National Australia Bank: Increased probability of AUSTRAC penalty
About the author:
- Author name:
- By Azib Khan
- Job title:
- Senior Analyst
- Date posted:
- 08 June 2021, 10:30 AM
- Sectors Covered:
- National Australia Bank (ASX:NAB) has been informed by AUSTRAC that AUSTRAC has identified serious concerns with NAB’s compliance with the AML/CTF Act 2006 and the AML/CTF Rules 2007. These concerns have been referred to AUSTRAC’s enforcement team, which has initiated a formal enforcement investigation.
- While AUSTRAC has said that it is not yet considering civil penalty proceedings, we believe today’s announcement increases the probability of such a penalty.
- Our target price is reduced (login to view). Recommendation downgraded to Hold.
Potentially chews into surplus capital
We had been flagging this risk based on NAB’s contingent liability disclosures; details of this can be seen on page 8 of our report titled Banking on further share price upside.
It is our view that NAB has been looking to maintain conservative balance sheet settings partly due to this AUSTRAC-related risk; this includes a conservative CET1 ratio target range of 10.75%-11.25%, a conservative approach to capital management and conservative loan loss provisioning.
NAB had a pro-forma CET1 ratio of 12.75% as at 31 March 2021, which equates to surplus CET1 capital (above a CET1 ratio of 11.0%) of ~$7.3bn.
Consequently, we see low risk of a capital raising to deal with a potential AUSTRAC penalty.
However, an AUSTRAC penalty would chew into the capital management potential.
CBA and WBC precedents tell us what to expect
AUSTRAC has a wide range of enforcement options available to it, including civil penalty orders, enforceable undertakings, infringement notices and remedial actions.
Commonwealth Bank of Australia (ASX:CBA) and Westpac Banking Corp (ASX:WBC) copped civil penalties of $700m and $1.3bn respectively, and in both cases APRA launched inquiries and imposed operational risk capital add-ons.
CBA and WBC also subsequently invested heavily into their risk management processes and systems which impacted the P&L in the form of higher operating expenses.
NAB can potentially experience similar consequences.
There is also the risk that if NAB’s management is distracted by AUSTRAC issues, then competitors – CBA, in particular – may be better poised to snatch SME market share from NAB.
Investment view and changes to forecasts
Due to the highly contingent nature of AUSTRAC-related issues, we are not yet building any penalty into our earnings forecasts.
However, we expect the uncertainty associated with this issue to weigh on NAB’s share price and we are consequently building the risk into our target price by allowing for a $5bn damage to NAB’s market capitalisation.
This results in our target price, based on our DDM valuation, being reduced (login to view).
Our recommendation is downgraded to Hold (previously Add).
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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.