The National Australia Bank Ltd (ASX: NAB) share price will be one to watch on Monday after it followed the lead of rival Westpac Banking Corp (ASX: WBC) by announcing that its first half earnings will be impacted by a number of charges totalling $1,144 million after tax.
What did NAB announce?
According to the release, the company's first half earnings will be impacted by a net increase in provisions for customer-related remediation matters of $268 million before tax. This equates to $188 million after tax.
These include adviser service fees charged by NAB Financial Planning. Provisions have been increased primarily to reflect a higher assumed refund rate of 40%, compared with 28% at September 30 2019.
The remediation charges also include increased Wealth-related remediation program costs and the progression of work on banking-related matters.
In addition to this, the banking giant has made a change to the application of the software capitalisation policy. It has lifted the minimum threshold at which software is to be capitalised from $2 million to $5 million. This will reduce NAB's capitalised software balance by $1,056 million and reduce its earnings by $742 million after tax.
Finally, the company is making an impairment to the carrying value of its investment in MLC Life of $214 million (before and after tax).
Management notes that this has been driven by a challenging operating environment within the life insurance industry. This impairment represents a 37% reduction in the carrying value of this investment.
Overall, the net increase in the provision for remediation of $188 million after tax is expected to reduce its Common Equity Tier 1 capital (CET1) ratio by approximately 6 basis points. However, the change to the software capitalisation policy and impairment of NAB's investment in MLC Life have no impact on the Group's CET1 ratio.
NAB is scheduled to release its half year results in just over two weeks on May 7 2020.
