National Australia Bank's (ASX: NAB) revelation it has earmarked another $314 million for customer remediation caps off an annus horribilis for Australia's big four banks.

Though this may not be the last of these payments, with the expectation these could flow on into fiscal 2019, according to the bank. It has said second-half cash earnings – banks' preferred measure or profitability – will be slugged with $261 million in costs, including refunds and compensation around financial advice fees unearthed by Kenneth Hayne's banking royal commission.

"Where we have let customers down, we are determined to put things right," NAB chief executive Andrew Thorburn said in a statement.

"We have made good progress in resolving a number of issues that impacted our customers and we want to compensate them as quickly as possible."

bank NAB Andrew Thorburn

NAB CEO Andrew Thorburn expressed regret and a determination to "put things right"

About 69 per cent of the cash earnings hit will affect revenue, with the remainder reported in expenses.

NAB already said in its third-quarter trading update that the costs are excluded from full-year expense growth guidance of between 5 and 8 per cent. Costs associated with responding to the royal commission are not included.

NAB shares were up 32 cents, or 1.25 per cent, at $25.82 at 11am Sydney time, the most of any big four banks. 

Rival ANZ Bank (ASX: ANZ) last week outlined $421 million in remediation costs, while Westpac has set aside $235 million and is tipped to make more.

Commonwealth Bank (ASX: CBA), which is on a different reporting calendar to its major rivals and has already announced its 2018 results, last week launched a remediation program for deceased estates.

More Hayne pain to come

Earlier in the month, Morningstar banks analyst David Ellis said the royal commission's interim report – released on 2 October – "was long on questions and short on recommendations".

NAB was one of the most undervalued of the big four banks, according to Morningstar analysis. This found NAB was 22 per cent below our fair value estimate, alongside Commonwealth Bank and Westpac – which were 22 per cent and 15 per cent respectively below FVE.

"The interim report doesn't materially change our view on Australia's highly profitable major bank oligopoly, but it is clearly not a positive," Ellis said.

"We see increasing headwinds to lending growth as tighter credit standards start to bite, fees and charges will be more heavily scrutinised, and operating expenses will increase due to tougher regulatory and compliance requirements."

Ellis expects the "tough environment for the unloved major banks" would continue "for the next six months at least"

"As expected, the interim report presented a scathing critique of conduct shown by financial services entities. We agree this conduct is totally unacceptable, and rightly has drawn widespread political and public condemnation," Ellis said.

"The report bluntly concludes that unfettered greed and the unrelenting pursuit of profit maximisation 'at the expense of basic standards of honesty' are behind the bad behaviour, with the interests of customers a distant last."

 

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Glenn Freeman is Morningstar's senior editor

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