The National Australia Bank (NAB) reported pre-tax profits of $1.4 billion on Friday. That's a lot of money. But it was $250 million that got the market's attention. The stock was down as much as 3.5% during the day before closing down 2.71%.
The $250 million in question is NAB's provision for future losses. The company called it an, 'economic cycle adjustment'. That's a polite way of saying it's worried that growth in Australia, Britain, and around the world will be lower in 2013 and losses on loans may be higher. NAB is saving up for a rainy day.
CEO Cameron Clyne said, 'In the last few months, falling commodity prices and weaker global growth prospects, specifically in China, have reduced growth...Considering the increased level of uncertainty, we feel that increasing the economic cycle adjustment on the collective provision is a prudent measure at this time.'
That sounds prudent enough. The trouble for NAB is that it reminded people of what happened last time the company set aside money for future losses. The initial provision to deal with losses on US-subprime related collateralised debt obligations (CDOs) was $181 million. And then later, $1.1 billion, which is quite obviously a lot more than $181 million.
NAB is currently in the middle of a class action suit over that little blowout. The suit alleges NAB misled shareholders about the real size of its exposure to CDOs. But really, this issue goes beyond NAB. Australia has an oversized banking sector relative to its economy. This a little wisp of smoke now. The fire later should be a doozy.
Regards,
Dan Denning
for The Daily Reckoning Australia
From the Archives...
China's GDP Growth Ponzi Scheme
19-10-2012 - Greg Canavan
An Australian Property Boom and Bust all at Once
18-10-2012 - Greg Canavan
The Fed's New Stooge
17-10-2012 - Bill Bonner
Discordian Religious Advice for the Investor
16-10-2012 - Nick Hubble
Electric Cars and Platinum Mines
15-10-2012 - Dan Denning
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by shortchanged on 23 October 2012:
So,..every thing is on track then,...for now.
Comment by Scott jeffers on 23 October 2012:
Same thing has happened in ireland. I am an ex pat, living here 12 years. Irish banks were best performing in EU in 04-06 and AIB shares valued at 30 euro.Now, after property crash value approx 0.70- 1.20 per share and sovereign had to absorb. Aussie top four on exact same course!
Comment by nicholas on 24 October 2012:
LOL