On 27 April 2020, National Australia Bank (NAB) announced a dividend cut and a plan to...

On 27 April 2020, National Australia Bank (NAB) announced a dividend cut and a plan to raise $3.5 billion of new capital.

Explain the reasons behind NAB's action. How did the market react to this news? (approximately 200 words)

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Expert Solution

NAB’s action to cut its dividend and raise $3.5 billion of new capital was taken with an objective of strengthening and bolstering its balance sheet. The bank is expecting a spike in credit losses and this decision has been taken in order to prepare the bank for this situation in the best possible manner. The bank is in urgent need to raise a buffer to help it tide over with its credit losses and this plan will help it do that in an optimal manner. The COVID pandemic led to a slowdown in the economy and this has negatively impacted the financials of the bank and its future business prospects as well. This is a sort of a proactive step that is being taken by the bank to get through the uncertain economic outlook by building capital. Once the crisis is over the bank will be in a position to take advantage of the positive economic scenario and opportunities that will come its way. The market accepted the news well and while the stock initially declined only marginally after the announcement it gradually picked up steam and started witnessing a rising trend after that once the market saw the rationale.

(Word count = 200 words)

jeff jeffy answered 1 year ago

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