost quadruple, he said.

“If the banks are seen to under-provide the market may view them as unrealistic and imprudent,” UBS Group AG banking analyst Jonathan Mott said. “If they are seen to over-provide, the market may be equally shocked.”

Dividend Pain

National Australia also confirmed the fears of retail shareholders -- who hold about 50% of the banks’ shares -- of a hefty income hit, slicing its dividend to 30 Australian cents a share from 83 cents a year ago.

While Australia’s prudential regulator hasn’t banned payouts outright, it has urged lenders to curb dividends to conserve capital. That’s led analysts to slash expectations across the industry.

“We see only two realistic scenarios,” Morgan Stanley analyst Richard Wiles said -- either a “material reduction” or a complete suspension.

Cutting the dividend so severely was a “difficult decision,” but necessary for its long-term future, National Australia said.

“We have no expectations that the world will return to what it was at the start of this year,” Chief Executive Officer Ross McEwan and Chairman Philip Chronican said in a letter to shareholders. “Drawing on our experience during the global financial crisis, we know that taking early and decisive action to strengthen our business and support our customers is critical.”

McEwan, the former head of Royal Bank of Scotland Group Plc who only took charge of National Australia in December, and Chronican will each take a 20% pay cut for the second half of the year. Executive bonuses will be canceled.

Share Sale

National Australia’s move to bring forward its earnings and be first to tap the market for capital could also be a sign of things to come.

The bank will sell A$3 billion of stock to institutional shareholders at A$14.15 each, a 10% discount to the last traded prices. A further A$500 million will be offered to retail shareholders.

“NAB’s decision to bring this raising to market earlier than their scheduled results briefing suggests they wanted to hit the market before other raisings,” said Dermot Ryan, a portfolio manager at AMP Capital Investors Ltd.

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