Banks may follow NAB's defences

Analysis by Credit Suisse of Friday's announcement that NAB would set aside $830 million to protect against mayhem in the US housing market suggests other major Australian banks might follow suit.

The analysis says other banks might move to bolster their defences even though their exposures don't match NAB's. NAB's move was to protect US companies they sponsor, called "conduits", against potential losses to loan derivatives, called "collateralised debt obligations" (CDOs).

"NAB's $1.2 billion CDO exposure is the only large CDO exposure within the sector," the analysis says.

"However, more broadly, NAB's lead in aggressively re-stocking provisions . now creates a further precedent for others."

For nine years before the US credit market seized up last year, Australian banks progressively diminished the money they held as provision against the risk loans would not be repaid. Credit was easy to find and the risk of default was considered to be low.

When banks make provision against losses, they must put aside money that would otherwise go to profit. That means that, if other banks follow NAB's lead, they will have less money available for shareholders.

"We continue to see downside risk to bank estimates from deteriorating asset quality," Credit Suisse analysis says.

As investors consider the implications from NAB's provision, talk has also turned to succession at the bank.

Chief executive John Stewart is on a rolling contract until the bank's board, led by chairman Michael Chaney, chooses a new leader.

Mr Stewart has spent much of his tenure stocking the bank with potential replacements, including chief executive of Australian operations Ahmed Fahour, head of strategy George Frazis, nabCapital boss John Hooper and Cameron Clyne, head of New Zealand operations.

Last week's revelation would seem to have damaged Mr Hooper the most, as the companies holding the bad assets sit within his division. A bank spokesman would not comment on this.

Yesterday on ABC television's Inside Business program, Mr Stewart said more houses were for sale in the US than existed in Australia. As bad as that sounded, he said he believed worse was in store for the US economy.

"This is the bottom for us for housing in the US because we are now cleared out," Mr Stewart said.

However, Credit Suisse's analysis says NAB has done nothing to protect $4.5 billion in other assets held by conduits.

"As such, we do see a risk of further provisioning against conduit assets," the analysis says.

NAB says those assets are still performing, and require no provision.