Analysts Downgrade Nab Forecast Over Portfolio Fears

The Age

Thursday October 2, 2008

Eric Johnston, With Michael West

THE focus has switched to what else remains in National Australia Bank's troubled $4.5billion portfolio of complex credit instruments.

This comes after NAB secured a hedging deal aimed at protecting itself from further write-downs against the most risky of the portfolio's assets.

Analysts believe a further $250 million could still be written down from $2.9 billion of credit instruments not covered by the hedging deal, given the holdings remain exposed to private equity loans and commercial property, which continues to come under pressure.

Analysts yesterday trimmed their NAB earnings forecasts by more than 2% for this financial year, with the bank predicted to take a $100million profit hit this year and $60 million in each of the next five years.

NAB has taken protection against $1.6 billion of the highest-risk collateralised debt obligation exposures, mostly backed by US and European corporate loans.

NAB declined to name the bank that is acting as a counterparty to the transaction. But speculation yesterday centred on JPMorgan or Deutsche Bank agreeing to take on the trading risk and then on-selling this to several large investors.

Counterparties are coming under focus following the near-collapse and recent bail-out of insurance giant American International Group, with investors looking for comfort that payments will be made during default.

Brokerage Citigroup said the hedging contract, while expensive, had removed one of the major reasons why NAB shares had been trading at a discount to its rivals.

"While the eventual total cost of mitigating this risk will prove expensive, representing more than one-third of the face value of the $1.6 billion investment, the associated damage to the bank's market capitalisation is likely to have been many multiples of this," Citigroup analyst Craig Williams said.

Treasurer Wayne Swan yesterday said the Australian banking system was sound and regulators, including the Australian Prudential Regulation Authority, understood the complex exposures of the nation's banks.

"In fact our regulators have been working with our banks to declare those exposures - that has been part and parcel of our response to this crisis, which began, after all, last August," Mr Swan said.

NAB this week ruled off its accounts for this financial year. Analysts are tipping NAB's annual cash earnings could fall by as much as 6% when it hands down its results later this month.

Separately, Suncorp-Metway said it was pushing ahead with a review of its business, with details about likely job cuts expected to be released over the next few weeks. -- With MICHAEL WEST

© 2008 The Age

Back to News Index | Back to Home