National Australia Bank Limited (NAB) has announced an additional provision of $830 million to its portfolio of 10 collateralised debt obligations of asset backed securities (ABS CDOs). Shares in Australia's second largest bank, based on market cap, opened 12% lower on the news.
These ABS CDOs contain US residential mortgages and are held in international conduit facilities used to finance customers.
The bank said the $830 million was in addition to the $181 million charge taken in the group's half year results to 31 March 2008 and nearly 90% of the portfolio was now provisioned.
CEO John Stewart said the provision reflected the unprecedented conditions in global credit markets and, in particular, the rapid deterioration in the United States housing market.
"Earlier this year CDOs were subject to rating agencies' downgrades that also affected thousands of similar investments, at which time appropriate provision was made," Mr Stewart said.
"The continued deterioration in the US housing market has been further highlighted in recent weeks with foreclosures mounting and recovery rates from security in some categories falling to less than half of the loan value."
Mr Stewart added that the final dividend would be unaffected by the creation of this provision.
"NAB remains comfortably within its target capital ranges," he said.
SHAW Stockbroking senior analyst David P McDonald said that although the current analysis by NAB indicated only a loss of only 2%, they expected this may get worse.
"They have effectively written the whole exposure off," Mr McDonald said.
Meanwhile, Mr Steward said that NAB belived it was prudent to take a full provision now, based on a worst case scenario."
"We have a specialist team based in New York that will continue to investigate all avenues for mitigating losses, including the effects of the recently passed American Housing Rescue and Foreclosure Prevention Act of 2008. No benefit for these is factored into the provisioning decision at this time," he said.
"The remaining conduit assets are all performing in line with our expectations for corporate lending and will continue to be closely reviewed given the current economic cycle."
Mr Steward outlined that the purchase of CDOs was part of the initial development of nabCapital's securitisation business, providing access to international debt markets for its customers.
NAB's purchase of this type of ABS CDO ceased in March 2007.
"The CDOs were all rated AAA when liquidity facilities were put in place as part of the establishment of our securitisation business," he said.
"These were sound commercial and credit decisions given the market and ratings data available at the time. The likelihood of default was independently assessed as being extremely small."
He added that all relevant processes were considered robust and were properly followed at the time.
At 1008, NAB was trading down $3.85 or more than 12% at $26.85.