NAB to take AU$1.14 billion hit to its first-half net profit

An expected AU$1.06 billion reduction in capitalised software balance is partly to blame.

National Australia Bank (NAB) has announced net profit for first half year 2020 (1H20) will be reduced by AU$1.14 billion, partly due to changes the bank has made to the application of its software capitalisation policy.

The bank explained how following a review of NAB's application of its software capitalisation policy, changes have been made to increase the minimum threshold at which software is to be capitalised from AU$2 million to AU$ 5million.

As a result, NAB believes the change applied will reduce its capitalised software balance at March 31 by nearly AU$1.06 billion and its 1H20 cash earnings by AU$742 million after-tax.

"This reflects a change in approach to managing projects, which is intended to uplift business accountability for projects less than $5 million," NAB said in a statement on Monday morning.

Amortisation saving in 2H20 is forecast at AU$154 million. The bank said this change will be offset by investment expenses previously capitalised.

A net increase in provisions for customer-related remediation matters of AU$188 million after-tax has also contributed to the revised net profit amount, NAB reported.

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The revised numbers follow a week after rival Westpac announced that new and expected provisions and asset write-downs would total AU$1.43 billion and result in a reduced first half year 2020 net profit after tax.

Westpac detailed how part of the total expected provisions included AU$1.03 billion that would be related to Australian Transaction Reports and Analysis Centre (Austrac) proceedings.

Specifically, the bank has set aside AU$900 million to pay for expected fines, after the anti-money laundering and terrorism financing regulator applied to the Federal Court of Australia alleging Westpac was involved in "systemic non-compliance" with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 on over 23 million occasions.

Meanwhile, approximately AU$130 million in costs will be linked to the bank's Austrac response plan, which has since seen Westpac commit AU$25 million to improve cross-border and cross-industry data sharing and analysis as one of the "immediate fixes" as part of its plans.

Westpac's newest CEO Peter King, who stepped into the role after Brian Hartzer's departure, said the bank remains committed to fixing processes that led to Austrac's anti-money laundering investigation of the bank.

"In addition to closing relevant products and recruiting an additional 200 people in financial crime and compliance, I am putting in place a clearer accountability regime that will speed up decision making, improve implementation and more clearly define responsibility and its associated risk management," he said.

Westpac's earnings will also be impacted by a AU$70 million write-down on "software costs and physical assets", which it blames on COVID-19.

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