Frank Cicutto’s NAB and his management team has set a cracking pace to
open the New Year. Frank’s opening play is another fine value-added
capital management mess by NAB’s risk and financial management crew.

At 1.42 pm, Tuesday 13 January 2004, according to the ASX company
announcements, the NAB announced to the market that National Australia
Bank Limited has identified up to $180 million in pretax trading losses
relating to “unauthorized trading in foreign exchange options” and
“four employees have been suspended in relation to this trading”.

Unnamed  banking analysts were reported on Sky News as saying the
$180 million was small in relation to the NAB’s market capitalization
and appeared to shrug it off.     

Depends of course what you mean by small, how you calculate the real
impact, and what asteroid the bank analysts live on. On past
performance, they probably wouldn’t know if a duck was up the NAB
unless it flew away!

A $180 million loss will translate to a net after tax loss of shareholders’ funds of  $126 million.

This would have supported balance NAB sheet lending of around 16 times,
that is, about $2 billion. The NAB makes an after tax profit of about
1% on its lending portfolio.

This latest fiasco will therefore cost the NAB’s shareholders about $20
million of after tax capital, each year, compounding, forever. See how
that tallies up, after say, 5 years, and the impact on NAB’s growth?
Makes preservation of bank capital a highly prized goal, doesn’t
it?  

The NAB’s shares closed at $30.08, down 47 cents on previous close,
after earlier trading up to $30.82.      

That’s about $700 million in market capitalization down on the previous
day and a whopping $1.1 billion, that’s BILLION, down on earlier
trading.

Small eh?

The NAB’s market capitalization  typically trades at about twice
shareholders’ funds. A hit of a net $126 million on the NAB‘s
shareholders’ funds should typically translate to around $250 billion
off the market capitalization. The market has marked down the NAB stock
by more than a whopping four times that amount.

Why is that? One answer is that the market has put serious question
marks on the NAB’s board and senior management under Cicutto.
Translated, this is a serious loss of market confidence in the NAB.

Billion Dollar question marks and loss of confidence. They make
Cicutto’s very handsome option and compensation package look derisory.
Maybe an incentification pay rise for Cicutto is needed? Nothing would
surprise at 500 Bourke Street.  

But seriously, who is actually in charge of the NAB’s currency trading
operations. Who is responsible and accountable for husbanding the
bank’s highly geared capital? Will the “Homeside formguide” be rolled
out again to completely exonerate extremely highly paid executives?

Last week, reports appeared in the Australian Financial Review of
research by CS First Boston and Goldman Sachs that showed an alarming
chart with the NAB ranked as the worst performing major bank in the
world, and with questions raised over its capital accounting
methodology.   Little wonder since under Cicutto, the NAB’s
share price is about where it was 5 years ago when he was elevated to
CEO. 

History has shown that the market cannot rely on bank analysts to give any warning of an impending bank meltdown.

NAB’s recently completed buyback of 85.5 million shares was greeted by
general applause and Cicutto pocketed a handsome compensation hike. At
an average share purchase price of $33.06 on 85.5 million shares, these
“capital management” efforts by NAB have produced a book loss of almost
$3 per share, or more than a quarter of a billion dollars! This is
after pouring 2.8 BILLION of capital into the market to prop up the NAB
share price which in fact has collapsed!

And even with a buyback of almost 6% of its outstanding stock, NAB
struggled to make its 8% minimum growth target in 2003. And as an
encore, the NAB has backed up again to buy back another 25 million of
its outstanding stock, again against a backdrop of market applause.
Makes you wonder, doesn’t it?

This time, the real question is whether the microscope will focus on
NAB’s Board of Directors, CEO Frank Cicutto, risk management chief
Chris Lewis and CFO Richard McKinnon and what is really happening
inside Australia’s biggest bank.   

Shareholders could be excused for thinking the Three Stooges could do better, and maybe they could. 

One thing is for sure. Shareholders get the boards and managements they
deserve. And if they can’t recognize when the rear end of their company
is on fire, they probably can’t even smell smoke. 

Peter Fray

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