Time to grab some NAB shares
July 27th 2008 08:22
NAB CEO John Stewart, who is 'a rare blend. He is as engaging and entertaining as he is effective' - according to The Australian, July 26, 2008
It was a bad day on Friday for National Australia Bank, its management and its shareholders, all of whom took a hammering. And now, while the media ask questions about competency and transparency, while institutional investors and analysts work over the weekend adjusting their financial models, and while mums and dads who haven't baled out yet consider whether to do so, I suggest you and I let them all get on with their finger-pointing and number-nudging and nail-chewing and quietly buy a few NAB shares as soon as the stock market opens tomorrow.
In case you missed the news, the NAB share price was savaged by investors on Friday after the bank announced a provision of A$830m against its portfolio of collateralised debt obligations. The portfolio effectively represents NAB's exposure to the US home lending crisis, and following a provision of $181m in the previous reporting period, NAB has now written off A$1.01 billion of the portfolio's total value of $1.2 billion.
Friday, in fact, was the end of an ordinary week for NAB. On Tuesday it announced its withdrawal from negotiations to buy the Australian operations of investment bank ABN Amro. On Thursday it announced a $200 million bond deal which should have been positive except that, come Friday, investors were screaming that it was unfair to push a bond deal one day and release major bad news the next.
That's a fair accusation, and this article is not about to suggest that NAB has gone out of its way to behave with flawless virtue and honour. Retail banks don't tend to behave that way.
What I would like to say is that NAB has behaved pretty much exactly the way one would expect a major retail bank to behave in the circumstances, except it has arguably been a little more cautious and prudent than most. And caution and prudence are very much something the market and shareholders expect of their big banks.
What NAB has actually been guilty of is making a conservative accounting decision. It is convinced the US prime loan situation - something entirely out of its control - will deteriorate further, and it has made prudent adjustments to its earnings forecasts.
The worst that can be said is that the announcement came as a surprise to shareholders and to the market, but such announcements invariably are and it is difficult to see how NAB could have handled it any differently. Or, indeed, why it should have.
The best that can be said - and as far as I can tell, this is the only attempt to put the affair in a positive light that you will see anywhere this weekend - is that NAB has virtually wiped its exposure to the US sub-prime crisis. That it has done so early and aggressively leaves it open to questions of why, but now one of two things will happen. One, NAB's fears about US mortgages will be realised, and the value of its portfolio will indeed tumble, and eventually people will reverse the criticism and ask other big banks why they didn't have the foresight of the NAB. Or, second, the sub-prime crisis will stabilise and the value of NAB's portfolio (which continues to pay interest and which has lost only 2% of real value so far) will not fall through the floor and NAB will have a few hundred million, perhaps even $1 billion, sloshing around.
Financial institutions have to invest funds, and just like you and me they have to spread things a bit in the name of risk management. Given the scope of NAB's activities, it is to be expected that some investments will outperform expectations and some will underperform. And as sure as the sun will rise tomorrow, some will fail, occasionally spectacularly.
NAB's surprise writedown of almost $1 billion sounds big, but it in no way threatens the stability of the bank (if it did, NAB would not have had the confidence to make the announcement in this way). NAB will still announce a profit for the current quarter and the dividend is not expected to be affected.
Even if the mortgage portfolio does become worthless, this will, in time, be just another blip on the balance sheet. NAB will continue doing business in a prudent, cautious and less than flawlessly transparent manner, just as its shareholders like it.
And the share price will recover the 13.5% it lost on Friday. It may go down further first, and it may take a few days or even longer to recover fully. But it may also bounce back first thing Monday. Get in quick if you don't want to miss out.
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