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NAB's turn to face AUSTRAC's wrath

Nathan Zaia  |  07 Jun 2021Text size  Decrease  Increase  |  
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We make no change to our forecasts or $26 fair value estimate for National Australia Bank following the announcement AUSTRAC has begun formal enforcement investigations into breaches of anti-money laundering and counter-terrorism financing (AML/CTF) rules.

The bank (ASX: NAB) has disclosed reported breaches in its financial accounts since 2017, and after what transpired with Westpac (ASX: WBC), we already assumed an investigation and ultimately a penalty.

It remains difficult to know the extent and seriousness of these breaches, but we have allowed for a penalty of about $700 million in our forecasts to cover breaches of anti-money laundering and misleading practices in financial advice.

NAB fell 3.16 per cent to $26.64 following the announcement

NAB Share Price

Source: Morningstar

We think there are two interesting statements made by AUSTRAC - the Australian Government agency responsible for detecting, deterring and disrupting criminal abuse of the financial system:

  1. First, AUSTRAC is concerned by ongoing non-compliance, which we find disappointing as we hoped the bank’s uplift in compliance spend and awareness of issues would have made these legacy issues by now. The bank has invested around $800 million to uplift financial crimes capabilities since June 2017.
  2. Second, AUSTRAC is not considering civil penalty proceedings at this stage. This could mean AUSTRAC is not considering a penalty based on what it knows right now. We think it is more likely the regulator is simply waiting to complete the investigation.
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After Westpac incurred a record $1.3 billion penalty, the uncertainty of the AUSTRAC investigations could weigh on National Australia Bank shares for some time. But with National Australia Bank shares down over 3 per cent, wiping almost $3 billion off the market capitalisation, it appears a pretty bleak outcome has already been priced in.

Importantly, we don’t believe the outcome of the investigation will lead to any material change to the bank’s ability to compete in both mortgage and business lending, or raise deposits. Commonwealth Bank (ASX: CBA) shares hit a record high last week, with AML/CTF breaches costing $700 million in 2018 now practically forgotten by investors.

is a Morningstar equity analyst, covering the banking and insurance sectors.

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