National Australia Bank Ltd (NAB) could be prompted into a capital raising to cover losses of almost $4 billion from its portfolio of toxic debt that is being investigated by the nation’s prudential regulator, analysts say.

The Australian Prudential Regulation Authority (APRA) has been in talks with NAB for two months over the most appropriate method to value the $17 billion toxic debt portfolio.

The structured credit portfolio was held in nabCapital and includes corporate bonds, commercial mortgage backed securities, collateralised debt obligations (CDOs) and synthetic CDOs (SCDOs).

All are being held on a hold-to-maturity basis and analysts say any writedowns could cost shareholders $3.9 billion.

CLSA Asia Pacific Markets bank analyst Brian Johnson said if NAB applied current market valuations the fair value of the portfolio would be $3.9 billion below the current carrying value set by the bank.

“NAB has only brought back on to the balance sheet the $18 billion of debt issued by the conduits that they have purchased and not the underlying assets themselves,” Mr Johnson wrote in a client report recently.

NAB booked a $1.441 billion loss provisions on CDOs in the portfolio since March 2008 but has yet to mark the value of the instruments to market, which could result in more writedowns.

So far, the provisions have been set by NAB’s internal credit risk ratings.

APRA told NAB earlier this year that it expected provisions to take account market values, scenario-based losses, default and loss experience on similar instruments published by ratings agencies, as well as the bank’s own internal credit risk ratings.

Mr Johnson said more loan loss provisions could see APRA increase NAB’s tier one capital level to account for expected losses and the $3.9 billion valuation gap.

Others say it is difficult to value the tranches of debt within the conduits and so far there is nothing to suggest that holding the portfolio to maturity is the wrong course of action.

The timing of NAB writedowns in 2008 has been put under the spotlight by law firm Maurice Blackburn, which alleges the bank failed to disclose to shareholders the true value of its CDOs.

Maurice Blackburn contends the first provision announced in May 2008 was only about 15 per cent of the face value of the CDOs.

It said the bank should have made a larger provision given conditions in US markets that existed between January and May 2008.

Instead, the bank made a $830 million writedown on July 25 last year - another 75 per cent of the CDOs face value - sending the bank’s share price tumbling 13.5 per cent.

Maurice Blackburn spokeswoman Megan Telford said the litigation team now had enough shareholders who made a loss to proceed with a class action.

She said damages were expected to reach several hundred million dollars.

NAB announced in March it would sell the conduits and other non-franchise businesses.

On Wednesday the bank appointed Peter Thodey as executive general manager of specialised group assets to manage an orderly sale.

Mr Thodey takes up his new role on September 1.

AAP