National Australia Bank Employs Mark to Fantasy to Mask Losses

| About: National Australia (NABZY)

It seems NAB is employing the same mark to fantasy accounting treatments as US banks. According to law firm Maurice Blackburn, NAB (OTCPK:NABZY) failed to disclose the true value of its exposure to toxic CDOs.

[click images to enlarge]

NAB Jul09
From the Daily Telegraph:

NAB’s toxic debt digging a $4bn black hole

NATIONAL Australia Bank could be prompted into a capital raising to cover losses of almost $4 billion from its portfolio of toxic debt that is being investigated by the nation’s prudential regulator, analysts said.

The Australian Prudential Regulation Authority has been in talks with NAB for two months over the most appropriate method to value the $17 billion toxic debt portfolio.

The structured credit portfolio was held in nabCapital and includes corporate bonds, commercial mortgage backed securities, collateralised debt obligations (CDOs) and synthetic CDOs (SCDOs)..

NAB booked a $1.441 billion loss provision on CDOs in the portfolio since March 2008 but has yet to mark the value of the instruments to market, which could result in more writedowns.

So far, the provisions have been set by NAB’s internal credit risk ratings..

It would be surprising to see the Australian regulatory authorities force banks to mark to market since their US counter-parties have decided to bury their collective heads in the sand. However, even if NAB doesn’t mark to market, risks remain that toxic assets will need to be further written down to some degree. That of course means more capital raising and/or dividend cuts, which in my opinion is likely anyway for all the major banks in the next 12 months.
Impaired Assets Mar09
Consider the latest data on impaired assets in the quarter ended March 2009 released by the RBA last month. Impaired loans as a percentage of total loans now stand at 0.95%, the highest since June 1996. Still, by historical standards this is not terrible and certainly not anywhere near the levels of the early 90’s, but the trend is not the friend of the major bank’s.

Rising impaired assets means more write-offs which means more capital to absorb those write-offs. Throw in some dubious accounting treatments on toxic assets and you have significant downside risk here for NAB.