Response to Australian Shareholders Association Statement
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National Australia Bank Limited (NAB) | 2:44 pm, Monday 17 November 2008 | NAB | 0.000 |
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The National Australia Bank Limited (NAB) Board strongly opposes the Australian Shareholders’ Association’s proposal to remove Mr Paul Rizzo as a director and recommends shareholders vote against the resolution.
Mr Rizzo is one of Australia’s most experienced financial services non-executive directors. He makes a significant contribution to the Board and his experience is invaluable
to the Company, particularly during the current times of financial market dislocation. The loss of Mr Rizzo from the Board with his experience in other major periods of banking volatility would be to the detriment of the Company.
Mr Rizzo was appointed a director in late 2004 for the purpose of adding banking industry experience to the Board. He has over 37 years experience in senior roles in the Commonwealth Bank, the Australian and New Zealand Banking Corporation and Telstra. Since then, his exceptional skills, experience and commitment have
made a major contribution to improving the Bank’s risk management practices.
The Australian Shareholders’ Association (ASA) has sponsored the resolution to remove Mr Rizzo from the Board because of his position as Chairman of the Board Risk Committee. We believe this action is against the interests of the shareholders the ASA purports to represent.
The ASA’s expressed concern is with the A$1.1 bn provision which the Company has made against its asset-backed CDO portfolio. While the Board regretted the need to make such a provision and can appreciate shareholders’ disappointment, we believe it needs to be viewed in the context of the turmoil currently besetting global financial markets.
The International Monetary Fund now estimates that worldwide losses on mortgage-related debt securities will total US$1.4 trillion (A$2 trillion, or A$2000 billion). The sequence of events flowing from these losses has led to the failure, absorption or restructuring of some of the world’s largest financial institutions.
NAB is in a very different position to these institutions. The
Company continues to report strong profits and is well
capitalised. The ability of NAB to withstand these external
forces is testament to the huge effort that has been made
over the last four years in the development of our people,
our culture and our risk systems.
In acquiring the conduit assets, the Bank was not engaging
in high risk or speculative transactions. Like most major
banks around the world, NAB used securitisation conduits
to raise funds for itself and clients in order to be able to
provide funding at competitive rates. The transactions were
backed by securities that were AAA rated by independent
ratings agencies.
These transactions were considered to be very low risk
and, in normal and foreseeable market conditions, they
were. The losses that have emerged in NAB’s portfolio, and
in the industry, have stemmed from events that seemed
inconceivable at the time the assets were acquired. These
events include the drastic decline in US housing markets,
with arrears and losses at levels not experienced in over
70 years, and the almost complete failure of the asset-
backed commercial paper market.
The decision of management and the Board to establish
provisions against these assets in May and July of this
year was a proactive and appropriate course of action in
response to the continued and rapid deterioration of the
troubled US housing market.
The assertion by the ASA that Mr Rizzo should be held
personally accountable for these circumstances is firmly
rejected by the Board and management of NAB. Since
2004, the Bank has made significant improvements in its
risk management framework, as recognised this year by
the Australian Prudential Regulatory Authority awarding
it advanced accreditation under Basel II. NAB is one of the
few banks globally that has received regulatory approval
as an ‘Advanced Bank’ for the management of credit risk,
operational risk, market risk and interest rate risk in its
banking book. These achievements are due in no small
part to Mr Rizzo in his role as Chairman of the Board Risk
Committee.
The Board is committed to ensuring that the Company’s
risk management systems continue to develop and improve,
including through extensive scenario analysis, portfolio
stress testing and ongoing reviews of credit, asset quality
and risk appetite. Mr Rizzo will play an important role in
this process.
The Directors of the Bank unanimously oppose the
resolution to remove Mr Rizzo from office as a director
and believe it is against the interest of the shareholders.
We strongly recommend that shareholders vote against
the resolution.
National Australia Bank Limited’s response to the
Australian Shareholders’ Association Statement
2008 National Australia Bank Limited ABN 12 004 044 937 AFSL 230686 68849A1108
Statement pursuant to Section 249P of the Corporations Act 2001
received from the Australian Shareholders’ Association National Australia Bank’s Risk Committee has failed to adequately consider the underlying value of, or risks involved in, the significant portfolio of collateralised debt obligations (CDOs) held by the bank. These assets have resulted in large provisions that have significantly reduced shareholder value.
Whilst the entire board is responsible, Mr. Paul Rizzo, as a director and chairman of NAB’s Risk Committee, should be held accountable for the weak risk management culture which has led to the loss of shareholder value and bank credibility in relation to these assets.
When announcing the $181 million charge against the value of its portfolio of CDOs in March 2008, NAB claimed to be avoiding high risk business.
In May, the chairman of NAB, Mr Michael Chaney, wrote to shareholders stating “The volatility in world financial markets has highlighted the importance of robust risk management systems and prudent capital management in financial institutions. The efforts of our people to strengthen our risk framework and balance sheet in recent years has been validated by the company’s resilience during the recent period of significant financial disruption.”
In July, the bank announced a further provision of $830 million against the value of this portfolio.
In September, NAB announced additional costs of $100 million in 2008, $60 million per year for 5 years and a lesser yearly amount thereafter to hedge against default of the CDO portfolio.
In addition, NAB still has a substantial portfolio of CDOs, corporate bonds and commercial mortgage backed securities that are neither provisioned nor hedged.
Shareholders will have an opportunity to hold Mr. Rizzo accountable for this failure of risk management by
supporting a resolution to remove him as a director of NAB at the forthcoming annual general meeting.
If you are unable to attend and wish to nominate the ASA as your representative at that meeting, please insert the name “Australian Shareholders’ Association” as your proxy on the proxy form and lodge it in accordance with the instructions shown on the form itself.
For further information on how the ASA will vote please telephone 1300 368 448 during business hours or visit www.asa.asn.au. Australian Shareholders’ Association is an independent not-for-profit organization dedicated to the protection and advancement of the interest of retail investors.
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