BNZ parent reveals $1.7bn loss

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National Australia Bank, the owner of BNZ,  revealed yesterday that its A$18.4 billion ($23.8 billion) portfolio of troubled credit instruments had caused losses of A$1.3 billion ($1.7 billion) over the past two years.

It was NAB's first disclosure of the damage done by the holdings.

NAB warned that the portfolio was expected to take years to wind down, but insisted the health of the assets had stabilised amid signs of a recovery in the global economy.

Like banks around the world, NAB has been grappling with its exposure to synthetic credit instruments. NAB's collateralised debt obligations are mostly backed by infrastructure and commercial property loans across Europe.

About 60 per cent of NAB's portfolio is considered low-risk but the remaining exposure to junk or sub-investment grade rated instruments has kept investors nervous.

NAB set up a new business unit called specialised group assets, which will hold the troubled CDOs.

Restated accounts showing earnings across NAB's various businesses over the past two years reveal the CDO portfolio's steep losses.

The accounts show a loss of A$577 million last year, mostly on write-downs and bad debts. In 2008, at the height of the crisis, specialised group assets returned a loss of A$748 million.

The losses were previously taken across other parts of NAB's business, so the bank's full-year cash profit of A$3.84 billion for last year and A$3.91 billion a year earlier are unchanged.

NAB executive general manager Peter Thodey expects the portfolio to take about eight years to wind down, with its exposure expected to fall to A$10 billion by 2013.

The final maturity of the portfolio would depend on whether the underlying loans could be refinanced or other assets sold.

"Clearly we would like to improve the run rate if possible, we're working on various strategic options to do that" he said.

"The US and UK economies, while fragile, have stabilised in recent times. Unless we see a W-shaped recession we're hopeful of maintaining a portfolio credit quality somewhere near where we have it today."

In late 2008, NAB spent hundreds of millions of dollars taking protection against A$1.6 billion of the highest-risk CDO exposures.

- © Fairfax NZ News