NAB announces 2 large cost items that will hurt its HY report

National Australia Bank Ltd (ASX: NAB) is one of Australia’s big four banks and it’s one of the biggest companies in Australia. Any cost that counts as ‘significant’ or ‘material’ will end up costing hundreds of millions of dollars due to NAB’s size.

NAB is going to release its half-year result on 3 May 2018, but it has gotten some bad news out of the way first by announcing two key impacts early.

The first impact is restructuring-related costs of $755 million, which is reduced to $530 million after tax. NAB said that this will be included in the cash earnings but will be separately identified. Management said that it had already outlined that these costs were upcoming because it relates to an acceleration of the bank’s strategy, which mainly relates to reducing the workforce.

Management had initially guided that the restructuring costs would be in the range of $500 million to $800 million, so the cost is at the upper end of the range.

CYBG PLC CDI 1:1 (ASX: CYB), or Clydesdale and Yorkshire Bank (CYB), announced a few days ago that it expects to increase its provision for legacy payment protection insurance (PPI) costs at 31 March 2018 by £350 million.

Under the terms of the conduct indemnity deed with NAB, CYB expects to use the remaining undrawn capped indemnity amount of £148 million. NAB expects to report this as part of its discontinued operations (non-cash earnings) as it has done in the past. NAB’s ASX release said that it will have no impact on NAB’s Common Equity Tier 1 capital.

Foolish takeaway

Costs are usually never a good thing for a bank. NAB is taking the right steps by reducing its workforce, but the PPI scandal shows how vulnerable banks can be to fines, penalties and refunds from scandals. That’s one of the main reasons why I avoid investing in banks.

NAB may have a low price/earnings ratio and a large dividend yield but I don’t think it’s a buy today.

I’d much rather buy growing blue chips for my portfolio like these long-term winners.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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