The National Australia Bank (NAB) reported pre-tax profits of $1.4 billion on Friday. That's a lot of money. But it was $250 million that got the market's attention. The stock was down as much as 3.5% during the day before closing down 2.71%.

The $250 million in question is NAB's provision for future losses. The company called it an, 'economic cycle adjustment'. That's a polite way of saying it's worried that growth in Australia, Britain, and around the world will be lower in 2013 and losses on loans may be higher. NAB is saving up for a rainy day.

CEO Cameron Clyne said, 'In the last few months, falling commodity prices and weaker global growth prospects, specifically in China, have reduced growth...Considering the increased level of uncertainty, we feel that increasing the economic cycle adjustment on the collective provision is a prudent measure at this time.'

That sounds prudent enough. The trouble for NAB is that it reminded people of what happened last time the company set aside money for future losses. The initial provision to deal with losses on US-subprime related collateralised debt obligations (CDOs) was $181 million. And then later, $1.1 billion, which is quite obviously a lot more than $181 million.

NAB is currently in the middle of a class action suit over that little blowout. The suit alleges NAB misled shareholders about the real size of its exposure to CDOs. But really, this issue goes beyond NAB. Australia has an oversized banking sector relative to its economy. This a little wisp of smoke now. The fire later should be a doozy.

Regards,

Dan Denning
for The Daily Reckoning Australia