In an extremely unusual move, National Australia Bank has reported its results to the ASX almost a fortnight early as it seeks an extra $3.5 billion of investment from shareholders.

Key points: NAB has reported a 51pc fall in profit for the half year to March 31, to $1.3 billion

NAB has reported a 51pc fall in profit for the half year to March 31, to $1.3 billion The bank is seeking an extra $3.5 billion from shareholders to shore up its position against potential COVID-19-related losses

The bank is seeking an extra $3.5 billion from shareholders to shore up its position against potential COVID-19-related losses NAB is also slashing its dividend to shareholders by 64pc to 30 cents per share to strengthen its financial position

The bank reported a 51 per cent slump in half-year profit to $1.3 billion.

The single biggest factor in that decline was an almost $1.2 billion increase in the money the bank set aside to cover future losses from bad debts, with more than $800 million directly related to COVID-19 effects.

There was a further $1 billion in write-downs to a change in the way the bank accounts for the cost of its software.

However, the results for the half year ending on March 31 are yet to reflect the full fallout from COVID-19 and the shutdowns and social distancing that have crippled large sections of the Australian economy.

In fact, NAB's preferred measure of cash earnings showed a 26 per cent increase in profit from its consumer-banking division, while business banking profits were only down 5.7 per cent by the end of March.

The biggest COVID-19-related hit to earnings in the March quarter came from the steep falls and volatility on global markets, which knocked 10 per cent off the bank's corporate and institutional banking profits.

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Bank taps investors for more cash

While its profits have yet to feel the full brunt of COVID-19, NAB is seeking to raise around $3.5 billion from investors while also slashing its dividend by nearly two-thirds, to 30 cents per share.

The bank's directors and senior management are sharing some of the pain with investors, with board members foregoing 20 per cent of their base fees for the half-year and chief executive Ross McEwan giving up 20 per cent of his fixed remuneration for that period.

NAB said Mr McEwan and the bank's executive leadership team would also forego their short-term variable reward payments for the 2020 financial year.

The bank's shares have been placed in a trading halt while it asks institutional investors — such as the firms that manage superannuation funds — to buy up around 212 million new shares priced at $14.15 per share.

That is an 8.5 per cent discount to NAB's closing share price on Friday.

The share offer is fully underwritten, meaning that if there is not enough demand from large investors, NAB has an agreement in place with investment banks to purchase any shortfall.

The placement shares are due to settle on Thursday and begin trading on the ASX this Friday.

The institutional capital raising will increase the number of NAB shares on issue by more than 7 per cent.

In addition, existing individual NAB shareholders (as opposed to the big financial institutions) are being offered the opportunity to apply to buy up to $30,000 worth of NAB shares directly from the bank without incurring transaction costs at the lower price of either $14.15 or 2 per cent below the average traded price in the five days before that offer closes, probably on May 22.

That offer is intended to raise another $500 million for the bank, but can be scaled up or down at its discretion.

However, UBS bank analysts Jonathan Mott and Minh Pham question whether it is going to be enough extra capital and why NAB is paying a dividend at all while raising cash through a share sale at rock bottom prices.

"[An] $807 million credit overlay for COVID-19 appears slightly light," they wrote in a note on the announcement.

"It assumes ~87 per cent chance of its base case 'V'-shaped recovery and ~13 per cent chance of its more 'severe downside'. Further top-ups may be required in the second half of 2020."

"Capital strengthening appears prudent, but we question paying a dividend to shareholders while simultaneously raising $3.5 billion in fresh equity below tangible book value."

Why is NAB raising the cash?

The extra capital is intended to boost the bank's "common equity tier one", or CET, ratio to 11.2 per cent.

Essentially, CET is the money that regulators require banks to hold in reserve invested in safe assets that they can use to cover any losses from bad debts to ensure the bank can pay out depositors and bond holders and will not go bankrupt in the event of large-scale losses.

The bank said it was raising much more capital than regulators currently required because it did not yet know how big the losses related to COVID-19 would be.

"NAB is taking proactive steps to build capital via an equity raising and a reduction in the interim dividend, in light of the uncertain economic outlook due to the COVID-19 pandemic," it noted in a statement.

"These actions are intended to provide NAB with sufficient capacity to continue supporting our customers through the challenging times ahead, as well as increasing NAB's capital level to assist to manage through a range of possible scenarios, including a prolonged and severe economic downturn."

In its annual results, the bank presents a fairly bleak forecast from its economists about the effect of COVID-19.

NAB expects economic growth, as measured by GDP, to slump 8.4 per cent by September 2020 compared with December 2019, and not to recover to pre-COVID-19 levels of activity until early 2022.

The bank's forecasters also expect unemployment to peak at 11.7 per cent by the middle of this year, above Treasury's forecast of 10 per cent, and to only partially recover to 7.3 per cent by December 2021.

An increase in unemployment will lead to more defaults on credit cards, personal loans and mortgages, while a rising number of company failures will cause losses on NAB's significant small business lending portfolio, which is the biggest of the major banks.

'Unprecedented times'

In a sign of the extreme financial stress many households are already under just a month into the most restrictive phase of the shutdowns, NAB said it had already approved more than 70,000 home loan deferrals on mortgages, worth around $26.5 billion.

It has also approved more than 34,000 business loan deferrals on balances worth a total of $17.4 billion, while offering reduced credit card minimum repayments, fees and interest rates to 1.7 million customers.

"These are unprecedented times," Mr McEwan said during a conference call with journalists.

"To date, we've had well over 650,000 enquiries for assistance from both business and individual customers, and it's happened so quickly."

Mr McEwan said that was why the bank had elected to raise money early, before many of those loan deferrals potentially became defaults in six months' time if the economic recovery was not as strong as hoped for.

"At this stage, we're not too sure, it's pretty uncertain as to what the recovery will do," he explained.

"Very uncertain times, and at these times a bank should look after its balance sheet."