nab to take 400ml hit over cdo writedowns

NAB to take $400m hit over CDO writedowns
September 30, 2008
National Australia Bank will take at least a $400 million hit to its cash earnings spread over the next 10 years from long-term hedges taken to reduce the risk of writedowns associated with its $1.57 billion synthetic collateralised debt obligation (SCDO) portfolio.

After the market closed today, the bank announced it will take a $100 million hit to its fiscal 2008 cash earnings from a hedge entered into with a large, global bank counterparty.

The hedges will "substantially reduce the likelihood of loss'' arising from the SCDOs, and allow the bank to withstand corporate default rates "equivalent to the worst of those experienced over the past 90 year'', NAB said in a statement.

Another hit to cash earnings amounting to at least $300 million in ongoing hedge costs will occur as NAB incurs hedge costs of around $60 million per annum for the next five years, and a lesser amount thereafter.

The terms of the hedges vary and are between five and 10 years, NAB investor relations manager Nehemiah Richardson told AAP.

"The costs step down quite dramatically after five years,'' he said.

Brokers JPMorgan and Citigroup have previously flagged expected write-downs of between $500 million and $1 billion for both NAB and rival ANZ Bank.

JPMorgan says NAB could face a write-down of up to $1.5 billion from its $4.5 billion worth of exposures to conduits, which are currently held in the hold to maturity portfolio despite likely trading well below book value.

However, it is the SCDOs, spread over 400 global corporations, that are of chief concern to Citi.

Losses begin at a 4% default rate, with the entire principal being lost if defaults touch 10%, Citigroup said in a note to clients earlier this month.

NAB conceded that the market value for the SCDOs had halved amid current financial market turmoil.

The SCDOs are not marked to market, but are held on a hold-to-maturity accounting basis.

AAP