July 25 (Bloomberg) -- National Australia Bank Ltd., the country's biggest, set aside A$830 million ($795 million) for credit market losses, triggering the steepest decline in its stock in more than 20 years.

The provisions for collateralized debt obligations that have lost value because of the U.S. housing market slump may cut full- year profit by almost A$600 million, Chief Financial Officer Mark Joiner said in an interview today. The Melbourne-based bank said it also has a A$4.5 billion debt portfolio that's backed mostly by corporate loans in Europe and the U.S.

Chief Executive Officer John Stewart said soaring mortgage defaults in the U.S., where financial shares had their worst drop in eight years yesterday, forced National Australia to prepare for a ``worst case scenario.'' Investors including Peter Vann and Angus Gluskie questioned whether Stewart will be able to avoid more losses as the credit crisis deepens and economies slow.

``The fact that they didn't disclose this earlier raises serious questions about management.'' said Vann, who helps manage about $1.6 billion at Constellation Capital Management in Sydney, including shares in the bank. ``The market knew a provision was likely to come, but the magnitude was a surprise.''

National Australia's stock fell 14 percent to A$26.46 at 2:39 p.m. in Sydney, wiping out about A$6.2 billion of market value. Australia & New Zealand Banking Group Ltd. dropped 8.6 percent, the most since 1993, while Westpac Banking Corp. slipped 5 percent and Commonwealth Bank of Australia lost 6.1 percent.

Biggest Loser

The cuts make National Australia the biggest loser among the country's banks from a global credit squeeze that's triggered more than $468 billion in writedowns and losses at banks and brokerages. Bill Gross, who manages the world's biggest bond fund at Pacific Investment Management Co. at Newport Beach, California, yesterday predicted the housing slump will cost $1 trillion.

``Unfortunately the behavior of the housing market in the U.S. leads us to believe that the worst case scenario might not be too far away from the most likely,'' Stewart told analysts on a conference call.

National Australia and its largest competitors last year threw a financial lifeline totaling more than A$10 billion to several off-balance sheet investment vehicles to shield them from the fallout from the credit crisis.

Stewart said the A$4.5 billion portfolio remains unaffected by the U.S. housing crisis. The collateralized debt obligations portfolio was valued at A$1.2 billion until today's provision.

The bank said in July it also holds up to A$580 million in bonds issued by Fannie Mae and Freddie Mac, the beleaguered U.S. mortgage-finance companies.

Conduit Loans

``The credit risk has been receding in people's minds, but the reality is that it's with us for the next six or twelve months,'' said Gluskie, who helps oversee $500 million at White Funds Management in Sydney, including National Australia shares. ``Australian banks remain in a tough credit environment and they aren't insulated from the global woes.''

In September the company took A$6 billion of conduit loans, off-balance-sheet units that buy long-term securities by selling short-term debt, back onto its balance sheet. Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia and Westpac also put conduits on their balance sheets.

The company has struggled to win back investor confidence after a currency trading scandal in 2004 and $2.2 billion in writedowns from the acquisition of Florida-based mortgage company HomeSide Lending Inc. The company sold HomeSide to Washington Mutual Inc. in 2002 after the writedowns ended eight years of record profits.

The cost to protect National Australia's subordinated debt from default rose by the most in more than four months, credit- default swaps show.

The risk of National Australia defaulting on its senior debt gained 12 basis points to 90. The swaps are now about 2 basis points wider than contracts linked to ANZ Bank and 5 basis points wider than Commonwealth Bank, according to JPMorgan.

To contact the reporter for this story: Stuart Kelly in Sydney skelly22@bloomberg.net

Last Updated: July 25, 2008 01:04 EDT