citi paper

National Australia Bank Ltd (NAB.AX)
Structured Credit Bites Back
ƒæ We cut FY08e EPS by 14% ¡X or 2H08e by 28%, as a result of NAB¡¦s $830m
provision on Collateralised Debt Obligations within its conduits. Further, given
additional securities against which it has yet to take a material writedown, we
remain concerned about further downside. Retain Sell.
ƒæ Less than a ¡§conservative stance¡¨? ¡X In leaving $4.5bn of purchased corporate
securities and CMBS without a material provision, we believe management may
be seeking to ¡§ring-fence¡¨ this issue as purely a housing-related problem.
Given forecasts of broader economic downturns in major markets, we think
wider provision coverage of these exposures might have been more prudent.
ƒæ We had flagged structured credit exposures as a key risk ¡X Our note of 16 July
2008 highlighted ANZ and NAB as most at risk of further material provisions ¡V
citing potential writedowns of ¡§$1b to ~$2bn¡¨.
ƒæ Of peers, WBC & CBA have disclosed, with ANZ notably silent ¡X We remain
concerned about ANZ¡¦s ~$12bn of CDS exposure with monoline counterparties.
ƒæ M&A off the agenda ¡V With a credit rating on negative watch and credibility
damaged, NAB does not have a mandate to make acquisitions such as SGB or
HBOS in near term.
ƒæ Our bearish outlook certainly not ¡§scorched earth¡¨ ¡X While some investors have
viewed our recent earnings downgrades as a worst case scenario, we believe
NAB¡¦s announcement could put paid to that view. We think there is substantial
downside risk to our estimates, which in the event would put dividends at risk.