Analysts debate the meaning of increased provisions at NAB

Analysts were divided in their response to National Australia Bank's decision, announced on Friday, that it would add $A250 million to its collective provision as at September 30. While some argued the bank was addressing issues that are specific to its business, others said the news was a harbinger of a wider downturn.

NAB increased its provision as a "prudent response" to current economic conditions. It said: "The Australian economy remains comparatively strong but lower global growth expectations, divergence in business conditions across sectors and low levels of consumer and business confidence have reduced the outlook for economic growth in 2013.

"Furthermore, in the last three months, conditions in the United Kingdom have deteriorated and economic recovery is likely to be slower than previously expected."

Citi Research issued a note in response to the announcement, saying: "We see this as primarily a reflection of ongoing UK economic weakness and shortfalls in collective provisioning relative to peers. It is not a broader sector problem."

Credit Suisse took a similar line, saying: "NAB faces the risk of persistent earnings downgrades throughout the likely multi-year UK repositioning process. We would have preferred to see a much larger provision charge to immunise its UK exposure."

However, Morgan Stanley said that the increase in provisions reflected problems that could affect all the banks. It said: "The top-up suggests that conditions in problem industries remain tough. NAB is heavily exposed to business banking headwinds, with 45 per cent of earnings coming from business banking.

Macquarie said the additional provisioning was related to NAB's exposure to the slowdown in the mining states. It said: "NAB, followed by Westpac, has grown the fastest in Queensland and Western Australia. We were of the opinion that the uptick in bad and doubtful debts was a 2013 story, it appears it will be felt earlier than expected."

Merrill Lynch said: "Business confidence remains fragile and some banks are reporting more downgrades than upgrades in their business portfolios, a shift which we think could lead to gradually higher bad and doubtful debts."

A couple of analysts downgraded NAB; Merrill Lynch dropped its rating to Underperform and Macquarie downgraded its rating to Neutral.

Morgan Stanley maintained an Equal-weight recommendation, Credit Suisse maintained its Neutral recommendation and JP Morgan maintained its Underweight rating.

The only Buy recommendation among the reports sighted by Banking Day was from Royal Bank of Scotland.