August 27th, 2013 (minor edits September 9th, 2013)
For some time now, I have been warning that Clydesdale Bank and Yorkshire Bank are seriously damaged institutions that could — like HBOS in the mid 2000s — be an accident waiting to happen. Still plagued by bad debts and with a parent in Melbourne that has lost patience with them, the banks are both now effectively “zombie” institutions.
Unable to do much in the way of new lending, they are treating many of their existing small and medium-sized enterprise borrowers with contempt. The banks’ persecution of their existing business customers takes a variety of forms. These can include the serial “repricing” of business loans. There’s also the “revaluation strategy“, which involves asking borrowers to pay for a revaluation of their commercial property assets using a chartered surveyor selected by the bank. The revaluations invariably come in ridiculously low, enabling Clydesdale and Yorkshire to engineer breaches of covenant (since loan-to-value ratios will now be higher than was pre-agreed), and therefore to demand full repayment of the loan and/or to seize the assets.
Another of Clydesdale and Yorkshire Banks’ ploys is their refusal to acknowledge that thousands of business customers to which they missold interest-rate hedging products (complex and opaque derivatives which include interest rate swaps or IRSAs), as part of so-called “Tailored Business Loans“, qualify for compensation under a controversial deal that the Financial Services Authority hammered out with the banks in June 2012.
This is despite the fact that such embedded swaps should never been sold to unsophisticated SMEs and even though financially ruinous break fees, about which customers were never told, apply in the event of customers wishing to pay off such loans early. Many business people who purchased the loans were duped into thinking they were getting simple, fixed-rate loans and were not notified of the ruinous break fees.
The bank is coming under mounting political pressure, including from Scotland’s finance minister John Swinney and the Liberal Democrat MP and member of the Treasury select committee John Thurso, to reconsider its stance.
The specialist law firm QA Legal has written a piece on Clydesdale’s Tailored Business Loans, describing them as “a silent mugging“. The article says:
Why did these two banks arrange to hand their clients the huge risk associated with long term fixed interest rates, and why did they choose to wrap these within a TBL? Part of the answer certainly lies with an accounting trick, and part also lies with the power and leverage that a TBL gives the bank.
As many SME customers have found, the liability that the breakage cost brings (from day one) has been used by the bank to alter the terms and conditions of lending, to enforce margin increases, and in some cases to bring about termination of the loans themselves. As the banks cross their fingers hoping still to avoid any inclusion into the FSA’s redress and review, and pressure on Clydesdale and Yorkshire Banks from the Treasury Select Committee mounts, the level of understanding as to how this silent mugging managed to take place is growing, but it is still painfully thin. [you can read about how Clydesdale missold a “swap” to businessman John Glare in this Daily Mail article]
Bad debts such as those that are currently weighing down the Clydesdale balance sheet do not just come out of thin air. In its case, they owe their origins to a disastrous lending spree that occurred in 2005-07. This was presided over by former Clydesdale executive general manager Mike “Mikey Boy” Williams and its former chief executive Lynne Peacock, who joined from Woolwich Building Society in 2004.
The lending binge came hard on the heels of the bank’s 2004 launch of its so-called Financial Solutions Centres (FSCs). These were a key part of a “back to the future” expansion strategy that involved the launch, at huge expense, of a large cluster of quasi-autonomous jumbo-branches serving businesses and high net-worth individuals across Scotland, England and Wales.
NAB hoped that the strategy would enable Clydesdale and Yorkshire Banks to carve out a significant slice of the corporate, small and medium-sized enterprise and private banking market from the large incumbent players – Royal Bank of Scotland/NatWest, Lloyds TSB, HSBC and HBOS. But after rolling out 73 FSCs across the United Kingdom in eight years, Clydesdale and Yorkshire acknowledged the plan had failed.
Following a “strategic review”, the Australian-owned banks announced in April 2012 that many of the FSCs were being axed and that they would retreat back to their Scottish and North-East English heartlands. The banks also declared that £6.2bn of “toxic” commercial property loans were being palmed off on their parent institution, NAB, for run off and wind down. And you know what that sort of thing means for customers.
Reasons for the banks’ string of failures included that the FSCs abused the autonomy they were given and lent recklessly, especially to commercial property borrowers. This was part of a wider problem of woefully inadequate systems and controls across Clydesdale and Yorkshire Banks.
Unlike at Swedish-owned bank Handelsbanken, where localised decision-making has been a huge success, it turned out to be a disaster at Clydesdale and Yorkshire Banks. However, Business First magazine still saw fit to put Mike “Mikey Boy” Williams on the front cover of its February/March 2011 issue, claiming he had “reinvented banking for the modern age”!
I have charted the unfolding catastrophe at NAB’s now unsaleable UK subsidiaries in four articles over the past two and half years (all published in the Glasgow-based Sunday Herald).
First I revealed that the FSA had lost faith in the bank’s financial reporting (29 May 2011); I then warned that a takeover of Clydesdale Bank by the comparatively under-capitalised shell company NBNK Investments would have led to lots of Scots being thrown out of their homes and Scottish companies finding credit lines removed and going bust (11 September 2011); then I revealed that NAB’s Melbourne-based chief executive Cameron Clyne had become so disenchanted with the dire performance and capital-neediness of Clydesdale and Yorkshire Banks that he had lost patience with them and put them on a “care and maintenance” strategy (12 February 2012); and last but not least, I outlined the true failure of Clydesdale and Yorkshire Banks’ disastrous FSC strategy, and some of the human fallout of this, in Clydesdale’s Retreat (6 May 2012).
In a blog – Where did it all go wrong for Clydesdale and Yorkshire Banks? (14 February 2012) – I revealed how the whistleblower Amy Davies, a former financial controller at the banks, was fired after seeking to alert her bosses to a financial “black hole” at Clydesdale and Yorkshire Banks, which are known for accounting purposes as National Australia Group Europe (NAGE).
In Clydesdale’s Retreat, describing the reckless lending spree of 2005-07, I wrote:-
One [commercial property borrower] said: “I was subjected to high pressure sales techniques including competing by text message to get a deal done.” Another corporate borrower said two Clydesdale executives turned up unannounced at his building site “offering the seductive prospect of easy, no strings lending.” Some of these borrowers have since been personally bankrupted after Clydesdale reneged on earlier lending agreements [through the “repricing” of loans], and interest rate swaps deals they believe were mis-sold by the bank turned sour.
The credit rating agency Moody’s Investors Services, which downgraded Clydesdale Bank three notches to near “junk” status on Friday 23 August, and the Australian media are finally catching up with the unfolding crisis at Clydesdale Bank and Yorkshire Bank. Here is an article published in the markets section of Australia’s Business Spectator yesterday.
Markets: NAB’s UK problems fester
By: Brett Cole
Published: Business Spectator
Date: 26 August 2013
National Australia Bank’s sore that is its UK bank Clydesdale has not turned gangrenous but it is festering and giving off a decided whiff.
Moody’s Investors Service says it has downgraded Clydesdale, probably named after the plodding horse, to Baa2 from A2. The credit rating agency says NAB’s Clydesdale is a weakened franchise. NAB’s efforts to turn around Clydesdale by strengthening risk management and cost controls “will take some time to be effective”.
NAB itself is also subject to short-term business pressures, says Moody’s. The asset quality of its business loan book is under pressure, it says. NAB suffers from low profitability that “reduces the bank’s financial flexibility,” the agency says.
That’s not pleasant reading for NAB chief executive Cameron Clyne. Worse is to follow. “Moody’s believes the bank’s (NAB) franchise as a retail and selective business lender has been materially weakened following a strategic pull back from commercial real estate and other areas of business lending,” says the rating agency.
Meanwhile, Clydesdale is putting further pressure on its parent. The UK bank’s low profitability and poor efficiency – it has a cost to income ratio of 70 per cent – reduces NAB’s ability to absorb provisions and write offs, says Moody’s. Cost cutting through firings may help Clydesdale’s efficiency but Moody’s notes efforts to reduce the bank’s business is not without execution risks.
Clyne’s response to Moody’s is that its credit rating is disappointing and “the restructure of the UK operations is driving significant improvements in the business”.
That may be not enough to reassure NAB investors. NAB shares are up 30 per cent this year and 16 per cent since June 12. Given Moody’s analysis they may have already reached their 2013 peak.
I guess it will only be a matter of time before Standard & Poor’s and Fitch follow Moody’s lead.
One customer of Clydesdale Bank, David Goodall is so disenchanted with the bank he produced this song, loosely modelled on Electric Light Orchestra’s Mr Blue Sky about the bank. It’s called Mr Clydesdale Banker.
If your business has been affected by the shenanigans at Clydesdale Bank and Yorkshire Bank, a support group was set up last year – the NAB customer support group