National Australia Bank Ltd (NAB), the nation's top lender, booked another A$830 million ($798 million) in losses from its exposure to US mortgages, sending its shares down as much as 15 percent.
NAB blamed the worsening global credit squeeze for the higher provisions and said it had now set aside enough to cover nearly 90 percent of its total asset-backed collateralised debt obligations (CDOs) portfolio, but some investors reacted angrily.
"One hopes there is nothing more lurking," said Eric Betts, equities strategist at Nomura Australia. NAB insisted the write-off was based on a worst-case scenario of what it said was a "meltdown" of the US mortgage market, but fund managers turned on management at a briefing and questioned the rest of the bank's securitised assets.
"This incident is a direct result of the meltdown going on in the US housing market. (That) has been further highlighted in recent weeks with foreclosures mounting and recovery rates from securities in some categories falling to less than half of the loan value," Chief Executive John Stewart told a briefing. (See for the latest US housing story)
"It's very hard to say to people that buying 'AAA' assets was reckless," Stewart said, referring to how even some of the highest-quality rated debt securities have succumbed to the property credit crisis. "If we wouldn't invest in 'AAA' assets, then quite frankly we wouldn't invest in any Australian company, we wouldn't lend to any of them."
NAB said it expects a profit impact of just under A$600 million from the provision, which could wipe out nearly a quarter of its second-half earnings based on market expectations. Ahead of Friday's announcement, analysts had estimated NAB would earn core second-half profit of about A$2.25 billion.
But NAB said its final dividend would not be affected by the new provision and that it would stick to a payout ratio of around 70 percent of earnings. Investors have been lured to Australian banks due to their attractive dividend yields. NAB shares fell as much as 14.6 percent to A$26.22 before ending down 13.5 percent, their biggest one-day percentage fall since October 1987. That compared with a 3.4 percent fall in the wider market
"It's certainly very disappointing in light of what we were told at the half-year results," said Mark Nathan, fund manager with Fortis Investment Partners, before a highly charged briefing where analysts repeatedly questioned the bank's asset quality.
Australian banks have largely avoided the worst of the global credit crisis but bad-debt charges are rising as many highly geared Australian firms have struggled to refinance their debts and economic growth is expected to slow.
NAB assured investors that its other businesses were faring well. "The reliasable value of many (US) houses is about 45 percent of the mortgage," Mark Joiner, NAB's Group Chief Financial Officer told an analysts briefing.
"We are not going to hit a panic button and assume that Aussie houses sell at 50 percent of their value." NAB said total provisions against its holding of distressed US mortgage-backed securities had risen to A$1.01 billion, the highest among Australia's top four lenders.
Citigroup estimates Australia's three other big banks, Commonwealth Bank of Australia Ltd (CBA), Australia and New Zealand Banking Group Ltd (ANZ) and Westpac Banking Corp, to have a total conduit exposure of A$15.4 billion in various forms of credit.
Westpac and ANZ said later there was no earnings impact due to their CDO exposure, and CBA said it had no direct exposure to CDOs. When asked about a UK newspaper report that NAB and US investment bank J.P. Morgan were interested in buying assets of British bank HBOS, Stewart said his firm would have made a public statement if it was active in such a consortium.
"We're not sure this is a clever time to make acquisitions," Stewart told a media briefing. NAB purchased the CDOs as part of its plans to provide customers with access to international debt markets. It stopped buying the CDOs in March 2007.
The bank conceded the downturn in US, UK and European economies could affect Australia, and said demand for credit in its home market had slowed very quickly. "There are no real signs of stress in our other banking businesses," Stewart said, adding there were no plans to mount a rights issue and that the latest provision might only dent its tier-one capital ratio by around 20 basis points.
But the market was sceptical. Australian banks' funding costs have risen amid the global credit squeeze, squeezing their margins and prompting them to lift their mortgage rates to around 9.5 percent. Core inflation in Australia has accelerated to its fastest annual pace in 17 years as the cost of fuel, financing and rents all climbed, suggesting interest rates would stay high for some time to come, crimping loan demand.
NAB's announcement pulled down rest of the banking sector. Second-ranked Commonwealth Bank of Australia Ltd fell 6.8 percent, Australia and New Zealand Banking Group Ltd, the third-biggest, lost 8.7 percent and Westpac Banking Corp dropped 3.1 percent.