Nov. 4 (Bloomberg) -- National Australia Bank Ltd., which last week reported its first loss in at least nine years, said it scrapped plans for a A$500 million ($451 million) bond sale amid concern about changes to bank asset regulations.

Melbourne-based National Australia won’t sell notes after exploratory talks with “bank buyers and other investors” showed “considerable uncertainty over the new draft Australian Prudential Regulation Authority liquidity standards, and specifically whether term bank paper will be a qualifying liquid asset in the future,” spokesman George Wright said in an e- mailed response to queries from Bloomberg News today.

APRA outlined potential changes to the way banks define liquid assets for the purpose of stress-testing on Sept. 11, saying it found lenders had reduced the quality of the asset buffers they must keep to protect depositors. The implication is that banks will have to “own less of each others’ paper” while boosting holdings of government bonds, National Australia market research head Peter Jolly said in a research note yesterday.

The Basel Committee on Banking Supervision, a 35-year-old panel that sets international capital guidelines, plans to propose a “new minimum global liquidity standard” by year’s end, according to a Sept. 15 statement from the Financial Stability Board, which coordinates the Group of 20 nations’ regulatory initiatives.

Contagion Risk

“In Australia the market is dominated by four banks, which have substantial holdings in each other’s bonds within their liquidity portfolios,” said Ben Byrne, credit analyst at Nomura Australia Ltd. “One of APRA’s concerns is the contagion risk of this situation, which could compound liquidity issues in the next systemic crisis.”

APRA spokesman Stuart Snell declined to comment on National Australia’s remarks about its investor talks today.

Australian banks, led by the so-called four pillars of Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, Westpac Banking Corp. and National Australia, sold A$143.9 billion of state-backed debt since the government started guaranteeing their bonds, according to a federal document published Nov. 2. Prime Minister Kevin Rudd offered the guarantee in October 2008 as credit markets froze in the wake of Lehman Brothers Holdings Inc.’s collapse.

Price Guidance

National Australia told investors it may sell five-year bonds priced to yield between 80 basis points and 90 basis points more than the swap rate and seven-year notes priced at a spread of between 90 basis points and 100 basis points, the Australian Financial Review reported today, without saying where it got the information.

Preliminary price guidance “looked a bit on the expensive side,” said John Sorrell, who helps manage A$14 billion of fixed-income assets at Tyndall Investment Management in Sydney. Tyndall had queried the pricing and was considering “whether to buy when it was pulled,” he said.

“If they’d priced it realistically they’d have comfortably got the volume they wanted,” said Nick Bishop, a portfolio manager for Aberdeen Asset Management Plc in Sydney.

National Australia’s “investor dialog and price discovery process occurs regularly, and does not always result in a transaction being launched,” spokesman Wright said. Investors expressed no “specific concerns” about the bank, he said.

Net Loss

National Australia, Australia’s biggest corporate lender, posted a net loss of A$75 million in the second half ended Sept. 30 compared with a profit of A$1.85 billion in the year-earlier period. Cash earnings, which strip out one-time items, rose 8 percent to A$1.81 billion.

Credit-default swaps protecting the bank’s senior and subordinated bonds fell 1 basis point to 64 basis points and 87 basis points respectively as of 5:21 p.m. in Sydney, according to Citigroup Inc.

A basis point is 0.01 percentage point and is equivalent to $1,000 a year on a contract protecting $10 million of debt. Credit-default swaps pay the buyer face value if a borrower fails to honor its debts in exchange for the underlying securities or the cash equivalent.

To contact the reporter on this story: Sarah McDonald in Sydney at smcdonald23@bloomberg.net.

Last Updated: November 4, 2009 01:45 EST