By Paulina Duran and Byron Kaye
(Reuters) - National Australia Bank Ltd (NAB) (AX:NAB) on Wednesday said it has almost doubled to A$2.09 billion ($1.40 billion) the amount of money set aside to repay customers for overcharged fees and unneeded insurance, sending its shares down as much as 3%.
The charge follows a government-mandated inquiry into the financial sector which found misconduct at major institutions, with NAB singled out over accusations that top management had failed to accept responsibility for wrongdoing at the bank.
Australia's third-largest lender subsequently lost its top two executives and has turned to former Royal Bank of Scotland Group PLC (L:RBS) chief Ross McEwan to rebuild trust.
NAB's unexpectedly large charge gets the bad news out of the way before the new chief executive starts in December but weakens the bank's capital position ahead of a regulatory deadline in January, analysts said.
"We had expected remediation costs to come at about A$500 million, so this is worse and means NAB's capital position its also slightly worse than expected," said banking analyst Azib Khan at stockbroker Morgans Financial.
NAB said it was setting aside the extra A$1.18 billion mainly because it expected to have to return about 55% of ongoing advice fees received by its network of self-employed advisers from 2009 through 2018.
"We understand that shareholders will be rightly disappointed," acting CEO Philip Chronican said in a statement. "However, we also recognize the need to prioritize dealing with these past issues and fixing them for customers."
NAB said the charge would reduce its cash earnings in the second half of fiscal 2019 by around A$1.12 billion after tax.
It also said the charge covered costs of its remediation program, higher refund rates for mis-selling consumer credit insurance, and about A$348 million incurred after its software capitalization policies changed.
CAPITAL UNDER PRESSURE
To ensure compliance with a regulatory requirement to have a core capital ratio of 10.5% by January 2020, NAB this year cut its dividend for the first time in a decade, by 16%. The ratio refers to funds set aside to weather an acute economic downturn.
Its core capital ratio was 10.4% at June-end, meaning the new charge again puts pressure on the bank to ensure compliance.
"NAB's CET1 ratio will now be running a finer line than we previously thought relative to APRA's 'unquestionably strong' benchmark of 10.5%," Khan wrote in a note to clients, referring to the Australian Prudential (LON:PRU) Regulation Authority.
The bank said it would disclose the impact to its core capital ratio when it announces full-year earnings on Nov. 7.
NAB's share price was down 3.1% after the announcement, while the broader market (AXJO) was 1.4% lower. Its stock recovered slightly to A$28.9, or down 2.46%, in early afternoon trading.