More than six billion Australian dollars (€3.48 billion) was wiped off the market value of National Australia Bank yesterday after mistakes at its US mortgage subsidiary forced the bank to make one of the largest provisions in Australian corporate history.
Shares in the Melbourne-based group - which owns National Irish Bank and Northern Bank - fell 13 per cent to A$28.90 after it said it would have to take a second, larger provision of US$1.75 billion (€1.92 billion) against HomeSide Lending, just two months after announcing a US$450 million write-down.
Mr Frank Cicutto, NAB chief executive, admitted the write-down was a "disaster" but said he would not step down.
He said the group, which is the largest bank in Australia, would continue in its attempts to expand in the UK. It has been looking at acquisitions there for the past year, adding that its widely expected share buyback was still an "open issue".
"The game is far from over in the UK," Mr Cicutto said. "We still have options to develop our core franchises of banking and wealth management there." The group owns Clydesdale and Yorkshire banks in Britain, in addition to the two Irish banks and previously expressed interest in Abbey National.
Speculation about the future of National Irish Bank will resurface if its parent's European expansion plan stalls. The bank has been hit by a number of damaging scandals in recent years and NAB had been expected to try and sell the Dublin-based operation.
There are signs that NIB is recovering, having posted a 21 per cent increase in pre-tax profits to €11.3 million (£8.9 million) in the six months to March - the first increase in recent years. However, a report by High Court-appointed inspectors due by the end of the year is expected to be highly critical of the way the Irish bank was run in the 1990s.
Analysts said the provision meant NAB's surplus cash would fall to less than A$2 billion and that confidence in its ability to manage overseas businesses had been shaken.
The bank said US$400 million of the provision resulted from the discovery at the weekend of an incorrect interest rate assumption in its valuation of the business.
NAB has been caught out by the multiple cuts in US interest rates, which have prompted consumers to refinance their loans in numbers that were not predicted by its valuation model.
HomeSide's lack of in-house distribution for its mortgages has also hurt it during the refinancing boom. NAB has been expected to sell HomeSide, a mortgage servicing business that it acquired in 1998, for some time.
But analysts say the process of disposing of HomeSide was accelerated after the sale this year of Michigan National, NAB's other US business. This led to a revaluation of HomeSide, which revealed the extent of its internal problems.
The bank again blamed the turmoil in the US mortgage market caused by the multiple rate cuts there for the bulk of HomeSide's difficulties. It said the market was experiencing "unprecedented uncertainty and turbulence".
On a pro forma basis, the value of the subsidiary will fall from US$4.4 billion to US$3.2 billion in NAB's books. "It is incredible that in a matter of weeks they could hit us with another provision and one of this magnitude," said a Sydney-based analyst.
But Mr Cicutto said the group's underlying business was solid. "If you exclude the profit on the sale of Michigan National and the HomeSide write-offs, underlying cash earnings are still expected to grow by about 10 per cent this year."
