NAB takes further A$830m charge for CDOs

Friday 25th July 2008

National Australia Bank (NAB), that nation's biggest lender by assets, will take an additional A$830 million provision for collateralised debt obligations exposed to the US home mortgage market.

The charge adds to the A$181 million it took in its first half ended March 31 on a portfolio of 10 CDOs of Asset Backed Securities and brings provisioning to almost 90%. NAB shares tumbled about 11% to A$27.68 on the ASX.

"This provision reflects the unprecedented conditions
in global credit markets and, in particular, the rapid deterioration in the US housing market," chief executive John Stewart said in a statement.

US sales of previously owned homes dropped to a decade-low last month, the National Association of Realtors said yesterday, indicating a housing recession in the world's biggest economy shows no signs of abating. NAB expects its CDO portfolio to deteriorate further and the provision announced today is based on a worst-case scenario.

Losses on the assets underlying NAB's CDOs amount to an average of just 2% across the portfolio, Stewart said today.

He defended the bank's decision to buy the CDOs as part of the development of NAB Capital's securisation business. At the time, the securities were rated AAA with the prospects of default assessed as being "extremely small."

Since then, bond insurers who helped underpin the top ratings have themselves had their credit ratings cut, including MBIA Inc. and Ambac Financial Group Inc.

CDOs package securities such as mortgage bonds and loans into new securities. They accounted for the biggest portion of the US$453 billion of asset writedowns and credit losses at the world's biggest banks since the start of 2007, Bloomberg News reported in July 22.

Stewart said the provisions won't erode the bank's fourth-quarter dividend payment and the bank "remains comfortably within its target capital ranges."

By Jonathan Underhill

Comments from our readers

No comments yet