NAB has irritated retail shareholders by cutting dividends and announcing a $3.5 billion capital raising. But CEO Ross McEwan says decisive action is crucial.
The base case scenario sees economic contraction of 3 per cent this year along with unemployment of 11.6 per cent and house price falls of 10 per cent. The good news is a return to 3.4 per cent growth, unemployment falling back to 7.4 per cent next year and a modest recovery in house prices.
The bad news in the severe downside scenario predicts a much more protracted and punitive recession, with a further economic contraction of 2.5 per cent in 2021, along with unemployment up to 10 per cent and even bigger falls in house prices for a cumulative decline of 30 per cent over two years.
Ross McEwan delivers NAB’s interim results via a conference call on Monday. Supplied
But the most accurate prediction comes from understanding whats happening on the ground, particularly for all those small- and medium-sized businesses. For most, according to McEwan, the immediate outlook is chillingly clear after they saw their incomes totally collapse within a week.
“We have been talking to tens of thousands of businesses and they’re hurting badly, they’re hurting very badly,” he says.
That has already led to NAB deferring payments on loans for 34,000 businesses totalling more than $17 billion, in addition to 70,000 home loan deferrals on balances worth $26.5 billion.
Those numbers will certainly greatly increase given the extreme business conditions. The unemployment numbers are also artificially suppressed due to millions reliant on JobKeeper payments not being counted in the figures, but with many not having a real job awaiting their return.
NABs letter to shareholders from its CEO and chairman Phil Chronican also says bluntly the bank is telling business customers who were struggling before COVID-19 they may not survive this crisis, with or without bank support … ie no more credit.
For now, NABs $807 million extra provision for credit losses to reflect the impact of COVID-19 is more than double the $360 million it regards as required under its base case. But its also much less than the additional $3.83 billion provision needed should the Australian economy instead suffer its severe downside scenario.
NABs cash profit for the six months to March 31 was $1.44 billion, down 52 per cent compared with the same half last year and 26.6 per cent excluding large one off items. The coming six months will clearly be dire.
According to NAB, SME balance sheets are in stronger shape than ahead of the global financial crisis but the bank says this is still a very different event, making it hard to rely on that experience in judging any recovery.
Obviously, businesses in sectors such as discretionary retail, entertainment, tourism and accommodation have been hit much harder than, for example, those in agriculture.
Their ability to avoid drowning in a financial tsunami will be heavily influenced by how long the economy remains shut down, as well as the usefulness of various government support programs.
McEwan describes the shutdown measures as necessary and the government assistance as incredibly helpful. But the tone of alarm in business about the deteriorating health of the economy is jumping dramatically, even as the number of confirmed new COVID-19 cases steadily declines.
In NABs case, McEwan makes use of the familiar motto of preparing for the worst while hoping for the best. That meant taking decisive action sooner rather than later, no doubt also informed by McEwans personal history in rescuing a desperate Royal Bank of Scotland after the GFC.
And while the timing may have been unexpected, NABs decision to cut its interim dividend by nearly two-thirds to 30¢ is hardly surprising. This not only follows APRAs strongly worded suggestion that banks should reconsider their dividend payments, but also the accumulating evidence of economic devastation.
McEwan describes it as a question of balance given the importance of dividend payments to retail shareholders.
Other banks can be expected to follow NABs lead on cutting dividends and increasing provisioning, contributing to the fall in their share prices.
The size and timing of yet another big COVID capital raising was more surprising, particularly to NABs peers after it jumped ahead of any announcements they were planning. ANZ is due to report its results on Thursday and Westpac next Monday.
The $3 billion institutional placement will be accompanied by a share purchase plan to raise a further $500 million at an 8.5 per cent discount to the close last Friday. Retail shareholders can apply for up to $30,000 of shares, although NAB can choose to raise more or less than $500 million.
The level of dilution certainly wont please retail shareholders seeing dividends cut and unable to take up the discounted offer. But McEwan says his view has always been once a decision is taken, get on with it.
Just what will be left for many businesses to get on with is harder to predict. For bankers too.