Rogue trades deepen NAB confidence crisis

  • Business
  • Thursday, 15 Jan 2004

SYDNEY: National Australia Bank Ltd (NAB) faces a hard struggle to regain investor confidence after recent rogue trading losses of up to A$180mil highlighted severe risk management problems, analysts said yesterday. 

The fact that mounting losses on unauthorised foreign exchanges trades failed to trigger alarm bells at Australia's biggest bank has perplexed many investors more than the size of the loss, which could wipe out any earnings growth for the full year. 

“NAB has a problem with risk control, and that’s the number one thing in a bank. If the market loses confidence in that, it’s a very serious issue,” said Matt Williams, fund manager at Perpetual Trustees. 

Four employees in the bank’s forex trading operations have been suspended over the unauthorised trading, which happened between last October and this month. 

Sources said the four had tried to cover up losses related to the sale of call options over Australian and New Zealand dollars, trying to pick the top of the recent rise in the two currencies against the US dollar. 

The losses were only picked up when a trader in another section blew the whistle after noticing unusual activity. 

The Australian dollar surged 34% against the US currency in 2003 and has risen a further 4% this year. 

“The biggest problem is that it’s NAB – again,” said George Raftopulos, investment analyst at Constellation Capital Management. 

Standard & Poor’s Ratings Services said its ratings on NAB were unaffected by the disclosure of unauthorised forex transactions. But it noted that while the size of the loss was manageable, it was concerned about the breakdown of formal risk management controls. 

Currency strategists speculated that the increasingly sophisticated derivative products now being traded could prove a compliance quagmire for banks, and more irregularities were bound to crop up. 

The latest incident at NAB follows a US$2.2bil write-down at its US HomeSide mortgage servicing unit three years ago, blamed partly on incorrect financial modelling, which tarnished the bank’s reputation for tight management. 

Its plans to expand in Britain and Ireland have also been stymied, while tough competition, higher pension costs, and the strong Australian dollar have hurt its overseas earnings. 

One analyst said it could take until at least 2005/06 before NAB turned around its British operations and regained investor confidence. – Reuters  

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